Proposed reforms to UK asset management regime welcomed

According to a new discussion paper (49 pages / 712KB PDF), the FCA has suggested that a more tailored regime would improve asset management regulation and better meet “the needs of UK markets and consumers”. It follows proposals in the government’s Future Regulatory Framework (13 pages / 232KB PDF) to make the FCA responsible for oversight of the sector – including whether to diverge from EU asset management regulations that were retained in UK law after Brexit.

One significant proposal would see the FCA align over-arching compliance obligations for asset managers. These are currently governed by various separate pieces of EU legislation, including the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. The regulator said the overlap has “led to a lot of duplication, especially for the core conduct rules such as general organisational requirements, conflicts of interest management and outsourcing.”

The FCA suggested creating a common framework that would set standards for all types of asset manager, simplifying regulation of the sector, with long-term benefits for firms and consumers. But it warned that large changes to FCA rules could cause “significant one-off costs and disruption for many firms, as well as other stakeholders, at least in the short term.”

Elizabeth Budd of Pinsent Masons said: “Properly aligning over-arching compliance obligations, such as conflicts of interest, will remove unnecessary discrepancy. Similarly, the idea of looking at how fund managers or portfolios managers are faced with common risks like liquidity will help to provide a consistent approach.”

The FCA also proposed removing the boundary between UCITS funds and Non UCITS Retail Schemes (NURS) funds. It said the change would simplify the funds regime, and mean that all authorised funds that can be widely distributed to retail investors would be subject to a single set of rules.

Another option, already recommended by the UK Funds Regime review, would see the FCA rebrand the NURS regime as ‘UCITS plus’ – so that mainstream retail products “fall under the UCITS banner” and more complex ones “fall under the ‘UCITS plus’ banner”. The regulator said the change would create a clearer differentiation between the regulatory categories of product.

In a third approach, the FCA would create a category of ‘basic’ funds – separately or alongside one of the other approaches - which would be limited in the types of investments that they could make. The FCA said basic funds could be restricted to investing in only the largest and most liquid investments, or in their use of derivatives, or be required to have a high level of diversification.

Budd said: “Over the years, the UCITS world has moved from fairly straightforward funds investing in listed securities and money market funds through to funds with complex strategies and active use of derivatives. The proposals to refocus the regime around ‘basic’, UCITS and ‘UCITS plus’ funds has certain attractions, but clearly needs further assessment – not least to avoid confusing investors or diminishing the value of the UCITS brand.”

She added: “The FCA suggested that further confusion also exists in the authorised investment funds (AIF) space, between small, authorised AIF managers (AIFMs) and registered AIFMs. The FCA proposed moving all AIFMs to authorisation, but recognised that perhaps it is not necessary for all full-scope AIFMs to be subject to such a heavy regulatory regime. It also said that it might be possible to permit more AIFMs to operate a small AIFM – although the counterbalance to that may be to introduce more rigour into that regime.”

The regulator also highlighted concerns over fund compliance with the consumer communications element of the new Consumer Duty. It warned that prospectuses “are generally written in legal, technical language” and can be “opaque and unhelpful, which might deter some investors from accessing the document”. The FCA suggested a number of reforms to rules governing the publication of prospectuses that it said “would help investors and advisers by making the content more easily comparable and available for public scrutiny” and “give confidence that the document was not a scam”.

Budd said: “Fund prospectuses are in general not consumer friendly being lengthy, legalistic and difficult to navigate. Some prospectuses have been amended multiple times which exacerbates the issue. They are certainly not a document that a consumer would want to read, with most consumers relying on the key investor information document. While many UCITS managers recognise that there is room for improvement, without a regulatory push to do so, there are so many other calls on time and resources that turning a legalistic document into a consumer friendly one will be unlikely to reach the top of the to do list.”

The FCA said it was unlikely to adopt all the proposals in the discussion paper and that any ideas it does take forward would “be subject to public consultation” and “appropriate cost benefit analysis”. It added: “We want to ensure any changes better meet the needs of investors, both domestic and international, and retail and professional; enable technological development, innovation and better use of data; are consistent with international standards…and are effective and proportionate.”

The deadline for responding to the discussion paper is 22 May 2023. The FCA said it would consider feedback and publish a statement later in the year, possibly as part of a wider consultation paper.