FCA Outlines Regulatory Roadmap, With Focus on New Fund Types and ESG

The FCA last week issued the third edition of the Regulatory Initiatives Grid, outlining its regulatory roadmap for the next six months in its latest bi-annual report.

Upcoming work listed in the 40-page document includes eight new ESG initiatives, the Bank of England and FCA’s work to transform data collection, and a review - and possible overhaul - of fund liquidity across the UK’s funds regime.

‘This Grid represents a continuation of our “controlled return to normality” approach,’ the regulator said. ‘The pipeline charts as steady a course as we can, remaining mindful of the ongoing operational disruption of the pandemic.’

Liquidity and New Fund Types

There are a handful of initiatives relating specifically to investment management, many of which focus on fund liquidity. On 7 May, feedback was published for a proposal to introduce notice periods for open ended daily dealt property funds, a controversial plan that attracted much controversy and ire amongst the industry. The proposal comes after dozens of UK property funds, with over £5.2bn in assets, were suspended for over a year, with some funds only reopening last month.

The FCA said it was ‘considering its next steps’ and would not make a decision until Q3 at the earliest. While the industry has raised its objections, it’s widely expected that notice periods could become a feature of these funds.

Concerns were initially raised that retail investors would be unable to access alternative or niche investments. Fortunately, however, the FCA launched a consultation on Long Term Asset Funds (LTAF) , also on 7 May, aimed at boosting long-term investing. with the FCA welcoming will be welcoming feedback until 25 June.

The new type of open-ended LTAF fund is designed to invest efficiently in long-term, illiquid assets, giving retail investors access to niche assets such as venture capital, private equity, private debt, real estate and infrastructure - but avoiding the liquidity mismatches that has befallen many funds.

Meanwhile, calls for feedback on the UK Funds Regime Review closed on 25 April. The UK government plans to analyse responses on issues such as tax and fund structures, and will then consult on specific proposals for reform.

ESG and Sustainable Investing

ESG remains a key focus too. A consultation on climate-related disclosures affecting asset managers, life insurers and FCA regulated pension providers is set to be released in June. The new rules are set to codify many of the recommendations of the Taskforce on Climate related Financial Disclosures (TCFD), and the final rules will be published later in Q4.

ESG ratings are also under the spotlight, with the regulator in the process of developing guiding principles for the design, delivery and disclosure of ESG / sustainable fund products. A consultation paper will be released next month, and it’s hoped this will ensure firms are clear about their existing obligations, including their responsibility to provide clear information to consumers.

‘This should support consumer access to genuinely sustainable investment products that meet their needs and preferences,’ the FCA said. As well as the consultation paper next month, next steps on guiding principles are expected sometime in Q2 and Q3.

And in what’s likely to herald the biggest ESG shift for UK fund managers and consumers, the FCA confirmed that it will be working closely with the Bank of England to produce a UK green taxonomy that’s somewhat similar to the EU’s.

While the UK taxonomy is not set to be as sweeping or stringent in scope, the UK still plans to ‘develop Technical Screening Criteria to define what economic activities are economically sustainable,’ the FCA noted. The Technical Screening Criteria is set to be finalised by the end of 2022.

Data Collection

Finally, the FCA, along with the BoE, confirmed its commitment to transforming data collection in 2021 and beyond. The regulators are setting up a joint program to consider the future of the data collection process, with a joint programme set to begin in June 2021.

The programme will have regular engagement sessions as solutions are designed and developed, the FCA said, with changes set to be implemented by June 2023.

Regulators across the world have been streamlining much of their data collection lately. The FCA has adopted new technologies and recently unveiled a new reporting system to replace its longstanding Gabriel portal.

In the EU, meanwhile, regulatory reporting could be streamlined further, with a proposal that firms report directly to ESMA, rather than local NCAs, for some of their reporting requirements, potentially including transaction reporting.

The initiative is part of a wider framework to promote the use of the same standards and formats acrossduce reporting duplications and increase overall data quality.