Funds and asset management regulatory news, May 2021

Hogan Lovells

Hogan Lovells

Selected UK and EU regulatory updates of interest to the funds and asset management sector. 


  • Financial Services and Markets Act 2000 (Collective Investment Schemes) (Amendment) Order 2021
  • Making money market funds more resilient: BoE Governor speech
  • Authorised fund regime for investing in long-term assets: FCA CP21/12
  • Liquidity mismatch in authorised open-ended property funds: FCA FS21/8

Financial Services and Markets Act 2000 (Collective Investment Schemes) (Amendment) Order 2021

The Financial Services and Markets Act 2000 (Collective Investment Schemes) (Amendment) Order 2021 (SI 2021/566) has been published, together with an Explanatory memorandum.

The Order clarifies that a firm that takes over lending agreements operated via a peer-to-peer lending platform, specifically because the original firm is being wound up, is not a collective investment scheme (CIS) and is, therefore, exempt from being authorised by the UK Financial Conduct Authority (FCA) for this particular activity.

The Order does this by amending the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062), which sets out the kinds of arrangement that do not amount to a CIS as defined in section 235 of the Financial Services and Markets Act 2000.

The Order comes into force on 18 June 2021.

Making money market funds more resilient: BoE Governor speech

The Bank of England (BoE) has published a speech by Andrew Bailey, BoE Governor, on the reforms needed to make money market funds (MMFs) more resilient. Mr Bailey explains that, as MMFs played a role in amplifying the stress seen in the global financial crisis, the "dash for cash" at the start of the COVID-19 pandemic is the second time they have proved to be insufficiently resilient. It is, therefore, right that a large amount of effort is going towards tackling these issues.

He identifies five principles that could shape a framework for reforms and explains that three big-picture changes flow from these principles and should form the basis of the reforms. These three changes are:

  • the removal of the adverse incentives introduced by the liquidity thresholds related to the use of suspensions, gates and redemption fees;
  • the simplification of the landscape to make clearer the critical distinction between cash-like funds and investment funds; and
  • the more explicit definition of what constitutes cash-like.

Mr Bailey emphasises that no single reform will solve things on its own and states that there needs to be a coherent package of reforms to address the current vulnerabilities in the MMF sector. He identifies three broad approaches that illustrate the potential options available:

  • at one extreme, asset holdings could be limited to government instruments. Given the low risk and liquid nature of these instruments, this would materially reduce run risk;
  • at the other extreme, the liquidity mismatch could be removed by making funds non-daily dealing (that is, not cash on demand), which would require a term notice period; or
  • a combination of measures could be used to reduce the risks to a sufficiently low level. For example, a limit could be introduced on the percentage of assets an MMF could hold in non-government instruments, to reduce the holding of less liquid assets. This could be combined with making sure funds are structured as variable net asset value, although with this asset mix the variability of the value in the fund should be lessened. Also, there should be no regulatory cliff-edges, so that funds could be more confident to release their cash buffers in times of stress to meet withdrawals.

Mr Bailey notes that the Financial Stability Board (FSB) will be consulting shortly on what reforms would be most appropriate and states that the BoE remains very supportive of the FSB's work.

Authorised fund regime for investing in long-term assets: FCA CP21/12

The FCA has published a consultation paper, CP21/12, on a new authorised fund regime for investing in long-term assets. These assets are sometimes called productive finance and include venture capital, private equity, private debt, real estate and infrastructure.

The FCA proposes to create a new category of fund called a long-term asset fund (LTAF). A new chapter 15 of the Collective Investment Schemes (COLL) sourcebook will contain rules for LTAFs. Authorised fund managers will also need to comply with rules in other sourcebooks, including PRIN, FUND, COBS and SYSC.

LTAFs will be alternative investment funds (AIFs). They will make investments in assets that may be complex and risky, which means that their managers will need to have appropriate resources as well as good systems and controls. Therefore, the FCA proposes to require that only firms that are authorised as full-scope UK alternative investment fund managers (AIFMs) can manage LTAFs.

The FCA's proposed framework for the LTAF is principles-based and it does not propose to set detailed or prescriptive rules in many areas. It has designed a regime that it considers will secure an appropriate degree of protection investors for whom the products might be appropriate. LTAFs will facilitate investment through a UK-authorised fund, in assets that are less liquid, and potentially higher risk, than assets that are available for mainstream retail funds.

Pending feedback, the FCA proposes to initially restrict the distribution of LTAFs to professional investors and sophisticated retail investors (based on the distribution rules for qualified investor schemes (QIS)). It has designed the rules to enable wider distribution if it subsequently decides that this would be appropriate.

The FCA plans to enable LTAFs to invest in a range of long-term illiquid assets, with few restrictions on eligible investments. Since the types of investment held within an LTAF could have diverse risk characteristics and return profiles, it proposes to require additional disclosures to help potential investors understand how the fund will be managed and explain important features.

The FCA is also proposing to amend the permitted links rules in COBS 21.3 to allow defined contribution (DC) pension schemes to invest in LTAFs.

The consultation closes on 25 June 2021. The FCA intends to publish a policy statement and final rules later in 2021.

Liquidity mismatch in authorised open-ended property funds: FCA FS21/8

The FCA has published a feedback statement, FS21/8, setting out the feedback it received to its August 2020 consultation paper on liquidity mismatch in authorised open-ended property funds (CP20/15).

The FCA reports that respondents expressed a range of views, though many defended the utility of open-ended property funds as a component of an investment portfolio. Only a small number of respondents agreed with the proposal that property funds operate a notice period (of between 90 and 180 days) before processing investor redemption requests, as consulted on. However, just over half of respondents, who expressed a clear position, supported the proposals "in principle" but subject to the following important conditions:

  • the wider "ecosystem" that supports and distributes investment funds (including platforms' and advisers' systems) being able operationally to support notice periods; and
  • investments in funds with notice periods continuing to be eligible assets for ISA purposes.

The FCA states that it is carefully considering its next steps in view of the feedback received. It also plans to consider feedback to its separate consultation paper on LTAFs (see above), and wider progress on LTAFs, before finalising its policy on notice periods for property funds.

If it proceeds with introducing mandatory notice periods for property funds, it will allow for a sufficiently long implementation period before the rules come into force, to allow firms to make operational changes. It notes feedback that 18 months to two years would be an appropriate period.

Alongside FS21/8, the FCA also published a statement on its work in this area. In this, it commits to continue to work with industry stakeholders, including through the Productive Finance Working Group set up by the FCA, Bank of England and HM Treasury to overcome the operational barriers identified.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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