7 May 2021

FCA: launch LTAF consultation

Read our latest UK financial services developments, including some breaking news from the FCA.

1. ‘Milestone’: UK Financial Services Act receives Royal Assent

 “The Act marks a major milestone in our plans to develop a regulatory regime that works for the UK and helps us seize new opportunities in the global economy.” – UK Treasury Economic Secretary

Last week, extensive amendments to the UK Financial Services and Markets Act 2000 (FSMA) were formally approved by the Queen.  Areas of specific interest within the 192 page legal bill include:

  • UK-PRIIPs: Financial Conduct Authority (FCA) empowered to determine local rules applicable (i.e. ahead of pending de-alignment from the EU equivalent regime in 2022).
  • Formal establishment of the Overseas Funds Regime (OFR). This will apply to UCITS and AIFMD firms / funds based in the European Economic Area (EEA) in due course.
  • Extension of the UK temporary marketing permissions regime (TMPR) from 3 to 5 years.
  • Amendments to the onboarded Markets in Financial Instruments Regulation (UK-MiFIR) regarding the provision of services by third country investment firms (i.e. including those based in the EEA) following equivalence determination.
  • Clarification of the reverse solicitation exception scope (i.e. impacting the UK-AIFMD regime).

2.FCA: launch LTAF consultation

“The aim of this new long-term asset fund (LTAF) would be to provide a fund structure through which investors can invest with appropriate confidence in less liquid assets because the fund structure is specifically designed to accommodate relatively illiquid assets. These can offer attractive expected returns to investors. If successful, the existence of funds investing in these assets can also help businesses and infrastructure projects have greater access to long-term capital to support investment and wider economic growth.” – FCA, 07 May 2021

As we go to press, the FCA have just launched a landmark consultation covering the proposed UK long-term asset fund (LTAF) regime.   Running until 25 June 2021, this will be of interest to firms acquainted  with managing illiquid, long-term assets (i.e. notably AIFMs), alongside depositaries, prospective investors (incl. “sophisticated” high net worth clients), pension providers / trustees, insurers,  investment advisers and fund distributors.

NB: a reminder that the LTAF is positioned as a direct competitor to the European Long-term Investment Fund (ELTIF) being dusted down by European Commission (EC) for an official re-launch later this year.

3.The IA: ‘abolish UK funds tax’

“Brexit represents an important opportunity for the UK to define an innovative and responsive policy framework for investment funds. The UK requires a fund tax regime that is simple to understand and operate while also offering certainty to investors” – Chris Cummings (the IA CEO)

The Investment Association (IA) represents the UK’s asset management industry (£8.7 trillion AUM administered by 250 AM firms, including Kneip as a member).

The Financial Times recently reported the IA’s proposed set of post-Brexit fund industry reforms, including moving to a full exempt tax regime for all UK funds (i.e. to enable the City of London to compete more effectively against rival European fund hubs in Dublin and Luxembourg).

They also called for rule changes to encourage the development of new UK products “that will not suffer any tax disadvantages compared with directly competing European funds”.

The IA suggest this could be achieved either by amending the existing UK fund tax regime or by introducing tax exemption for funds.

4. BoE: considers creating central bank digital currency

Last month, the Bank of England (BoE) and HM Treasury (HMT) announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a new form of digital money formally issued for use by households and businesses.   The CBDC would exist alongside physical cash and bank deposits (i.e. rather than replacing them).

While stressing no decision yet taken, the UK will now proceed to “engage widely with stakeholders on the benefits, risks and practicalities of doing so”, via:

  • CBDC Engagement Forum: gathering strategic input on all non-technology aspects (i.e. to understand the practical challenges of designing, implementing and operating a national digital currency). Members will be drawn from financial institutions, civil society groups, merchants, business users and consumers.
  • CBDC Technology Forum: gathering input on all technology aspects from a diverse cross-section of expertise and perspectives (e.g. financial institutions, academia, Fintechs, infrastructure providers and technology firms).

5. FMLC: raises fears of diverging UK-ESG disclosure

“Considering the complexity of the existing regulatory backdrop, and the challenges that the firms are facing with respect to disclosure/compliance requirements, the FMLC would urge HMT to provide clarity on the approach it intends to take towards the SFDR and other pieces of legislation post Brexit.”  – Lord Thomas, FMLC Chairman

The Financial Markets Law Committee (FMLC) is a UK charitable body established for the purposes of financial markets law education and understanding.  Their extensive list of committee members includes representatives from legal firms, global asset managers, the FCA and Bank of England.

They have now disclosed a recent letter sent to HM Treasury (HMT) regarding the UK’s role within the International Platform on Sustainable Finance (IPSF) forum that they joined earlier this year.

While extending their congratulations, the FMLC also highlighted concerns about the growing risk of sharp divergence within the European corporate ESG disclosure regime.

This follows the UK’s decision not to onboard the EC’s Sustainable Finance Action Plan legal components (e.g. SFDR, EU-Taxonomy alongside the new Corporate Sustainability Reporting Directive [CSRD] and Delegated Acts to amend AIFMD, UCITS and MiFID II frameworks).

To rectify, the FMLC outlines 2 x possible solutions for UK government to adopt:

  • An approach broadly similar to ESMA level 2 standards (i.e. including “potentially enhancing detailed disclosure requirements, where appropriate” in the UK), or
  • An outcomes-based approach (i.e. “consistent with the direction of travel in the EU and beyond, to avoid regulatory conflict”)
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