UK Regulatory catch-up
A) UK new CCI framework latest
1. FCA first UK-CCI consultation continues
Fund firms continue to grapple with the likely outcomes from the UK’s new Consumer Composite Investments (CCIs) disclosure framework, proposed by the Financial Conduct Authority just before Christmas.
The FCA’s initial consultation cites the need to “move away from the rigidly templated format of the PRIIPs KID and UCITS KIID”, which “do not effectively help decision-making, as they do not consistently engage consumers.”
Instead, their new UK-CCI regime will enable “good quality product information that helps retail consumers make effective decisions”. This will be delivered via:
- A ‘hybrid approach’: utilising new CCI rules and existing Consumer Duty obligations;
- Only “essential” standardised disclosure information is required: said to “better assist consumer understanding and comparison of key product aspects”;
- A “flexible, technologically neutral regime”: with FCA urging firms to “innovate” (e.g. use of layering or dashboards, inclusion of images and graphics).
The current ‘UK-CCI product information framework’ consultation is open until 20 March 2025.
Key initial challenges
At first glance, the FCA’s new “simpler approach” presents several conundrums for firms in scope, including:
- Manufacturers and Distributors: new roles and responsibilities for those marketing retail products;
- Manufacturer delivery of ‘Core product information’ files and ‘Product Summary’ documents, without any UK-CCI disclosure format or templates specified;
- Manufacturer option to supply non-CCI product info (e.g. “general sustainability information”)
- Distributor option to “tailor” CCI pre-contractual disclosure (based on underlying information)
- Retail investors’ legal right to receive CCI Product Summary documents before and after sale.
More UK-CCI consultations pending
The FCA’s legal proposals (per draft ‘DISC’ Handbook) do not yet cover major areas of the final regime, e.g.
- UK-CCI Transaction Costs: for CCIs active less than 3 years, plus certain ‘Implicit Costs’ (although the FCA will retain the PRIIPs ‘Arrival Price’ method);
- Transition arrangements: official details of how UCITS/NURS, AIF and CEIC firms can chose to adopt the CCI disclosure ahead of the overall 31 Dec 2026 deadline;
- CCI-related legal updates: other UK regimes (e.g. UK-MiFID cost disclosure) and FCA Sourcebook rules.
These will form part of additional consultations, expected to occur soon, given the FCA’s intention for the final UK-CCI disclosure regime to be enforceable “as soon as the Policy Statement is published, …later in 2025”.
NB: other key practicalities remain unclear at this stage. For example, the FCA make no mention of CCI Product Summary document filing continuity (i.e. given current COLL 4.7.7R obligations), nor general arrangements for non-retail product share classes. There are also scarce details of exactly how the FCA intend to perform regulatory oversight of both Manufacturers and Distributors, as they attempt to fulfil their new CCI regime roles in due course.
We await the FCA to clarify these (and other) areas in H1-2025.
2. Overseas Fund Regime latest
The rapidly evolving UK-CCI regime will most likely create additional hurdles for those EU-UCITS firms currently planning their passage to the long-term Overseas Fund Regime (OFR).
Ongoing, they will face significant efforts to synchronise widely diverging dual UK/EU disclosure processing, for the same product marketed in both regimes. They must also consider the specific UK-CCI ‘basic product governance standards’, to be imposed by the FCA on unauthorised EU firms.
However, the FCA have also confirmed:
- the ‘fair value’ rule will not directly apply to EU funds given ‘recognised scheme’ status within the OFR;
- unauthorised (non-UK) firms will remain outside the Consumer Duty, itself.
Meanwhile, the FCA recently added a new User Guide to the Overseas Fund Regime website, assisting firms with their future material fund changes and termination notifications (via the ‘Connect’ application).
NB: there is still no sign of the UK Treasury’s postponed consultation on extending the local Sustainability Disclosure Requirements (SDR) regime to OFR products (i.e. originally planned Q3-2024, per OFR ‘roadmap’).
c) Closed-ended investment companies latest
Closed-ended investment companies (CEICs) will form part of the new UK-CCI scope, with an accelerated transition deadline (i.e. within 12 months of FCA issuing their final retail disclosure regime rules).
As we previously predicted, the FCA did update their forbearance statement, following the UK’s recent law changes to local cost disclosure regimes:
- Shares in UK-listed CEICs are now entirely exempt from the local PRIIPs regime;
- MiFID investment firms are no longer required to aggregate costs of manufacturing and managing shares in UK-listed CEICs.
These legal exclusions “supersede” the FCA’s previous statement, which now ceases to apply.
For the time being, CEIC retail products are no longer required to produce, review or update a UK-PRIIPs KID.
However, firms are obliged to consider alternate product information disclosures, necessary to “equip consumers with the information to make effective, timely and properly informed decisions”, as per Consumer Duty obligations in place since July 2023.
NB: there are currently no proposed changes to either the European PRIIPs or MiFID templates [EPT/EMT], following these UK legal amendments.
B) UK new CCI framework latest
“It’s still early days for SDR” Financial Conduct Authority spokesperson, 14 January 2025
1. UK-SDR recent events, current trends
The UK Sustainability Disclosure Requirements (SDR) regime seems to be picking-up.
Since the 2 December 2024 red-letter day, there has been a steady media trickle of UK firms reportedly adopting one of the four available SDR ‘sustainable’ labels for their products. So far, around 60-65 products are said to have adopted one of the SDR labels; moreover, circa 110-115 additional products apparently await an FCA response to their application request.
Morningstar recently forecast a continued SDR label take-up in 2025, but no more than “150-200 funds… depending on investor demand and product development”. In mid-December, they also considered the “unintended outcome” of their non-labelled SDR fund universe ending up being larger than the labelled SDR fund universe, following receipt of 218 non-labelled SDR consumer-facing disclosures (CFDs).
2. FCA interim SDR consultation, guidance
Last month, the FCA updated their ‘SDR pre-contractual disclosure examples’ guidance document.
This was expanded to include illustrative examples for ‘Sustainability Impact’ and ‘Sustainability Mixed Goals’ labels (p.18-41).
The FCA also recently consulted on “some minor corrections and clarifications to SDR rules”. The latest Quarterly Consultation Paper proposes to give local ‘sustainable’ managers an extra 4 months to prepare their initial ‘ongoing product-level disclosure’ report.
If enacted, firms will have 16 months (i.e. following the start of their use of either a SDR label, or specific ‘sustainability’ naming terms), to prepare the first annual SDR detailed product information report (i.e. covering the previous 12-month reporting period). Subsequent reporting would then continue as normal, each year.
3. Next key milestones
The UK Treasury consultation to assess the future role of the local ‘Green Taxonomy’ will end on 6 February.
The ‘temporary SDR flexibility‘ granted by the FCA to certain asset managers (i.e. with funds using ‘sustainable’, ‘sustainability’ or ‘impact’-related naming terms) will expire on 2 April. After this date, firms must fully comply with the SDR ‘naming and marketing’ rules, including mandatory consumer-facing and pre-contractual disclosures (for both labelled and unlabelled products).
As before, the FCA’s delayed policy statement to bring Portfolio Managers within scope of the SDR regime is now re-scheduled to appear during Q2-2025.
C) other key UK developments
1. New UK Financial Services Strategy pending
As the industry pores over the EU Commission’s new ‘Competitiveness Compass’ a reminder that the UK Treasury also intend to publish a similar national policy, during Q2-2025.
The upcoming UK ‘Financial Services Growth & Competitiveness Strategy’ is said to be a “central guiding framework to unleash growth and investment.” Interim goals aim to:
- Simplify UK regulation;
- Foster innovation: by supporting adoption of new technology such as on fund tokenization;
- Facilitate cross border activity: by both breaking down barriers to doing business and attracting clients from overseas.
The UK Chancellor has identified UK financial services “one of the eight key growth-driving sectors within the government’s Modern Industrial Strategy” [i.e. ‘Invest 2035’]. Over the coming months, she is set to host Industry Forums with asset management, banking and insurance leaders.
2. FCA ponder crypto regulation, use of tokenised fund assets
“We want to develop a crypto regime that is fair, balanced and proportionate for all.” Financial Conduct Authority, 16 December 2024
In late 2024, the UK Government confirmed it will proceed with legislation to bring cryptoassets into the FCA’s regulatory perimeter. They now plan to enact legislation covering fiat-referenced stablecoin activities, crypto trading, exchange and other activities (i.e. all at the same time).
The FCA depict their ‘Crypto Roadmap’ in an initial discussion paper, as they seek input on their future cryptoasset market abuse, admissions and disclosure regimes. It is open for comment until 14 March.
The FCA are also member of Project Guardian, a global initiative led by the Monetary Authority of Singapore (MAS), which also includes the Financial Services Agency of Japan (JFSA) and the Swiss Financial Market Supervisory Authority (FINMA). Their aim is “to enhance liquidity and efficiency of financial markets through asset tokenisation”.
During 2025, the FCA will collaborate with the Project Guardian co-members to explore the regulatory considerations for tokenisation within the asset and wealth management sector.
NB: their latest report (co-authored by Schroders and Franklin Templeton) sets out a vision for the use of distributed ledger technology (DLT) in the asset management industry.
3. UK-AI latest
Earlier this month, the UK Government published their ‘Artificial Intelligence Opportunities Action Plan’.
This very ambitious policy paper sets out 50 detailed recommendations to “shape the AI revolution” across the UK economy. These will lead to the creation of a new ‘UK Sovereign AI’ unit, a public/private collaboration with “the power to deliver the clear mandate of maximising the UK’s stake in frontier AI”.
Meanwhile, it is stated “the UK’s current pro-innovation approach to regulation is a source of strength relative to other more regulated jurisdictions and we should be careful to preserve this”. Presumably, this is a referral to the EU AI Act, currently unfolding across the Single Market.
The Department for Science, Innovation and Technology (DSIT) will consult in Spring 2025 on “proposed legislation to provide regulatory certainty to help kickstart growth and protect UK citizens and assets from the critical risks associated with the next generation of the most powerful AI models”. The government also intends to establish the AI Safety Institute (AISI) as a statutory body.
This summer, the Government will appoint ‘AI Sector Champions’ in financial services, creative industries and life sciences, to “drive AI adoption” and “unlock new growth opportunities” in each sector.
NB: There is no mention of the FCA’s role, at this stage. They recently co-published (with the Bank of England) the results of their regular survey on artificial intelligence use in financial services. Key findings include that 75% of UK firms are now using AI, with a further 10% planning to use AI over the next three years. Respondents also reported that 55% of all AI use cases “have some degree of automated decision-making”, with 24% of those being semi-autonomous (i.e. enabled to make a certain decisions on their own, with human oversight only for ‘critical’ or ‘ambiguous’ decisions).
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Article written by Mark Kilbride [Regulatory Affairs Advisor, Kneip Product team].
Feel free to contact me at [email protected].