UK regulatory catch-up

1. UK-PRIIPs exemption pending for CEITs

There have been a series of fast-moving recent events in relation to closed-ended investment trusts [CEITs]. This follows attempts to address specific cost disclosure concerns, previously raised by the local sector.

a) FCA forbearance statements

The Financial Conduct Authority (FCA) have made several forbearance statements concerning the disclosure requirements of certain CEITs listed in the UK.

Since 19 September, the UK regulator say they will not take enforcement action if a UK-listed CEIT chooses not to follow the requirements of the local Packaged Retail and Insurance-based Investment Products (PRIIPs) regime, and/or the MiFID II cost disclosure requirements.

In their most recent update, the FCA considered a scenario “where firms choose not to provide a key information document (KID)”; however, they also reminded CEIT entities of their obligations to:

• abide by the Conduct of Business Sourcebook (COBS) rule 2.1.1 [‘client’s best interests’], plus
• fulfil their local Consumer Duty (applicable to all closed-ended products, since 31 July)
• equip consumers with required information to make effective, timely and properly informed decisions.

The FCA concluded: “we expect firms in the distribution chain for securities issued by investment trusts to look to work together to determine and share what information is required to enable the continued distribution of these products, in compliance with their more general obligations towards retail investors, including in particular under the Consumer Duty.”

b) HMT UK-PRIIPs amendment

The UK Treasury has since published a draft statutory instrument, revising certain local PRIIPs and MiFID rules.

Once approved by the UK Parliament, these legal changes will supersede the FCA forbearance; ongoing:

• UK-listed closed-ended investment companies will be entirely exempt from the local PRIIPs regime;
• MiFID investment firms are no longer required to aggregate costs of manufacturing and managing shares in a UK-listed closed-ended investment company.

These exemptions will remain in effect until the start of the new UK Consumer Composite Investments (CCI) framework, subject to Parliamentary approval and completion of the FCA’s consultation process (see next item below).

NB: Despite the pending UK-PRIIPs legal amendment, the FCA have recently confirmed that local Closed-Ended Investment Trusts will be part of UK-CCI scope, ongoing.

c) So, what now?

We are aware of some uncertainty, following these events.

However, in order to preserve business continuity across the distribution chain (including steady alignment with the EPT and EMT templates), we understand some firms seek to continue producing a UK PRIIPs-KID for their CEIT products, including:

• a suitably amended cost disclosure section, plus
• some form of disclaimer (i.e. to indicate the Key Information Document has been voluntarily produced).

Once the UK-PRIIPs legal change is enacted, it is possible the FCA may (again) revise their forbearance statement.  However, we strongly advise CEIT firms impacted to seek legal counsel, before proceeding with any amendments.

In the meantime, we remind all firms drawing up a PRIIPs KID must ensure that all disclosed information remains “accurate, fair, clear and not misleading.”

 2. CCI regime looms ahead

The draft Consumer Composite Investments (CCI) statutory instrument has been laid before the UK Parliament; this will replace the local PRIIPs regime.

Instead, a new retail disclosure framework will be established by the UK Government, with the FCA legally empowered to define the detailed rules that firms must adhere to, in due course.

The explanatory memorandum states the new CCI Regime will “be more proportionate and tailored to UK markets than its predecessor.”  The UK Treasury and FCA intend the CCI framework “to be less prescriptive than PRIIPs, providing flexibility for firms to tailor their disclosure to enhance retail investor understanding.”

The draft law also brings UCITS products into CCI scope; although still exempt from UK-PRIIPs (which remains in place until 31 Dec 2026), UCITS will be able to choose an advance CCI transition (i.e. once the FCA’s final disclosure rules are legally applied in 2025).

NB: the FCA are expected to consult on their CCI disclosure proposals during November. Watch this space.

3. Overseas Fund Regime gateway opens to EU-UCITS

As indicated in their Overseas Funds Regime (OFR) roadmap, the FCA published a policy statement with the final rules and guidance necessary for EU-UCITS to transition to a permanent, legally equivalent marketing UK regime.

The start date for fund operators within the Temporary Marketing Permissions Regime (TMPR) is still set to begin on 1 November 2024.

In preparation, the FCA have been busily updating their OFR website content for EU-firms, in incremental stages:

• Final OFR implementation rules, per FCA policy statement;
• ‘Completing your application’ information, plus ‘How to’ guide and Glossary of key terms documents;
• Additional documentation:
  • Further ‘How to’ guides: including Standalone schemes and Umbrella schemes within the TMPR;
  • Application form Q&A: to assist applicant preparation;
  • ‘Approach to Recognition’ document: explaining the FCA decision-making process;
  • ‘Draft disclosure wording’ document: to help explain liability rights to UK investors (i.e. facing an EU fund operator and depository).

NB: our colleagues from the Fund Registration team recently summarised the OFR transition process in a separate article, also available on our website.

4.  FCA publish Consumer Duty ‘Price and Value’ update

The FCA also recently published an online publication ‘Price and Value Outcome: Good and Poor Practice’.

‘Price and value outcome’ is a central part of the UK Consumer Duty regime, in place since July 2023.

The FCA present extensive insights from the first year of the implementation, “to help firms improve the way they think about fair value assessments”.

Presumably, some of this FCA content (e.g. ‘Assessing value’ section) will be closely monitored by the EU institutions, ahead of their Retail Investment Strategy negotiations (i.e. including UCITS/AIF ‘Value for Money’ framework) set to begin before the year-end.

NB: it was reported this week that EU-UCITS firms applying for the OFR will face a ‘costs conundrum’, arising from their exemption to produce annual value assessment reports (i.e. unlike their UK equivalents).

 5. FCA publish interim Regulatory Grid

Last week, the FCA published an interim update to their Regulatory Initiatives Grid, which includes the PRIIPs / CCI consultation mentioned above.

NB: the Financial Services Regulatory Initiatives Forum are unable to provide a complete grid update for 2024, given extensive replanning “because of the UK government change”.

Due to timing uncertainty, not all items from the previous Grid are included in this provisional version. Although the FCA have included the most accurate information available, “…timings are subject to change”.

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Article written by Mark Kilbride