Financial Services

Funds legal update

Published on 20th Jan 2022

Welcome to our first Funds Legal Update of 2022.

We look at two open consultations which impact the investment funds industry. HM Treasury is consulting on updating the financial promotion exemptions for high net worth individuals and sophisticated investors for the first time in 15 years. Change is also on the horizon for the appointed representative (AR) regime: the UK Financial Conduct Authority (FCA) is consulting on updates to the rules, and the government has called for evidence on how the regime is used at present with a view to potential legislative changes.

In the environment, social and governance (ESG) space, we cover developments in both the UK and the EU: the FCA's final rules on enhancing climate-related disclosures by asset managers, plus various publications relating to the EU Taxonomy Regulation. 

FCA consults on improving the AR regime

On 3 December 2021, the FCA published a consultation paper (CP21/34) on changes to the AR regime. The regulator is seeing a wide range of harm across sectors in which the AR model is used. This often happens because principals do not carry out sufficient due diligence before appointing an AR, or as a result of inadequate oversight and control by the principal after an AR has been appointed. 

At a high level, the FCA's proposals: 

  • require principal firms to provide additional and more timely information on their ARs and how they are overseen; and
  • clarify and strengthen the responsibilities and expectations of principal firms. 

HM Treasury has also published a call for evidence to gather information on how firms use the AR regime, how effectively it works, and possible future reforms. The government wants to ensure it has a good understanding of how the regime is used at the moment before it decides whether legislative reform is needed (as well as the rule changes the FCA is proposing). 

Possible future reforms include changes to the scope of the AR regime under section 39 of the UK Financial Services and Markets Act 2000, putting extra regulatory obligations on ARs, and extending the Financial Ombudsman Service's ability to investigate complaints involving ARs. 

Comments can be made on both papers until 3 March 2022.

Updating financial promotion exemptions for high net worth individuals and sophisticated investors 

On 15 December 2021, HM Treasury published a consultation paper on changes to the financial promotion exemptions for high net worth individuals, sophisticated investors, and self-certified sophisticated investors. Comments can be made until 9 March 2022. 

It has been over 20 years since the exemptions were introduced, and 15 years since they were last reviewed. Since then, there have been major economic, social and technological changes which have radically changed the context in which the exemptions operate, including the rise of the online retail investment market, inflation, and pension freedoms. Significantly more consumers now fall within the exemptions than when they were introduced, as inflation has eroded the monetary thresholds. 

HM Treasury is also aware of the exemptions being misused, leading to investors who are not high net worth individuals or sophisticated being marketed products inappropriately.

The government sets out proposals for how the exemptions could be updated, including:

  • Increasing the financial thresholds for high net worth individuals. At a minimum, the threshold for annual earnings would be raised from £100,000 to £150,000, and for net assets from £250,000 to £385,000, in line with inflation.
  • Amending the criteria for self-certified sophisticated investors. A key proposed change is removing the criterion that an investor has made more than one investment in an unlisted company in the previous two years, as this is no longer a good indicator of sophistication.
  • Putting more responsibility on firms to ensure investors meet the criteria.
  • Updating the high net worth individual and self-certified sophisticated investor statements, including by simplifying the language, and requiring the investor to engage actively with the content.

ESG developments

FCA issues policy statement on enhancing climate-related disclosures by asset managers

On 17 December 2021, the FCA published its policy statement on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (PS21/24). In response to feedback on the June consultation paper, the FCA clarified the intended scope of firms and products, and has made changes to the rules and guidance consulted on, including the following:

  • Firms will not have to disclose information if data gaps or methodological challenges cannot be addressed through proxies and assumptions, or if doing so would lead to misleading disclosures. Firms will have to explain where and why they have not been able to disclose, as well as steps they will take to improve completeness and quality of disclosure. Any data gaps are expected to be transitional, and relevant only to certain asset classes.
  • The FCA is only mandating disclosure of core metrics using the Task Force on Climate-related Financial Disclosures (TCFD) methodologies. Further metrics will be disclosed as far as reasonably practicable.
  • A firm in a country with a net zero economy commitment is encouraged to consider how far it has taken this into account in developing its transition plan.

There is a phased approach to implementation: the rules applied from 1 January 2022 for the largest in-scope firms, and will apply one year later for smaller firms (above the £5 billion exemption threshold). The first public disclosures will need to be made by 30 June 2023.

EU Taxonomy Climate Delegated Act published

On 9 December 2021, the Taxonomy Climate Delegated Act was published in the EU Official Journal (the Commission Delegated Regulation (EU) 2021/2139 supplementing the Taxonomy Regulation relating to climate change mitigation and adaptation). It has applied since 1 January 2022.

The legislation contains a set of technical screening criteria that define which activities contribute to environmental objectives under the Taxonomy Regulation (that is, climate change adaptation and climate change mitigation). The Taxonomy Climate Delegated Act does not cover gas or nuclear activities, but the Commission made clear in 2021 that work on including these was ongoing.

On 1 January 2022, the European Commission published a press release announcing it is working on a Taxonomy Complementary Delegated Act which covers gas and nuclear activities. Recognising nuclear power and forms of natural gas as "green" activities has been a controversial development.

The Commission and the EU Platform on Sustainable Finance has since published the EU taxonomy NACE alternate classification mapping, which maps selected industry classification systems and how they relate to the description of activities in the Taxonomy Climate Delegated Act. The mapping table is intended to help users identify their activities against those included in the Taxonomy Climate Delegated Act.

Disclosure obligations under EU Taxonomy Regulation published

On 10 December 2021, the Disclosures Delegated Act was published in the EU Official Journal (Commission Delegated Regulation (EU) 2021/2178). This specifies the content and presentation of information to be disclosed by asset managers (among others) under the EU Taxonomy Regulation, and sets out common rules relating to key performance indicators. It has applied from 1 January 2022, albeit the application of specific requirements depends on the type of entity.

The Commission and the EU Platform on Sustainable Finance published the following information to support disclosures under Article 8 of the EU Taxonomy Regulation:



* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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