Funds legal update | UK regime review, ESG and Europe's sustainable finance roadmap

We look at recent UK developments, including the government's latest publication on its review of the UK funds regime and the delays to the change in control notification process, as well as the UK's response to the Russian invasion of Ukraine.

From an environmental, social and governance (ESG) perspective, the European Commission has approved a Taxonomy Complementary Delegated Act, which would bring gas and nuclear activities into the scope of activities covered by the EU Taxonomy. The European Securities and Markets Authority (ESMA) has set out a roadmap for its sustainable finance work over 2022-2024, with priorities including tackling greenwashing, promoting transparency, and building regulators' capacities in this sector. Looking ahead, the European Commission is considering whether and how to bring in a social taxonomy, analogous to the environmental taxonomy, as the ESG space continues to evolve.

UK developments

UK funds regime review: summary of responses and next steps

On 10 February 2022, HM Treasury published a policy paper on Review of the UK funds regime: a call for input: Summary of responses. The government welcomes further input on its priorities from stakeholders (no deadline is given for responding).

The purpose of the call for input (January 2021) was to identify options which would make the UK a more attractive place to set up, manage and administer funds, and support a wider range of more efficient investments better suited to investors' needs. As part of the wider UK funds regime review, the UK Financial Conduct Authority (FCA) has introduced rules for long-term asset funds, covered in a previous update, and a new tax regime for asset holding companies (AHC) will be introduced.

The response sets out the government's priorities, which include reviewing the genuine diversity of ownership condition; a workstream focusing on further reforms to real estate investment trusts (REITs), which will also consider the interaction of REITs with the new AHC regime; and further work to explore options for a new unauthorised contractual scheme fund structure.

FCA acknowledges delays in processing change of control notifications

On 18 February 2022, the FCA updated its webpage on submitting change in control notifications to address its plans for dealing with the high volume of notifications it has been receiving recently.

There is currently a delay of about two months between submission of a complete notification and allocation of a case officer to the file. The FCA recommends that all relevant information and documents are provided in the initial submission; many of the notifications it receives are incomplete, resulting in longer timelines. The FCA will allocate notifications as soon as a case officer becomes available and confirm whether the notification is complete as soon as possible thereafter.

The regulator is recruiting more case officers and making improvements to its processes aimed at reducing the time to allocate and determine cases.

FCA releases statement on new Russian financial sanctions

On 22 February 2022 (updated 24 February 2022), the FCA published a statement on new financial sanctions measures relating to Russia. The regulator points firms to the tranche of sanctions on Russia announced by the prime minister on 22 and 24 February 2022, and reminds them that its expectations on systems and controls for financial sanctions compliance are contained in chapter 7 of the Financial Crime Guide in the FCA Handbook. Firms should have established systems and controls in place to counteract the risk of being used to further financial crime, and this includes compliance with financial sanctions obligations.

The FCA advises firms to screen against both the UK sanctions list and the Office of Financial Sanctions Implementation (OFSI) list of asset-freeze targets, and to obtain a licence if they need one to permit any activity that would otherwise be prohibited by the new sanctions regulations.

Firms are reminded of their legal obligation to report certain matters to OFSI under the sanctions regime, as well as their obligation to notify the FCA. Where transactions give rise to concerns about financial sanctions evasion or money laundering, firms should also consider their obligation to report to the UK Financial Intelligence Unit at the National Crime Agency under the Proceeds of Crime Act 2002.

The FCA has set up a new webpage collating announcements connected to the Russian invasion of Ukraine, financial sanctions and information.

Economic Crime (Transparency and Enforcement) Act 2022 receives Royal Assent

On 28 February 2022, the government published a draft Economic Crime Bill (ECB) earlier than expected, with a view to bolstering its ability to target sanctions against Russian oligarchs in response to the invasion of Ukraine. Broadly, the ECB provides for:

• A new Register of Overseas Entities, including information on beneficial owners, and powers to compel overseas entities to register if they own land.
• Reform to the regime for Unexplained Wealth Orders (brought in from 2018 but not much used since).
• A new streamlined process for implementing sanctions against individuals.

The Economic Crime (Transparency and Enforcement) Act 2022 received Royal Assent on 14 March 2022. 
 

ESG updates

Commission approves draft Taxonomy Complementary Delegated Act on gas and nuclear activities

On 2 February 2022, the European Commission reached political agreement and approved in principle a Complementary Climate Delegated Act setting out the conditions for including nuclear and gas energy in the list of economic activities covered under the EU Taxonomy Regulation. This is controversial and the subject of objections from various parties.

The Act also amends Commission Delegated Regulation (EU) 2021/2178, supplementing article 8 of the Taxonomy Regulation, to require large listed non-financial and financial companies to disclose the proportion of their activities linked to gas and nuclear energy. Article 8 of the Taxonomy Regulation requires companies that publish non-financial statements under the Accounting Directive to include information on how and to what extent their activities are associated with environmentally sustainable economic activities.

ESMA sets out sustainable finance roadmap 2022-24

On 11 February 2022, ESMA published its sustainable finance roadmap for 2022-24.

ESMA has three priorities for its sustainable finance work: tackling greenwashing and promoting transparency, which are cross-sectoral issues; building national competent authorities' (NCAs) and ESMA's capacities in the sustainable finance sector; and monitoring, assessing and analysing ESG markets and risks.

ESMA will address its three priorities across sectors including:

• Investment management. Work includes contributing to the Commission's focus on minimum sustainability criteria for products related to article 9 of the Sustainable Finance Disclosure Regulation SFDR and reviewing SFDR technical standards.
• Investment services. ESMA will, among other things, contribute to the consistent implementation of new and existing requirements on manufacturing and design of ESG products, and collect data on distribution of these products.
• Benchmarks. Work includes contributing to the Commission's assessment of the merits of an ESG benchmark label, and monitoring trends in the use of EU climate benchmarks.
• Credit and ESG ratings. ESMA will assess how credit rating agencies incorporate ESG factors in its methodologies and support the Commission in improving the reliability and comparability of ESG ratings.

EU Platform on Sustainable Finance publishes final report on a social taxonomy

On 28 February 2022, the EU Platform on Sustainable Finance published its final report setting out a proposed structure for a social taxonomy, a potential future development in the EU ESG legislative framework. The social taxonomy is analogous to the existing environmental taxonomy.

The suggested structure builds on aspects of the environmental taxonomy, such as development of social objectives, types of substantial contributions, "do no significant harm" criteria, and minimum safeguards. However, the social taxonomy differs in some respects; for example, it contains sub-objectives that specify different aspects of three social objectives, as follows:

• Decent work (including for value-chain workers);
• Adequate living standards and wellbeing for end-users; and
• Inclusive and sustainable communities and societies

The sub-objectives relate to health and safety, healthcare, housing, wages, non-discrimination, consumer health, and communities' livelihoods.

The report also considers requirements for social criteria and indicators under this framework, together with suggestions for next steps. The Commission will now decide whether and how to take the initiative forward.