Funds and asset management regulatory news, 5 July 2021

Contents:

• Download the full regulatory news bulletin
• Host AFM firms: FCA multi-firm review findings
• MMF Regulation: ESMA guidelines on stress test scenarios
• MMFs: ESRB issues note on systemic vulnerabilities
• Enhancing MMF resilience: FSB consults on policy proposals
• Regulation on cross-border distribution of funds: ESMA report on marketing requirements and marketing communications
• Recommendations on sustainability-related practices, policies, procedures and disclosures in asset management: IOSCO consultation

Host AFM firms: FCA multi-firm review findings

The UK Financial Conduct Authority (FCA) has published a webpage setting out the findings and next steps following its multi-firm review into authorised fund managers (AFMs) that delegate investment management to third parties outside their corporate group. They are often referred to as host AFMs or host authorised corporate directors (ACDs)).

From Q4 2019 to Q4 2020, the FCA visited a sample of host AFMs to review the effectiveness of their governance, controls and monitoring and ask questions about the risks in their business models. These firms operate a significant number of authorised funds. The FCA examined:

• how well host AFMs understand their responsibilities for the funds they operate;
• whether these firms had adequate governance, controls and resources to carry out their role;
• how effectively the host AFM firms considered their regulatory responsibilities, primarily under the Collective Investment Scheme Sourcebook (COLL);
• how their oversight of delegated third-party investment managers considered the interests of fund investors; and
• whether they had appropriate resources for the nature and scale of the business they carried out.

The FCA's key observations are detailed on its webpage under four main area groupings:

• due diligence over delegated third-party investment managers and funds;
• oversight of delegated third-party investment managers and funds;
• governance and oversight; and
• financial resources.

Although the review mainly focused on AFMs managing UK UCITS funds through a host model, the FCA expects all AFMs, regardless of their business model, to consider the review's findings and assess whether there are weaknesses in their own systems that need addressing. In addition, while the FCA's observations are focused on conflicts and issues arising in a host model, it believes there are also useful lessons for firms operating within a group structure.

As well as liaising directly with firms in the review regarding specific findings, the FCA intends to conduct further work to identify whether it is appropriate to make changes to its regulatory framework. This could potentially involve rule changes, on which the FCA would consult.

MMF Regulation: ESMA guidelines on stress test scenarios

The European Securities and Markets Authority (ESMA) has published a webpage with official translations, including the English version, of its guidelines on stress test scenarios produced under Article 28 of the Regulation on money market funds (MMF Regulation). The guidelines state that they apply from two months after the date of their publication on ESMA's website in all EU official languages (that is, 30 August 2021). They apply to national competent authorities, MMFs and managers of MMFs. They establish common reference parameters for the stress test scenarios that are included in the stress tests conducted by MMFs or managers of MMFs.

The guidelines are updated at least every year to take into account the latest market developments.

MMFs: ESRB issues note on systemic vulnerabilities

The European Systemic Risk Board (ESRB) has published an issues note on systemic vulnerabilities of, and preliminary policy considerations, to reform money market funds (MMFs).

The ESRB has identified systemic vulnerabilities in MMFs and a broad set of preliminary policy options to reform them. It explains that there is an underlying tension between the two primary economic functions of MMFs: they offer on-demand liquidity to investors and provide short term funding to borrowers (mainly EU banks) but cannot dispose of their assets easily in all market conditions. This tension may become a systemic concern especially during market stress, as observed at the onset of the COVID-19 pandemic. In these circumstances, MMFs can face both higher redemption requests from investors and a lack of sufficient portfolio liquidity to meet this increased demand.

The ESRB explains that the macroprudential perspective taken in the report can inform the broader debate on MMF reforms and the European Commission's review of the MMF Regulation in 2022. To further inform the review, the ESRB plans to refine the policy options set out in the report (being mindful of the ongoing international work in this area), with a view to adopting a recommendation by the end of 2021.

Its ongoing analytical work will further consider the markets in which MMFs operate, the investors holding MMF shares or units, and MMFs themselves. The ESRB will focus on policy options that would address vulnerabilities within MMFs themselves.

Enhancing MMF resilience: FSB consults on policy proposals

The Financial Stability Board (FSB) has published a consultation report on policy proposals to enhance MMF resilience. The report forms part of the FSB's work programme on non-bank financial intermediation. It considers the likely effects of a broad range of policy options to address MMF vulnerabilities by examining how these options would affect the behaviour of MMF investors, fund managers and sponsors. The FSB also examines the broader effects on short-term funding markets, including through impacts on the use of potential substitutes for MMFs.

The report closes to responses on 16 August 2021. The FSB will publish the final report in October 2021.

Regulation on cross-border distribution of funds: ESMA report on marketing requirements and marketing communications

ESMA has published a report providing an overview of marketing requirements and marketing communications under the Regulation on the cross-border distribution of collective investment undertakings. The report is produced under Article 8(2) of the Regulation which requires ESMA, by 30 June 2021, and every second year subsequently, to submit a report to the European Parliament, the Council of the EU and the European Commission. The report must present an overview of member states' marketing requirements set out in Article 5(1) of the Regulation and analyse the effects of national laws, regulations and administrative provisions governing marketing communications, based on the information received from national competent authorities in accordance with Article 8(1) of the Regulation.

Recommendations on sustainability-related practices, policies, procedures and disclosures in asset management: IOSCO consultation

The International Organization of Securities Commissions (IOSCO) has published a consultation report on sustainability-related practices, policies, procedures and disclosures in asset management. IOSCO aims to improve sustainability-related practices, policies, procedures and disclosures in the asset management industry. This includes encouraging asset managers to take sustainability-related risks and opportunities into account in their investment decision-making and risk management processes and addressing the risk of greenwashing through improving transparency, comparability and consistency in sustainability-related disclosure.

In the consultation report, IOSCO:

• discusses the types, and provides examples, of greenwashing at the asset manager and product levels.
• describes the different regulatory approaches currently taken by members of IOSCO's task force on sustainable finance to address sustainability-related practices by asset managers, as well as disclosures at both the firm and product level. These are broadly categorised into the following areas (consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)): governance, strategy, risk management and metrics and targets;
• provides an overview of the current landscape of sustainability-related financial and investor education;
• considers, and highlights the need to address, the challenges associated with the lack of reliability and comparability of data at the corporate level and the environmental, social and governance (ESG) data and ratings provided by third-party providers. IOSCO will publish a further report in July 2021 covering the proliferation of data and ESG ratings providers; and
• sets out five recommendations for securities regulators and policymakers. These recommendations are designed to provide a list of potential areas for regulatory consideration in line with domestic regulatory frameworks.

The consultation report closes to responses on 15 August 2021.

Download the full regulatory news bulletin 

Authored by Yvonne Clapham