Deep Dive: Upheavals in UK regulation begin creeping up asset managers’ agendas

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Focus on post-Brexit, SDR and LTAF rules

Brexit and ongoing environmental developments have introduced a significant shift in the UK regulatory landscape.

The Treasury’s Future Regulatory Framework and the Financial Conduct Authority’s SDR and Consumer Duty just some of the new rules firms will have to be on top of this year.

After an unprecedented year for UK-regulated firms in 2022, when the UK’s financial watchdog advanced a number of regulatory initiatives, the remainder of 2023 will also see pivotal changes to the rules governing the asset management sector.

The Edinburgh reforms, part of the government’s Financial Services and Markets Bill currently making its way through parliament and expected to become law in the coming months, represents the most significant package of regulatory change since the UK left the EU.

Edinburgh Reforms: Key points from Hunt’s financial services regulation shake-up

The new rules aim to repeal the financial services legislation that previously aligned with EU law and give the government an opportunity to set out how it will overhaul the regulatory framework of the sector.

According to John Leiper, CIO at Titan Asset Management, the UK’s regulatory approach is “clearly differentiated” from the prior direction of travel, as well as its peers, which he said introduces both opportunity and risk.

“The perceived benefits from a tailored approach and access to new markets should be weighed against maintaining existing market access and managing the costs and complexities from the transition,” he said.

“Given the importance of financial services to the economy, we are particularly focused on the Edinburgh Reforms which seek to boost competitiveness in the sector, particularly in light of the recent banking sector turmoil in the US and Switzerland.”

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The coming months will also bring significant deadlines for the FCA’s Consumer Duty, which is set to come into force for new and existing products or services that are open to sale or renewal on 31 July, as well as growing discussions for a regulatory regime for cryptoassets.

“The macroeconomic consequences [of the changes] may not be apparent for some time, nor may they be as intended, necessitating an adaptive, pragmatic and holistically evaluative approach towards UK regulation,” Leiper added.

Focus on SDR

Beyond Consumer Duty and the Edinburgh Reforms, the FCA’s regulatory focus on sustainable finance continues to be centred on preventing greenwashing.

The FCA’s SDR investment labelling rules – the UK’s answer to the EU’s SFDR – seek to build trust in sustainable investments, increase the quality of disclosure and provide investors with clear labels to help them easily navigate the investment landscape.

FCA unveils SDR investment labels

“The framework also puts forward a general anti-greenwashing rule, which requires firms to ensure the naming and marketing of financial products are clear, fair, not misleading, and consistent with the sustainability profile of the product,” said Mark Remington, portfolio manager at EFG Asset Management.

“The goal here is that the product’s names and marketing align with the underlying sustainability-related objectives.”

The UK’s framework is different to the EU’s equivalent framework, which makes it slightly trickier for asset managers, said Remington. However, the FCA, in its consultation paper, provided a roadmap for how one can map the two frameworks together.

FCA: SDR ‘very different’ regime to SFDR

“For the purposes of the investor, the overall goal of the two frameworks are the same: to primarily to achieve better outcomes for the end user,” he added.

In March, the FCA said it would need until the third quarter before releasing their policy statement on SDR. The SDR regulations are expected to come into effect at the end of June 2024, with the anti-greenwashing rules coming into effect a year earlier, on 30 June 2023.

Long-Term Asset Fund

With over a year until SDR comes into effect and with many asset managers still struggling to keep on top of changes to EU regulation, Bhavik Parekh, research associate at MainStreet Partners, argued that adapting their current range of funds to comply with a potential SDR framework “is not high on managers’ agendas”.

However, SDR is not the only regulation that has the potential to improve sustainable investing, he noted, adding that an area of ESG and sustainable investing that has yet to see the same attention as public markets is private markets.

Schroders Capital unveils UK’s first LTAF

“There are benefits of holding assets privately, from a sustainability point of view, but currently private companies face far less scrutiny than publicly traded peers, simply because they are often not required to disclose at the same level,” he said.

Another problem of sustainable investing in public markets is that the benefits of good stewardship may not always be seen within the time horizon of an investment, which means the incentive for good stewardship is not always high, Parekh noted.

However, he said that the UK’s Long-Term Asset Fund (LTAF), which was introduced by the FCA in a bid to widen investment in long-term private assets to a broader investor base, primarily defined contribution schemes, has the potential to solve this problem.

“The long-term nature of these investments means that stewardship of the assets can be at the heart of how these investments are managed,” he said.

Schroders Capital gains FCA approval for renewables and energy transition LTAF

Schroders Capital became the first asset manager to receive regulatory approval to launch an LTAF at the end of March, the Capital Climate+ LTAF, which is designed to help UK defined contribution pension funds support the net-zero transition by investing in diversified multi-private assets.

In May, the firm launched a second LTAF dedicated to renewable energy and the energy transition: the Schroders Greencoat LTAF. According to Parekh, there will likely be more LTAF launches “with some kind of sustainability focus”.

Also at the start of May Aviva Investors launched a £1.5bn property LTAF, a portfolio of selected direct real estate assets seeded by Aviva UK Life with-profits funds.

Although these funds are currently only available to DC clients, an ongoing FCA consultation on broadening access to LTAFs may mean that these vehicles will  also have a role to play in the UK wealth market going forward.

By Bhavik Parekh, ESG Research Associate at MainStreet Partners