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November Investment Management Update

November Investment Management Update

  • United Kingdom
  • Financial institutions - Asset managers and funds


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What were October’s highlights?

ESMA consults on MiFID II product governance guidelines

On 5 October 2016, ESMA published a consultation paper (ESMA/2016/1436) on product governance guidelines under the MiFID II Directive (2014/65/EU).

MiFID II introduces product governance requirements to enhance investor protection by regulating all stages of the life-cycle of products or services in order to ensure that firms which manufacture and distribute financial instruments and structured deposits act in the clients’ best interests.

The draft guidelines aim to promote greater convergence in the implementation and application of the MiFID II requirements on product governance.  The proposed guidelines address issues specific to manufacturers and distributors as well as issues common to both.

However, the guidelines primarily address the target market assessment, as this aspect was identified as the most important for ensuring a consistent application of Articles 16(3) and 24(2) of MiFID II and Articles 9 and 10 of the European Commission Delegated Directive supplementing MiFID II.

Proposed guidelines for manufacturers and distributors focus on:

  • identifying potential target markets and negative target markets (where a product would be incompatible with target clients);
  • articulation of a distribution strategy;
  • the relationship between the product governance requirements and the assessment of suitability or appropriateness;
  • the interaction of the provision of different investment services;
  • the distribution of products manufactured by entities not subject to MiFID II product governance requirements or products that are manufactured before MiFID II enters into force; and
  • the application of the target market requirements to firms dealing in wholesale markets.

The consultation closes on 5 January 2017. ESMA will consider the feedback it receives to the consultation in the first quarter of 2017 and expects to publish a final report in the first half of 2017. The guidelines will apply from 3 January 2018.

FCA consults on proposals to improve transactions cost disclosure by asset managers

On 5 October 2016, the FCA published a consultation paper (CP16/30) setting out proposed rules and guidance aimed at standardising the disclosure of the transaction costs incurred by workplace pensions.

Governance bodies of defined contribution pension schemes (independent governance committees and trustees) have a duty to request and report on transaction costs as far as they are able. However, currently there is no corresponding duty on asset managers to provide full disclosure of these costs in a standardised form. The FCA's proposals aim to introduce a regime that delivers a high degree of consistency in how transaction costs are reported and provide governance bodies with a comprehensive assessment of the costs that are incurred on their behalf by asset managers.

The proposed rules set out a standard way in which transaction costs should be disclosed. The FCA is proposing to:

  • place a duty on asset managers to disclosure aggregate transaction costs to pension schemes that directly or indirectly invest in their funds;
  • require asset managers to provide a breakdown of transaction costs on request, with the total broken down into categories of identifiable costs, which could include specific costs like taxes and securities lending costs;
  • require the disclosure to be based on a comparison of actual prices with the value of the asset immediately before the order to transact entered the market (which is known as the slippage cost approach);
  • require disclosure of administration charges alongside transaction costs; and
  • ensure that where it is not possible to provide the transaction cost information for all the assets in a scheme, the firm must disclose this to the governance body and explain why.

The deadline for responses to the consultation is 4 January 2017. The FCA expects to publish its final rules in a policy statement in the second quarter of 2017.

ESMA continues preparations for AIFMD third country passport

On 11 October 2016, Steven Maijoor, the Chair of ESMA, briefed the European Parliament’s Economic and Monetary Affairs Committee on ESMA’s next steps, which are to:

  • continue its assessment of Bermuda and Cayman Islands with a view to reaching a definitive conclusion on whether to extend the passport to those countries;
  • start to assess a third group of non-EU countries, when it has more clarity on the next steps envisaged by the co-legislators; and
  • focus on putting in place the extensive framework foreseen by the co-legislators in case the passport is indeed extended to one or more non-EU countries.

ESMA will continue its assessment of Bermuda and the Cayman Islands with a view to reaching a definitive conclusion on whether to extend the passport to these countries.

ESMA provided advice to the European Parliament in July 2016 on extending the application of the AIFMD passport to non-EU jurisdictions.

See our recent e-briefing on ESMA's AIFMD Third Country Passport for more information.

Investment Association publishes guidance on charity authorised investment funds

On 12 October 2016, the Investment Association (IA) announced in a press release the publication of industry guidance on charity authorised investment funds.

In the March 2015 budget, the Chancellor of the Exchequer announced that a new category of FCA authorised funds would be introduced exclusively for investment by charities and for charitable purposes.  These funds are to be known as Charity Authorised Investment Funds (or CAIFs) and will also be subject to oversight by the Charity Commission (as each CAIF will itself be a charity).

The IA has worked with the Charity Investors Group and the Charity Law Association to produce guidance for investment managers on setting up a CAIF. The guide explains how CAIFs are regulated and compares them to the existing common investment fund (CIF) structure. It contains details as to how CAIFs can be established, and the process for obtaining FCA authorisation and applying to the Charity Commission for registered charity status. The guide also sets out ongoing regulatory requirements.

See our recent briefing “Making a success of the new charity fund structure” for more information. 

For more information contact

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