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15 March 20237 minute read

FCA publishes discussion paper DP 23/2 on updating and improving the UK regime for asset management



The UK Financial Conduct Authority (FCA) has published a discussion paper, DP23/2 seeking views from market participants on how best to create a more streamlined, simplified “coherent, agile and internationally respected” regulatory regime for the UK asset management sector including whether elements of EU retained law should be included.

DP23/2 (the DP) was published alongside the FCA’s discussion paper on the future disclosure regime for retail investment products (you can access our Alert here).


Key themes

Structure of the asset management regime and creating a common framework

At present the regulation of the UK asset management sector is principally governed by the AIFMD, MiFID and UCITS as incorporated into UK law. In the FCA’s view, this has led to “identical or similar activities [being] regulated to a slightly different standard”, which has led to duplication which in some instance is technical in nature (e.g. conflicts of interest), whilst in others, it is more substantive (e.g. conduct of business). 

With this in mind, the FCA is seeking views on creating a single rulebook that will be applicable to all types of asset managers (i.e. regardless of whether they are managing a fund or individual segregated accounts). The FCA’s view is that this approach could significantly simplify the regulation of the asset management sector, although, it may add an extra layer of regulatory compliance to portfolio managers who are not subject to the additional rules that apply to fund managers and a radical overhaul of the regime, could impose significant one-off costs.


Regime for retail funds

Aligning with its strategy on providing good outcomes to retail customers under the FCA Consumer Duty regime, the FCA is seeking views on:

  • removing the boundary between the UCITS and NURS regimes so that retail investors are subject to a single set of rules;
  • simplifying certain specific requirements by having flexible rules for master-feeder fund structures;
  • rebranding NURS and more complex retail products as UCITS plus with mainstream retail products being branded as UCITS; and
  • creating a category of basic funds which are restricted from making certain investments and distinguishing such funds these from other retail funds.

Given the ambition of these changes, it will be important for market participants to give views on the timetable for implementing changes to the regime.


Regime for professional funds and small registered AIFMs

The FCA is seeking feedback and views on:

  • changing the size threshold at which firms must apply to become full-scope UK AIFMs;
  • allowing firms that meet other criteria (unrelated to size) to use the small authorised UK AIFM exemption; and
  • introducing a set of high-level rules applicable to small UK AIFMs including liquidity management, amongst other things, while continuing to set high standards around financial stability and market integrity.

The FCA is concerned that investors may not fully understand the difference between a small authorised AIFM and a small registered AIFM and the respective regulatory protections that apply. Indeed, the FCA is consulting with HM Treasury on whether the registration regime remains appropriate. This may mean that some small registered AIFMs will need to apply for authorisation.


Host AFMs and portfolio management

The FCA is seeking views on the use of host AFMs, whether they meet appropriate standards and also whether appropriate guidance should be established for such AFMs.

The FCA is also concerned that misunderstandings between portfolio managers and host AFMs may lead to gaps in oversight and seeks views on whether this can be addressed through the imposition of specific contractual requirements between the portfolio manager and the host AFM.


Enhancing liquidity management and investment due diligence

The FCA states that it plans to convert stress testing guidelines issued by the European Securities and Markets Authority into FCA rules and guidance which will then apply fund managers.

The FCA is notably considering removing the restriction around liquidity stress testing “where appropriate” so that there aren’t reasons for fund managers to avoid stress testing.

In addition, the FCA is seeking views on extending reporting requirements to ensure more effective regulatory supervision of the liquidity of funds and is also considering whether to impose more rules governing the use of anti-dilution mechanisms.

The FCA asks whether regulatory expectations in relation to the due skill and diligence requirements ought to apply to all types of asset management activity.


Clarifying rules for depositaries

The FCA is concerned that depositaries have not always challenged fund managers or intervened in ways that are expected of them under the UK regulatory framework. Therefore, the FCA is seeking feedback on whether it should provide further guidance in relation to its expectations of depositaries in relation to such matters as:   

  • the resources, skill, knowledge and experience expected of a depositary;
  • appropriate systems and controls that should be in place to identify breaches of the scheme rules and the constitutional documents of a scheme;
  • actions a depositary must take when a breach is identified;
  • actions a depositary should take if the AFM does not take action to deal with the breach;
  • the depositary’s oversight of the AFM’s liquidity management, including liquidity stress testing; and
  • the depositary’s oversight of the AFM’s pricing and dealing in units of the fund.


Improving technology in fund operations

In recognition that the current rules in the FCA Handbook may not adequately reflect how managers  should adopt to new technology in a manner that is compliant with their  regulatory requirements, the  FCA is seeking views on how to improve the fund rules which include:

  • giving flexibility to managers when it comes to applying rules on investments in eligible assets and markets upon which such assets can be traded in certain circumstances and providing further guidance to managers;
  • reviewing and changing the rules on spread that limit risks funds can take and taking a reasonable principles-based approach in line with sound risk management;
  • using the Investment Association’s “Direct2Fund” model1;
  • identifying opportunities for change in the funds industry, for instance, how exchange or payment tokens could be regulated in the UK which would need to ensure consumer protection, engagement, understanding and competition as part of this process2;
  • inviting views on how tokenisation3 can be simplified and made more efficient in terms of interactions between the fund manager, the fund and its investors; and
  • identifying specific risks associated with operating a “digital register” and whether there is interest by unitholders to use such technology.


Improving investor engagement through technology

Finally, the FCA is seeking feedback on how post-sale information provided to investors by fund managers can be improved if provided in digital form, including:

  • modernising prospectus disclosures and increasing scrutiny of these to align such disclosures with international best practice, ensuring machine readability of its content so that consumers and third parties have easier access to its content and requiring prospectuses to be stored and published under a central repository;
  • improving manager’s reports so that the content of such reports are electronically accessible, in line with guidance on periodic reporting, contain information such as disclosures about sustainability targets, amongst other things; and
  • better use of technology to improve voting, attendance and participation at meetings such as identity validation and use of such technology for fund managers to act in investors’ best interests, such as encouraging investor engagement in underlying companies.


Next steps

The FCA requests stakeholders to send comments by 22 May 2023. The FCA will publish a feedback statement later in 2023.


1This was a proposition put forward by the Investment Association to make it possible for investors to transact directly with the fund when buying and selling units, rather than the AFM doing this on behalf of the fund and the investors.
2The FCA recognised that the UK government recently consulted on regulating crypto-assets in the UK, and therefore has left this particular topic on portfolio management of crypto assets to be progressed by the UK government.
3Tokenisation is the ability to issue a fund’s rights of participation units or shares to investors as digital tokens.