Following on from our fourth summary on the Financial Conduct Authority’s (“FCA”) discussion paper titled “Updating and Enhancing the UK Asset Management Regime” (DP23/2), we have produced a fifth and final summary centred on improving the fund rules.
The FCA has expressed concern about…
the outdated nature of fund rules, given the evolution of markets since their inception. The FCA’s aim is to have greater focus on desired outcomes and ensure that the fund rules effectively deliver these outcomes in a way that is proportionate to modern markets. The FCA presents potential areas for reform or enhancement of the fund rules as follows:
Eligible assets regime:
The eligible assets regime, which outlines the investment requirements for Undertakings for Collective Investment in Transferable Securities (“UCITS”) funds, is a key area of concern. Under this regime, UCITS funds are permitted to invest up to 10% of their portfolio into assets that do not meet the eligible markets criteria, commonly referred to as the “10% rule.” The FCA has raised concerns that some UCITS managers may interpret this rule as a general permission to invest this part of the fund in a wider range of assets, without adequately considering the implications for suitability or risk management. While the FCA recognises the need for flexibility to address unforeseen circumstances, they propose providing guidance to managers regarding their expectations around the 10% rule. For instance, the FCA expects managers to refrain from utilising the 10% rule in a manner that undermines the liquidity of the fund, or its ability to adapt to changing market conditions over time.
Changes to rules in the Collective Investment Schemes sourcebook 5 (COLL):
The FCA is considering changes to the detailed rules found in COLL 5 of the Collective Investment Schemes sourcebook. These rules pertain to the diversification of risk and establish the maximum amount that a fund can hold in specific assets. The rules aim to limit the risk that a fund can take, and they set specific limits that Authorised Fund Managers (“AFMs“) and depositaries can monitor. However, stakeholders have proposed replacing the current prescriptive requirements with a more principles-based regime that considers sound risk management principles, allowing for greater flexibility in investment decisions. The FCA is assessing the potential benefits of modifying the rules in this area, however they are not considering the removal of quantitative restrictions altogether.
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