UK FCA climate-related rules for asset managers, listed companies; Beginning 2022

Published on: 21 December 2021 12:35 PM
by KnowESG
UK FCA climate-related rules for asset managers
UK FCA climate-related rules for asset managers

A Brief Summary

The conduct regulator for financial services, the Financial conduct authority (FCA) is all set to introduce climate-related rules for investment managers, life insurers, and pension funds, starting 2022. The release is followed by a consultation launched by the FCA in June aimed for high-quality information on climate-related risks. Following the announcement of disclosure rules for premium-listed companies in Dec 2020, companies are required to follow stringent compliance standards that demand them to include a statement in the annual financial report showing whether the disclosures are consistent with the recommendations concerned, or else to explain otherwise. The new policy entails how they manage or administer investments on behalf of clients and consumers after taking climate-related matters into account.

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The UK Financial Conduct Authority (FCA) published its consultation paper CP21/17 (the Consultation Paper) on new climate-related disclosure requirements for asset managers, life insurers, and FCA-regulated pension providers on June 22, 2021, with a phased-in approach for the largest firms beginning January 1, 2022. The proposed disclosures would be based on the Task Force on Climate-related Financial Disclosures of the Financial Stability Board (TCFD).

The consequences of the new rules for asset managers are the focus of this Update. Although the restrictions are intended to apply directly to about 140 UK asset managers (with a £5 billion AUM threshold), it is likely that the new rules will have an indirect influence on non-UK asset managers (such as those in the United States and the European Union).

The recommendations are consistent with the TCFD's recommended disclosures, which were finalized in June 2017. The UK government said in November 2020 that it intends to implement these disclosure requirements by 2025, with a large chunk in place by 2023.

The new FCA guidelines will be applied through the FCA Handbook's new "Environmental, Social, and Governance (ESG) Sourcebook." The FCA plans to expand the ESG Sourcebook over time to incorporate more ESG-related subjects.

The EU's Sustainable Finance Disclosure Regulation has already mandated certain ESG-related disclosure obligations for asset managers and others (SFDR). More information is available in our January 2021 Update EU ESG Disclosures Required from March 10, 2021 — Action Points for Non-EU Fund Managers and our June 2020 Update EU Sustainable Finance Disclosure Regulation and Taxonomy Regulation ESG Disclosures for Asset Managers. The UK is not implementing the SFDR, as we mentioned in our Updates. Unlike the SFDR, which covers a wide range of ESG issues, the UK's approach is almost entirely focused on climate-related issues. This Update will quickly discuss the significant similarities and differences between the proposed UK standards and the SFDR requirements where applicable.

Which asset managers in the United Kingdom are affected?

The FCA proposes that the new regulations apply to FCA authorized entities that manage investments from a UK-based establishment. These are some of them:

  1. Portfolio managers

  2. UK UCITS management businesses

  3. AIFMs in the United Kingdom

Advising on investments or managing investments on an ongoing basis; or for private equity or other private market activity, managing investments.

That is, the word "portfolio management" goes beyond what one may expect it to cover, given that it is commonly used to refer to merely discretionary investment management tasks. However, for the purposes of the ESG Sourcebook, the word will also refer to investment advice provided by private equity firms.

Only asset managers with an AUM of £5 billion or more (on a three-year rolling average) are expected to be affected by the new restrictions. The Consultation Paper states that if that level is met, the new rules will apply to 140 UK asset managers. The Consultation Paper, on the other hand, does not define AUM or how it is to be computed.

Is it possible that non-UK asset managers may be directly affected?

No, as previously stated, the new restrictions are planned to apply to FCA-authorized entities doing specified activities from a UK-based facility. To be clear, a non-UK firm that simply markets its funds in the UK (for example, via national private placement regimes established under the UK Alternative Investment Fund Managers Regulations 2013) is not an authorized firm for this purpose.

As a result, the proposed UK TCFD disclosure rules are lower in scope than the EU's SFDR. The SFDR, on the other hand, applies to "financial market participants," who are currently thought to include non-EU AIFMs that advertise their funds in the EU.

Non-UK managers, on the other hand, are likely to be impacted indirectly by the new restrictions — see below.

What types of life insurance and pension providers in the United Kingdom are affected?

The phrase "asset owner" is used throughout the Consultation Paper to refer to UK life insurers and FCA-regulated pension providers who will be subject to the new requirements. The FCA is supporting disclosures necessary for in-scope trustees of occupational pension plans under the Department of Work and Pensions (DWP) draught regulations and statutory guidelines (the DWP Draft Regulations), which take effect in October 1, 2021.

Asset owners with less than £5 billion under administration, like asset managers, are planned to be excluded from the disclosure rules. There is no definition of "administration," just as there isn't one for "AUM" for asset managers. According to the Consultation Paper, if the £5 billion thresholds are implemented, 34 asset owner corporations will be subject to the new restrictions.

How might the new restrictions affect non-UK asset managers indirectly?

Non-UK asset managers (as well as other non-in-scope UK managers) are likely to be indirectly affected by the new rules imposed on in-scope UK asset managers and UK asset owners. In-scope UK asset managers and asset owners would request that a non-UK asset manager (or a non-in-scope UK asset manager) provide certain product-level information in order to fulfill the in-scope UK asset managers/asset owners' own disclosure obligations, according to the FCA's proposals and the DWP Draft Regulations).

For example, a US fund manager may receive a request for information from a UK pension provider that is in-scope under the new FCA regulations or the DWP Draft Regulations and is attempting to meet its disclosure responsibilities under the new FCA rules or the DWP Draft Regulations.

What are the disclosure obligations for companies that are part of the scope?

The FCA is proposing new rules that will require asset managers (among others) to disclose climate-related information at the entity and product level. These disclosure standards are designed to give market participants clear and easy-to-understand information about the climate-related risks and possibilities associated with certain investments.

Reports at the entity level

Annual entity-level reports must be posted in a prominent location on the firm's main website. These reports' criteria are based on the TCFD recommendations, which include governance, strategy and risk management, scenario analysis, and metrics and targets. The FCA suggests a flexible approach to entity-level reporting, which might alleviate the cost of creating several disclosure reports for businesses. The following are examples of situations where relief may be available:

  • Reporting in groups. Climate-related disclosures made at the group level may be referred to by in-scope firms within a group structure.

  • Investment management delegation

    • When an "authorized fund manager" (AFM) delegated investment management to a third-party portfolio manager who is not part of the same group, the delegating AFM was still liable for producing a TCFD entity report. A delegating AFM's entity-level TCFD report, on the other hand, may include linkages and cross-references to relevant climate-related financial disclosures made by delegated managers, if those disclosures are available. The FCA Handbook only defines an AFM as an "authorized corporate director," a "authorized contractual scheme manager," or an "authorized unit trust manager." The Consultation Paper does not clarify why this delegation plan is just for AFMs and not for other asset managers.

    • Asset owners will be able to delegate or cross-refer to other third-party reports (in addition to group reports as noted above). When an asset owner's underlying funds are managed by an external asset manager, for example, the firm can consult the appointed asset manager's TCFD disclosures.

    Product/portfolio-level reports, like entity-level reports, will be published on the firm's main website once a year. They should also be communicated to clients in acceptable ways. These reports are anticipated from asset managers for the following purposes: Unauthorized AIFs, licensed funds (excluding feeder funds and sub-funds in the process of being wound up or terminated), and portfolio management services (as defined above). The obligatory core metrics (as per TCFD supplemental guidelines) and other data are given on a 'best efforts' basis should be included in these reports. Firms are expected to cover deviations in product-level reports where a specific product's strategy differs from the overarching approach described in entity-level reports. When a company delegated asset management to a third-party portfolio manager, it may choose to cross-refer to the delegate's disclosures. The FCA warns that product-level public disclosures may not always be appropriate (for example, where firms provide discretionary portfolio management services to individual investors, or for unlisted unauthorized AIFs). If this is the case, the Consultation Paper recommends that firms be prepared to give 'on-demand' disclosures to their clients once a year, upon request. Timing The disclosure rules would be implemented in two parts, according to the FCA's plan. The requirements will take effect on January 1, 2022, for asset managers with more than £50 billion in assets under management, with the first disclosure date scheduled for June 30, 2023. The requirements will take effect for other firms on January 1, 2023, with the deadline for disclosure set for June 30, 2024. The consultation period will end on September 10, 2021. Conclusion The FCA demonstrates through this Consultation Paper that, despite the UK Government's agreement to meet the EU Sustainable Finance Action Plan's aspirations, of which the SFDR is a part, the UK is taking its own approach to climate-related disclosures. When one considers that plans for ESG-related disclosures are also being created in the United States and several Asian nations, the patchwork of different standards that asset managers must comply with becomes even more complex. As a result, asset managers are likely to be directly affected by new requirements (in certain situations, such as the SFDR on an extraterritorial basis) or indirectly affected since their investors are subject to new local rules.