A separate UK ESG investing taxonomy and a couple of foreign-fund access regimes that replicate EU rules are some of the ways the London government is considering using its post-Brexit powers. Meanwhile in Luxembourg, the CSSF is working to reduce complexity for market players regarding the implementation of EU sustainability rules.
‘We will be developing a UK ESG taxonomy, so we won’t be carbon copying whatever happens in the European Union,’ Nick Miller, head of asset management supervision with the UK regulator the Financial Conduct Authority (FCA) told ALFI’s virtual London Conference on 23 November. He went on: ‘We’re aiming for similar outcomes here, which are about consumers understanding the risks around sustainability, what the products claim to do, and that they actually do them. So I suspect there won’t be much disagreement between UK and EU on that issue.’
Does the industry want this?
However it is unlikely that the European fund industry wants greater complexity. ‘Many companies are working with so many different taxonomies, they find it really difficult,’ said Anne Richards chief executive officer of Fidelity International speaking earlier in the day. ‘I think a key part of our role is in pushing for standardisation in how and what you measure,’ she added.
The UK government likes to talk about diverging from the EU, but so far many of its actions have sought to replicate existing single market arrangements. For example, Miller described the planned temporary permissions regime (TPR) for fund marketing and the overseas funds regime, both of which offer an open door to EU regulated products.
With the TPR, ‘UCITS funds will be able to opt in to continue to be marketed to UK retail investors broadly in the same way that they have been doing for years and decades,’ he said. Similarly, with the overseas funds regime this would see the regulator and the UK finance ministry decide which jurisdictions are ‘equivalent’, so enabling financial products from these countries to be marketed freely into the UK, subject to some additional requirements from the FCA. ‘The equivalence determinations should be made where a regime is similar in terms of the outcomes,’ Miller said. In other words, EU-based funds will probably be able to access UK investors with ease.
Gentle warning
Pierre Gramegna, Luxembourg’s finance minister, speaking at the start of the day gave a warning to the UK authorities about the current state of negotiations. ‘Brexit is not on the mind of many political decision makers on the continent,’ he warned. Moreover ‘financial services are not part of the European Commission’s mandate, so is not the core of the negotiations and are being treated a little bit in the margins.’ The clear implication being that unless the UK compromises there is a chance that its financial services firms could be frozen out of the EU market.
Nicolas Mackel, CEO of Luxembourg for Finance went further: ‘if there were to be no deal, I think the relationship would be acrimonious, not for months, but probably for at least one or two years. It will be very difficult to envisage any sort of bridges being built.’
CSSF ESG implementation
Meanwhile, the CSSF is seeking to streamline implementation of the new EU ESG rules. Marco Zwick (pictured), director at the CSSF was keen to reassure market players that the CSSF understands the size of the challenge of incorporating new EU rules into procedures. He noted that the environmental investing aspect in particular is ‘putting people under a lot of pressure right now, because change needs to happen quickly,’ he said.
‘It’s one thing to say you should become compliant with something which is clearly defined, it is another thing where only high level principles have been established,’ he said. So for example, when assessing marketing documentation, he said the CSSF: ‘would expect the messaging to be clear, transparent, and not misleading to investors, with such disclosures not being reduced to marketing statements.’
s for sustainable finance disclosure regulation (SFDR) compliance, Zwick said the CSSF will define a fast track procedure and planning process for prospectus updates. ‘We will also ask the responsible person or boards of management companies and funds to send us certification that they comply with the SFDR,’ he noted, adding ‘we are not going to challenge everything from day one, but we will do a number of checks and ex ante verifications.’ Fundamentally, he said ‘the European regulation does not give us tolerance but our goal is to help implementation.’