Developing regulatory frameworks for the fund industry in the European Union and post-Brexit UK has been vital to safeguarding investor interests, ensuring market stability and bolstering the financial markets’ integrity. The EU has crafted a system prioritising transparency and investor protection. In contrast, since leaving the EU, the UK has refined its regulatory measures to better fit its market needs while aligning with international norms for cross-border activities. The differences and intersections between the two areas highlight a key discussion in global finance regulation, which this article addresses.
The European Union
The EU has honed its regulatory framework for the fund industry, prioritising stability, transparency and market integrity. The development of these regulations stems from a need to protect investors and counter systemic risk, a lesson from previous financial crises. Central to this framework are four elements: UCITS for standardised investor protection; AIFMD for alternative investment funds; MiFID II for transparency and robust trading; and SFDR for sustainability-related disclosures. These regulations strengthen the European fund industry and oversee the operations of its entities, and are explored in more depth here.
Undertakings for the Collective Investment in Transferable Securities (UCITS) delineate a critical regulatory framework within the EU, serving to entrench a harmonised approach towards retail investment funds and ensuring a robust investor protection regime. Instituted to facilitate the cross-border offering of investment funds, UCITS adheres to stringent liquidity, diversification, and leverage rules, thereby aiming to cultivate a transparent and secure environment for investors.
While it has considerably buoyed the European investment landscape, UCITS has not been without challenges. Issues such as disparate national interpretations and periodic contentions regarding regulatory alignment amongst member states have surfaced, adding complexities to its holistic and uniform implementation across diverse jurisdictions.
The Alternative Investment Fund Managers Directive (AIFMD) serves a quintessential role in regulating managers of Alternative Investment Funds (AIFs). Primarily aimed at shedding light on the previously opaque realm of alternative investments, AIFMD seeks to enhance transparency, mitigate systemic risk, and fortify investor protection. It obliges fund managers to adhere to strict operational, risk management and transparency protocols, whilst also permitting marketing activities across the EU via a passporting system.
Despite its pivotal role, AIFMD has grappled with certain issues, notably regarding non-EU AIFMs and their market access, often resulting in intricate navigational challenges through varying national private placement regimes. This discord amongst regulations presents an onerous path for fund managers striving for a seamless pan-European presence.
Markets in Financial Instruments Directive II (MiFID II), implemented in 2018, epitomises the EU’s steadfast commitment to transparency, investor protection and the orderly functioning of financial markets. A multifaceted regulation, MiFID II shapes the architecture of Europe’s financial markets, defining the codes of conduct for financial entities, establishing organisational requirements, and orchestrating market structures to ensure efficacious securities trading.
Despite its laudable aspirations, MiFID II has encountered its share of tribulations. Critics highlight its complex reporting obligations and the resultant operational burdens for smaller firms, coupled with controversies surrounding research unbundling and its ripple effects on asset managers and brokers. These facets necessitate an ongoing appraisal of its efficacy and adaptability.
The Sustainable Finance Disclosure Regulation (SFDR) stands as a linchpin in the EU’s strategy towards actualising environmental, social and governance (ESG) objectives within its financial sector. Implemented in March 2021, SFDR mandates financial market participants and advisers to make scrupulous disclosures regarding how ESG factors are integrated into their investment decisions and advice, thereby advancing transparency and preventing greenwashing. The regulation propels the EU’s ambition to direct capital towards sustainable activities.
However, SFDR’s journey has not been devoid of hurdles. Firms have grappled with challenges related to data availability, establishing methodologies to quantify sustainability impacts, and navigating the nuances of detailed disclosure requirements, thereby spotlighting intricate intersections between regulatory compliance and practical implementation.
United Kingdom
In the post-Brexit era, the UK has refined its fund industry’s regulatory framework to ensure international competitiveness and strong investor protection. Leaving the EU meant deviating from specific EU directives, allowing the UK to align regulations more with domestic preferences. Although no longer bound by EU rules, the UK has initially incorporated much of the EU legislation into its own law, making many European regulations still applicable in the UK. The UK’s version of AIFMD, governing alternative investment funds, mirrors the EU’s, and it maintains a framework in line with the EU’s UCITS. Furthermore, post-Brexit, UK firms selling or marketing in the EU must still adhere to the EU’s PRIIPs regulation. Additionally, the post-Brexit framework introduces the UK IFPR, updated FCA rules, OFR, and LTAF, underscoring the UK’s dedication to a vibrant and secure global fund industry.
The Investment Firms Prudential Regime (IFPR) represents a pivotal development in UK’s financial regulation. Instituted to align the prudential standards of investment firms, its purpose is to streamline and fortify the capital and risk management practices of such entities. Functionally, the IFPR consolidates myriad existing rules, offering a more coherent and proportionate framework. Its scope primarily targets investment firms, differentiating requirements based on firms’ size and non-systemic nature. However, transition to IFPR has posed challenges for some firms, particularly in comprehending the intricate rule adjustments and the consequent operational recalibrations.
The Financial Conduct Authority (FCA) plays a pivotal role in regulating the UK’s fund industry. Its primary purpose is to protect consumers, preserve market integrity and promote competition. The FCA sets and enforces rules which fund managers and entities must adhere to, ensuring transparency and ethical conduct. Its scope encompasses a broad range of financial services, including asset management. However, some industry participants argue that the FCA’s regulations can be overly complex, potentially stifling innovation or creating administrative burdens.
The Overseas Funds Regime (OFR) is a regulatory innovation designed to facilitate the access of overseas funds into the UK market. Its chief purpose is to establish a framework for recognising and allowing such funds, primarily from jurisdictions outside the European Economic Area, to be marketed in the UK. It operates on an equivalence basis, where the overseas regime is compared with the UK’s standards. Despite its intent, the OFR has faced challenges, including complexities in assessing equivalence and potential delays in granting access to non-UK funds.
The Long-Term Asset Fund (LTAF) is a novel UK fund structure, devised to facilitate investment in illiquid assets, such as infrastructure and unlisted companies. Its primary aim is to offer investors better outcomes through diversified long-term returns, while simultaneously supporting economic growth. Functionally, the LTAF allows more extended redemption periods, aligning with the nature of its assets. However, the LTAF’s nascent stage has seen challenges in achieving widespread adoption and ensuring adequate investor protection given the inherent risks of illiquid assets.
The regulatory landscapes of the EU and post-Brexit UK underscore the importance of financial governance in safeguarding investor interests, ensuring market stability and promoting transparency. While the EU emphasises stability through regulations such as UCITS, AIFMD, MiFID II, and SFDR, the UK has adeptly tailored its framework post-Brexit, incorporating EU norms yet introducing bespoke measures like the UK IFPR and LTAF. Both jurisdictions exemplify the evolution of global fund industry regulations with the aim of continuing to attract investment.