Welcome to the third edition of our Horizon Scan, where we focus on some of the principal recent and expected developments and changes that we expect to be of interest to those in the private funds and investment management sectors. We have grouped the topics under the following headings: UK and EU funds; sustainable finance (UK, EU, and US); regulatory developments (UK and EU); tax topics (UK and EU); and US-specific developments (for non-US fund managers marketing in the US and other than environmental, social, and governance (ESG)). At the end, we set out additional topics and anticipated developments to look out for over the next few months. They are also likely to impact the private funds industry, but in the interest of trying to be as succinct and focused as possible, we have not covered them in detail. There are a few items that remain of interest for which there have been no updates to report on since our last Horizon Scan in May 2023 (and which we have designated “no update” in the table for reference).

We pick out three broad themes that influence the legislative developments, as set out below.

Theme Comment
Sustainable finance and proposals to tackle greenwashing. ESG legislation increasingly applies on a cross-border basis, so having to comply becomes less about domicile and regulation and more about market expectations. We are already seeing movement toward codification and harmonisation in the way the industry reports, to try to make reporting unified and easier for GPs/managers and the data collected from reports more comparable and scalable for investors.
Steps toward the “retailisation” of investments that would otherwise be available only to professional investors. The finalisation of the European Long-Term Investment Fund (ELTIF) reform by January 2024 is an important regulatory initiative in this area. The EU Retail Investment Strategy aims to increase the amount of investment in the EU. It opens an important debate about how best to recognise the diversity of structures and how managers are to interact with their investors. Managers targeting only professional investors will not welcome being affected by stringent rules aimed at mass-retail clients.
On the UK side in particular, initiatives aimed at promoting the competitiveness of the private funds market. The Long Term Asset Fund (LTAF) has broader investment and structuring parameters than the EU ELTIF, but, being a UK fund vehicle, it does not benefit from the EU AIFMD marketing passport. The outcome of the review of the Alternative Investment Fund Managers Directive (AIFMD) is expected in early 2024 and will be important for both the outcome on loan origination AIFs and future UK divergence from AIFMD II. Both the LTAF and the ELTIF are welcome developments that provide access (subject to certain conditions) to retail investors. The ELTIF has some inherent structural complexities over other structures (i.e., funds of funds can invest only in other EU funds that make eligible investments, and master-feeder structures can invest only in underlying ELTIFs). A UK manager seeking to target the retail market via the LTAF would need to accept increased compliance and regulatory risk along with the Financial Conduct Authority (FCA)’s permission to manage an authorised AIF.

We plan to refresh and update this Horizon Scan in early 2024. In the meantime, please speak to your usual Goodwin contact or one of the co-authors of this briefing for any further detail, or if you want to discuss how any of these initiatives may affect your fund structures and investments.


This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.

UK and EU Funds Developments


Draft legislative limited partnership reforms make up part of the Economic Crime and Corporate Transparency Bill (ECCT Bill). Once enacted, the changes will represent a significant reform to UKLP law, in parallel with reforms to the powers of Companies House and law enforcement for economic crime.

See our October 2022 client alert for background.

Recent and Expected Developments

Once the ECCT Bill is enacted, we expect a short (six-month) transitional period for existing UKLPs to comply. This will include gathering the required information to be submitted to the registrar for each partner (including specifics on each individual limited partner), ensuring a UKLP has access to a Scottish or English registered office where its principal place of business is not also in the UK, and arranging appointments of individual registered officers of GPs.

The ECCT Bill is currently in the “ping-pong” stage, in which the bill goes back and forth between the House of Commons and the House of Lords as they seek to agree on the final details. It is expected to receive Royal Assent very soon after this process is completed (which could be imminent). Pending the legislation being finalised, secondary legislation being drafted, and the Authorised Corporate Service Provider (ACSP) regime becoming effective, GPs of existing UKLPs will want to make sure that they have the necessary information and make the necessary adaptations to their models within the six-month transitional period.


Helpfully, various initial concerns have now been addressed through proposed legislative amendments — namely, on the protection of a limited partner’s liability following dissolution and during the UKLP’s winding-up period, and regarding any change to the current regulatory treatment of whether a UKLP is a UK alternative investment fund (AIF) or a non-UK AIF (due to the new concept of a UK registered office; see below). However, we would note the broad provision that remains in the ECCT Bill giving the Secretary of State the power to make regulations that apply company law with modifications to fit the circumstances of limited partnerships (mirroring an existing power for LLPs). This is a far-reaching provision for potential future amendments to align partnership with company law (although it seems that there is no current initiative to extend the Persons of Significant Control regime to English limited partnerships).

UKLPs will be required to have a registered office in the UK. This is a new concept, as previously the LP Act contained references only to a UKLP’s “principal place of business.” As the UK AIFM Regulations specify that a UK AIF is an AIF with a registered office in the UK, the concern was that many UKLPs with a principal place of business outside the UK (and therefore non-UK AIFs for regulatory purposes) would suddenly be treated as UK AIFs. Amendments to the UK AIFM Regulations tabled as part of the ECCT Bill process should deal with this issue.


Available since November 2021, the LTAF is a relatively new open-ended authorised fund structure that can invest in a full range of illiquid asset classes. Since March 2023 there have been a handful of launches by institutional fund managers, putting LTAFs firmly on the road map as a fund structure for UK AIFMs that choose an FCA-authorised vehicle and seek to access defined contribution (DC) pension wealth.

Only full-scope UK AIFMs can act as Authorised Fund Managers (AFMs) of LTAFs (with the necessary regulatory permission to manage an authorised AIF), and they must demonstrate to the FCA that they possess the necessary expertise and skills for their proposed investment strategies (whether or not they intend to delegate).

An LTAF has to be open-ended but can be evergreen or have a fixed life. Importantly, it cannot offer redemptions more frequently than once a month and is subject to a mandatory notice period of at least 90 days for redemptions. An LTAF must publish monthly valuations, regardless of its dealing policy.

The development of the LTAF is significant to the retailisation agenda as an investment platform to access retail wealth outside the listed market. A UK manager seeking to target the retail market would need to accept increased compliance, detailed authorisation requirements, and regulatory risk.

Recent and Expected Developments

Following its August 2022 consultation on its broader retail distribution, the FCA published its Policy Statement PS23/7, including final Handbook rules, on 29 June 2023. These changes took effect on 3 July 2023 (and for the handful of preexisting LTAFs, there is a 12-month transitional period, which will require compliance by 3 July 2024, or sooner if fund documents are updated). As anticipated, units in an LTAF have been recategorized from Non-Mass Market Investments (NMMI) to Restricted Mass Market Investments (RMMI). This extends the LTAF’s investor base to include restricted retail investors (up to 10% of their investable assets and subject to certain conditions being met) as well as self-select DC pension schemes and Self-Invested Personal Pensions (SIPPs). See our recent briefing The FCA’s Final Rules For LTAFs: Distribution To Mass Market Retail Investors for more.

Therefore, eligible investors in an LTAF (subject to conditions for those who are “restricted retail investors”) now include:

  • professional investors
  • certified and self-certified sophisticated retail investors
  • certified high-net worth investors (HNWIs)
  • DC pension schemes (whether by way of a professional investor, using a unit-linked insurance wrapper, or being self-selected)
  • SIPPs
  • Other restricted retail investors

The other recent helpful development is the ability of pension scheme trustees since 6 April 2023 to be able to exempt the performance-based element of investment management fees from a 0.75% cap on annual changes. The UK Pensions Regulator (TPR) has recently updated its guidance to help UK DC pensions schemes comply with the charge cap rule changes and disclosures of any performance-based fees; also to provide that from 1 October 2023, trustees must state their policy on investing in illiquid assets (including all fund investments) in the statement of investment principles for their scheme’s default arrangements.


The LTAF was initially launched as a NMPI, being a subcategory of the high-risk investment NMMI category. The FCA has decided that the RMMI is a more appropriate category for the LTAF (and in so doing, distinguishing the LTAF from the Qualified Investor Scheme (QIS), that is to remain a NMPI), noting the LTAF’s strict regulatory requirements — including strong governance and disclosure rules, the requirement for it to employ a prudent spread of risk, and the requirement for it to be managed by a full-scope UK AIFM. Delivering growth through unlocking pension investment formed a key part of the Mansion House 2023 speech, including agreement between asset owners to allocate at least 5% of their default funds to unlisted equities by 2030, the LTAF being one way to facilitate this.

There are additional rules to provide further protection for mass market retail investors, which apply only to LTAFs open to mass market retail investors. They do not apply to LTAFs (or classes of units) for the newly defined “limited protection LTAF class,” being those LTAFs intended only for professional, certified HNWIs, certified sophisticated, or self-certified sophisticated investors.

Broadening pension schemes and retail access may help increase the appeal of the LTAF either as an alternative to the QIS or for those looking to the authorised funds market for the first time. Although the FCA authorisation timescale for LTAFs remains six months (which compares negatively with other regulated forms — the FCA aims to process applications to complete a QIS within one month and a Non-UCITS Retail Schemes (NURS) within two months), early engagement with the FCA is key, and may well achieve more efficient outcomes. Concerns have been raised that the LTAF is not an eligible investment for Individual Savings Accounts (ISAs). Also that the relaxation on fund of funds exposure limits is only for those NURS operating as Fund of Alternative Investment Funds (NURS FAIF)). Otherwise, the NURS will continue to be subject to the investment restriction so that it can invest only in an LTAF that has no more than 15% of its investments in other funds.

The EU legislation on the ELTIFs (see below) has been repealed in the UK (under the Financial Services and Markets Act 2023), given the lack of take-up in the UK and the option of the UK-specific LTAF. Needless to say, the LTAF does not benefit from the AIFMD retail and professional marketing passport that goes with the EU ELTIF.


The Code aims to encourage the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.

It applies to asset owners, asset managers, and service providers. Asset owners include institutional investors, pension funds, insurance companies, local government pension pools, sovereign wealth funds, investment trusts, and other collective investment vehicles. Reports are to be made across an organisation’s business, i.e., as a single global organisation (if not possible it can be done as a UK entity).

Recent and Expected Developments

A consultation on a review of the Code (most recently revised in 2020) is expected in Q4 2023. This Green Finance Strategy 2023 update stated that this would include:

  • ways to evaluate and communicate the efficacy of stewardship activity and outcomes
  • the need for a common language for stewardship, e.g., defining engagement
  • the role of systemic stewardship in supporting the achievement of positive sustainability outcomes
  • evolving expectations for stewardship in asset classes other than listed equity

The Financial Reporting Council expects improved disclosures of how rights and responsibilities are exercised on asset classes such as private equity, real estate and infrastructure.


Except for certain FCA-regulated investment firms (who have to disclose the nature of their commitment to the Code or where they do not, their alternative investment strategy), the Code and reporting on its application are voluntary. However, there is an expectation that asset managers and asset owners are seen to be taking active steps, including embracing ESG considerations, in their stewardship role, regardless of whether or not they are a signatory to the Code.

As highlighted in the UK Green Finance Strategy (see below), evidence of active stewardship is seen as crucial to the successful management of risks, opportunities, and impacts presented by climate and environmental change.


On 27 April 2023, HM Treasury and HMRC published a consultation on the potential scope and design of a new type of investment fund: the Reserved Investor Fund (Contractual Scheme) (the RIF). The consultation closed on 9 June 2023. The aim is to add value to the existing range of UK fund structures. Government response and feedback is awaited. The Financial Services and Markets Act 2023 empowers HM Treasury to legislate on the RIF, but draft legislation is awaited.

The consultation followed HM Treasury’s January 2021 call for input on a review of the UK funds regime, covering tax and relevant areas of regulation.

Recent and Expected Developments

The proposal under development is that of a UK unregulated contractual structure (in co-ownership form) that is an AIF that is closed-ended or hybrid and unlisted, but with tradable units. The RIF would be treated as a Non-Mass Market Investment (NMMI) that could be promoted to certified high-net-worth individuals and certified and self-certified sophisticated investors as well as professional investors.

It is hoped that the RIF would be able to convert to a Long Term Asset Fund (see above) that is an Authorised Contractual Scheme (ACS) with no tax triggered on conversion. See below (under UK Tax) for other developments on the tax side that formed part of the original UK funds review, in particular on the VAT treatment of fund management services and further amendments to the REIT rules. We also cover other tax developments of interest in this section.


As a starting point, the consultation envisages that the RIF would be (i) transparent for UK income tax purposes and (ii) opaque for UK capital gains taxation purposes but not subject to UK capital gains taxation (UK CGT), in broadly the same way as a UK Co-ownership Authorised Contractual Scheme (CoACS).

In other words, as a starting point, a RIF would be not dissimilar to an onshore version of an overseas unit trust structured as a Baker trust (e.g., a typical JPUT) but without being subject to UK CGT.

However, because the RIF would not be subject to UK CGT, HMT and HMRC are concerned about the potential for loss of tax on direct and indirect disposals by the RIF of UK real estate assets in certain circumstances. Non-UK resident investors are generally not subject to UK CGT on disposals (or deemed disposals) of interests in a vehicle that is opaque for UK tax purposes (like the RIF) unless such vehicle is “UK property rich” (i.e., broadly, if at least 75% of its gross asset value is derived from UK land, directly or indirectly) at the relevant time. As such, in the absence of specific rules, if a non-UK property-rich RIF were to make a disposal of UK land or a UK property-rich entity, the RIF would not be subject to UK CGT, nor would investors when those proceeds were realised by RIF investors when disposing of units or receiving capital proceeds from the RIF.

The consultation therefore envisages three “Restricted RIF” categories, each of which addresses that concern of HMT and HMRC in a different way:

  1. A RIF that must be “UK property rich” (i.e., broadly, at least 75% of its gross asset value must be derived from UK land, directly or indirectly) at all times — i.e., the UK would be able to tax taxable non-UK resident investors in the RIF on disposals and deemed disposals of their interests in the RIF at all times.
  2. A RIF that must not directly invest in UK property, or in UK property-rich entities (with the possible exception of minor interests in UK property-rich collective investment vehicles) — i.e., no risk of loss of UK CGT, as the RIF would not hold any assets that taxable non-UK residents would typically be subject to UK CGT on if they held them directly.
  3. All investors in the fund are exempt from UK CGT (as with an exempt unauthorised unit trust) — i.e., in practice, no loss of UK CGT.

If a Restricted RIF breaches the relevant restrictions, the current proposal is that the RIF would become transparent for UK CGT purposes permanently. There would also be additional guardrails for a UK property-rich RIF, in relation to which comparisons are being drawn against rules for collective investment vehicles that make an exemption election. An “Unrestricted RIF” is also being considered, which would be unrestricted in terms of investor base and investment strategy. However, given HMT and HMRC’s concerns regarding non-resident CGT, the consultation envisages that there would need to be more complex tax legislation to protect against a loss of tax revenue for the UK. The consultation suggests a variety of options, including (i) transparency for UK CGT purposes only on disposals of UK real estate or a change in investor base, or (ii) transparency for UK CGT only whilst not UK property rich. As with the Restricted RIF, there would also be additional guardrails, some of which would be modelled on rules for collective investment vehicles that make an exemption election.

The proposal provides that units in a RIF may be issued only to those set out below (on the same basis as for an ACS). The RIF must also meet either a genuine diversity of ownership (GDO) condition or a non-close condition.

  • professional investors (but note that under the NMMI rules the RIF could also be promoted to other investor categories, namely certified high-net-worth individuals and certified and self-certified sophisticated investors)
  • large investors (i.e., those who make a payment or contribute property with a value of not less than £1 million)
  • existing RIF investors

The proposals also envisage that all RIFs would be opaque for SDLT purposes (as with CoACS and JPUTs), as well as expanding SDLT seeding reliefs that apply to PAIFs and CoACS to seeding of schemes that elect into the RIF regime, with conditions applying. The Scottish and Welsh equivalents of SDLT (LBTT and LTT, respectively) are not covered because they are devolved taxes, but the hope is that the position would be mirrored for those taxes as well.

Unfortunately, though, there is currently no proposal for any special VAT treatment specifically for management of a RIF.


This FCA discussion paper (DP23/2) sets out thoughts on how the FCA might modernise, update, and improve the UK regime for asset management. The feedback period closed on 20 May 2023, following which we wait for the FCA, as part of its Future Regulatory Framework Review, to prioritise focus areas.

Recent and Expected Developments

Some of the themes covered include:

  • creating a common framework of rules for asset managers regardless of the type of firm (AIFM, MiFID portfolio manager, AFM of authorised funds, etc.)
  • changing/removing the boundary of the UK authorised funds regime (e.g., rebranding NURS as “UCITS-plus,” allowing wider distribution to retail investors or creating a more basic fund category for certain investments in, for example, large/more liquid investments)
  • amending the threshold at which AIFMs must apply full-scope rules; providing a core set of high-level rules for small authorised AIFMs (on valuation, liquidity management and investor disclosure)
  • setting minimum contractual requirements between host AIFMs and portfolio managers
  • reviewing rules and guidance on liquidity stress testing
  • exploring digital tokenisation in UK authorised funds

The discussion paper also asks for input on potential reform of the UK regulatory regime for asset managers and funds in scope of the paper but not discussed in detail.


A goal of achieving a more streamlined and consistent approach (rather than a wholesale revision to the rules for asset management firms) is welcome, in particular to achieve:

  • clearly distinguished rules between AIFs that admit retail investors and those that admit only professional investors;
  • increasing the threshold at which the full-scope regime applies to an AIFM
  • continuing to engage on liquidity management issues to ensure best practice while not necessitating further regulation.

Related areas not specifically addressed in the discussion paper but on which clarity would be useful include: (i) the UK’s future alignment with the EU AIFMD and EU UCITS Directive; (ii) a framework that aligns with the EU rules (with a view to benefitting from any future third-country passport in AIFMD, for example); and (iii) any separate UK regimes that would be more appropriate for those firms operating in the UK only.


The law of 21 July 2023 amends:

  • the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended (the UCI Law)
  • the Luxembourg law of 15 June 2004 on investment companies in risk capital, as amended (the SICAR Law)
  • the Luxembourg law of 13 February 2007 on specialised investment funds, as amended (the SIF Law)
  • the Luxembourg law of 23 July 2016 on reserved alternative investment funds, as amended (the RAIF Law)
  • the Luxembourg Law of 12 July 2013 on alternative investment fund managers, as amended (the AIFM Law),

(the “Modernisation Law”)

Recent and Expected Developments

Among myriad amendments, the following are of particular interest in the context of the aim to increase the attractiveness and competitiveness of the Luxembourg financial centre for retail investors:

  • Amendment of the definition of “well-informed investors” under the RAIF Law, the SICAR Law, and the SIF Law. The minimum investment threshold of €125,000 will be lowered to €100,000. The definition of “well-informed investor” has been harmonised throughout the SIF Law and the SICAR Law to reflect the definition set out in the RAIF Law.
  • Extension of the deadline to meet the minimum amount of assets under management. Previously, (a) the minimum of €1,250,000 must be reached (i) within six months as of its authorisation for a Part II UCI, (ii) within 12 months of its authorisation for a SIF, (iii) within 12 months of its establishment for a RAIF, and (b) the minimum of €1,000,000 must be reached within 12 months of its authorisation for a SICAR. The reforms extend the deadline to 12 months for a Part II UCI and to 24 months for SIFs, RAIFs, and SICARs.
  • New legal forms available to structure Part II UCIs. Previously, Part II UCIs could be structured only as SAs. The amended law means that Part II UCI may also be established as an SCA, an SCSp, an SCS, or a S.à r.l., in line with what is allowed for RAIFs and SIFs.
  • More flexible rules for the issuance price of closed-ended Part II UCI units. Previously, units of all Part II UCIs must be issued at NAV (as is the case for UCITs). The law amends the UCI Law pursuant to which the constitutive documents of closed-ended Part II UCIs could freely determine the issuance price.
  • Marketing of RAIFs, SICARs, and SIFs in Luxembourg. The law amends the RAIF Law and the AIFM Law to allow RAIFs, SICARs, and SIFs to be marketed to non-professional investors in Luxembourg, provided they qualify as well-informed investors (noting that this is already possible for Part II UCIs in relation to retail investors).


The Modernisation Law is a game changer, providing options for managers to hit the retail market with a lighter regulatory framework. The changes, to be read in conjunction with the new ELTIF regime, are a response from the Luxembourg legislator to the increasing trend from alternative fund managers seeking to raise capital from retail investors across the world.

The changes, which provide, among others, a smarter regulatory framework for all non-UCITS alternative funds and their Luxembourg managers, are very much welcomed by the Luxembourg fund industry and are considered to be an important milestone toward alternative offerings to retail investors (in providing innovative structuring and distribution options mainly for managers to attract retail investors).

A tax incentive is also in place to persuade savers to diversify from traditional publicly traded stocks and bonds. UCITS, Part II UCIs reserved to pan-European Personal Pension Product investors, Part II UCIs-ELTIFs, ELTIFs, RAIF-ELTIFs, SIF-ELTIFs, SICAR-ELTIFs are all exempt from the annual subscription tax.


The Financial Stability Board (FSB) consultation on proposed revisions to its nine 2017 policy recommendations is to be read in conjunction with the consultation by the International Organisation of Securities Commissions (IOSCO) on anti-dilution liquidity management tools (LMTs) — both of which closed on 4 September 2023. A key theme is to mitigate first mover advantage, when investors are incentivised to redeem ahead of others if they anticipate that other fund investors will redeem and that remaining investors will bear the associated transaction costs. This may give rise to excess redemptions and, in consequence of this, fund sales of portfolio assets may contribute to greater market volatility and additional pressure on asset prices.

Recent and Expected Developments

Final reports are due to be published in late 2023. The FSB and IOSCO proposals include those set out below.

  • A bucketing approach. This is to take into account the extent to which the liquidity characteristics of portfolio assets: (i) are hard to assess, contingent on market conditions, or hard to value in a stressed market; and (ii) can create a potential incentive for investors to redeem early, to the disadvantage of other investors. Open-ended funds (OEFs) would be grouped into categories, depending on their liquidity profile: liquid, less liquid, illiquid, or comparable. If more than 30% of assets are illiquid, the fund manager should create and redeem shares at lower frequency than daily and/or require long notice or settlement periods. Where there is no one obvious category, a prudent approach should be adopted. There has been criticism of this concept, applying rigid rules and definitions through a one-size-fits-all bucketing approach and a preference to continue with established methods of liquidity management that allow manager flexibility across asset classes.
  • Regulators to ensure availability of a broad set of anti-dilution tools for use in normal and stressed market conditions. They should also reduce operational and other barriers that prevent the use of such tools and measures.
  • Anti-dilution liquidity management tools (LMT) should impose on redeeming and subscribing investors the explicit and implicit costs of redemptions and subscriptions, including any significant market impact of asset sales and purchases to meet those redemptions and subscriptions. Managers should use at least one anti-dilution LMT for each OEF they manage, with a view to ensure that subscribing and redeeming investors bear the full cost of liquidity, and should aim overall to achieve greater use with greater consistency. For example, adjusting NAV received or paid/swing pricing or charging a fee on redemptions/subscriptions.
  • Tools to be used particularly in stressed market conditions: suspensions, redemption gates, in-kind redemptions, and side pockets. IOSCO to provide more guidance on these “quantity-based” LMTs, with the aim of reducing stigma and increasing awareness of their possible use.
  • Clearer public disclosures from managers on the availability and use of LMTs in normal and stressed market conditions, in order to enhance investor awareness on LMT objectives and operation, and to better incorporate the cost of liquidity into investment decisions.
  • Greater inclusion of LMTs in constitutional docs and greater use and consistency of use in anti-dilution LMTs. Responsible entities should also ensure that appropriate and adequate arrangements are in place for LMTs, and for most responsible entities an “internal governance committee” is considered an appropriate step for this.


In parallel, on 6 July 2023 the FCA published a multi-firm review on liquidity management (although of note is that this did not cover property funds). Even though the focus is on authorised fund managers, the FCA expect all AIFMs to consider the findings for their businesses. The main output is that firms are not giving sufficient weight to managing liquidity in their frameworks and governance structures.

The LMT provisions in the review of AIFMD will have to be considered in due course alongside this guidance, once finalised.

Sustainable Finance (UK)


The proposals set out in the FCA’s October 2022 consultation CP22/20 aim to increase transparency on the sustainability profile of products and firms and to reduce the risk of harm from greenwashing. In addition, to protect consumers, providing better comparables among products and ultimately increasing capital flows into sustainable activities. As part of this package, the FCA proposes three sustainable labels that in-scope firms can use where they meet the relevant criteria.

Although not in scope to start, non-UK managers and overseas funds being marketed in the UK are expected to be brought into the new regime in due course.

See our October 2022 client alerts on SDR and on the Taskforce for Climate-related Financial Disclosures (TCFD) rules for background.

Recent and Expected Developments

The consultation closed on 25 January 2023, and the FCA received about 240 written responses. A policy statement was originally expected by end June 2023 (with a subsequent consultation due to follow on bringing overseas funds within scope). However, this has been delayed to Q4 2023. The House of Lords made some amendments to the Financial Services and Markets Bill 2022-23 (which received Royal Assent on 29 June 2023) relating to SDR. New sections 416A and 416B have been introduced to the Financial Services and Markets Act 2000 (FSMA):

  • the government (in consultation with the regulators) will have authority to make and revise disclosure requirements in connection with sustainability via an “SDR policy statement”
  • the FCA and the Prudential Regulation Authority (PRA) will be obliged to have regard to the SDR policy statement when making rules or issuing guidance relating to sustainability disclosure

Sustainability includes matters relating to the environment (including climate change); social, community, and human rights issues; and issues related to tackling corruption and bribery.

Apart from the anti-greenwashing rule (which is expected to apply to all FCA-authorised firms on publication immediately), the rules were originally expected to apply on a phased basis from September 2023. Given the delay to the policy statement, the effective dates will now be adjusted accordingly.

The FCA said it was using the extra time to consider more carefully its approach to various issues. In particular, it recognises the challenges that many firms have raised (as set out below).

  • Modifications can be expected in areas like the naming and marketing rules and in the criteria for the application of investment labels (including multi-asset and blended strategies).
  • The FCA is not going to require independent verification of product categorisation in order to qualify for a label.
  • There will be a place in the regime for products that do not qualify for a specific sustainability label but nevertheless have some sustainability-related characteristics.
  • In relation to international coherence, the FCA will continue to consider how to further support compatibility, while stressing the need for robust UK standards.


The FCA commented (see its 29 March 2023 press release) that there is broad support for the regime and outcomes it is seeking to achieve and it is grateful for the rich and constructive feedback on some of the detail. An interesting and welcome development is that the proposed labels suggested as an option by the European Commission (the Commission) in its September 2023 consultation on the Sustainable Finance Disclosure Regulation (SFDR) would align with the outline labels proposed under SDR (see below for more, along with our client briefing, which sets out a comparison of the EU and UK labelling proposals to date).

The following key questions are still relevant, pending the outcome of the consultation: (i) the extent to which a firm and its products are in scope; (ii) how (and if) the labels may apply to their existing products; (iii) whether or not a firm wants to use a label for its future products and, if so, any changes it may have to make (for instance to strategic, governance, or resources matters) to achieve this; (iv) information to be disclosed and what information needs to be gathered to be able to comply, for instance to identify any challenges with data availability and how these can be best managed; and (v) how (and when) to have conversations with investors on what these rules mean for investment portfolios.

The government wants to ensure that the financial system plays a major role in the delivery of the UK’s net zero target and is acting to secure the UK as “the best place in the world for responsible and sustainable investment.”


An update to the 2019 Green Finance Strategy, “Mobilising Green Investment: 2023 Green Finance Strategy,” was published on 30 March 2023 as part of the Green Day announcements, setting out updates on the government’s plans to achieve its green finance objectives.

The review of Solvency UK is mentioned in this paper — the government’s objective is to support insurance firms in supplying long-term capital to underpin growth, including innovative green assets and renewable energy infrastructure. There are no proposals to tailor the real estate Solvency Capital Requirements (SCR) of 25% (something the real estate sector has been advocating for some time, based on the argument that the volatility of non-listed real estate investments is lower than that represented in the short-term standard model applied in the legislation).

Recent and Expected Developments

The main developments since the publication of the updated Green Finance Strategy are set out below.

  • On 2 August 2023, the Department for Business and Trade (DBT) published the UK Sustainability Disclosure Standards (SDS), which provide information on the government’s framework for creating UK SDS. These will be based on IFRS Sustainability Disclosure Standards issued by the International Sustainability Disclosure Standards Board (ISSB) which launched its first two standards in June 2023 (see below for more on this).
  • Two reports by the Green Technical Advisory Group (GTAG) containing technical advice for HM Treasury on the development of a UK green taxonomy to provide investors with definitions of which activities should be labelled as green. The reports are on operational considerations for taxonomy reporting (with recommendations on how to ensure data gaps are minimised to support more robust and useful taxonomy disclosures without placing undue burden on businesses) and on the treatment of green financial products (with recommendations on how activities previously considered environmentally sustainable are affected when the UK green taxonomy is implemented) under an evolving UK green taxonomy. This is likely to feed into the UK SDR proposals and ESG integration and investment labels, in terms of demonstrating that assets meet a credible standard of sustainability. The government plans to mandate reporting after a two-year voluntary reporting lead-in.
  • A consultation on rules for the UK’s largest companies on publication of TCFD-aligned transition plans is expected in Q4 2023, once the Transition Plan Taskforce has finalised its framework. These are intended to complement the FCA’s existing transition plan “comply or explain” obligations in place for listed companies and asset managers/owners and to ensure consistency.


These refinements are intended to reinforce and expand the UK’s position as a world leader on green finance and investment. We would comment as follows:

  • Nuclear energy is proposed to be included in the UK taxonomy, which would be consistent with the EU’s approach under the Complementary Climate Delegated Act (although this is causing controversy in some member states, and various NGOs have commenced legal proceedings against the Commission).
  • The ISSB standards will provide a standardised framework across the UK regulatory framework, including company law and FCA requirements for listed companies. The government expects to make endorsement decisions on the first ISSB standards (IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2: Climate-related Disclosures standards) by July 2024, following input on assessment, endorsement, and implementation from two UK government-established committees. Both standards incorporate the recommendations of the TCFD, and the DBT has said it will divert from the global baseline only if “absolutely necessary” for UK-specific matters.
  • A key area will be the outcomes of the FCA’s SDR and investment label proposals, in particular given the regulatory focus on identifying and addressing greenwashing.

The funds industry will welcome robust and clear standards as these initiatives take effect, and implementation taking place in a cohesive and structured way to avoid any uncertainty and disruption.


On 26 June 2023, the ISSB issued its first two sustainability standards, IFRS S1 and IFRS S2. These standards, which incorporate the recommendations of the TCFD, address disclosure requirements related to a company’s governance, strategy, risk management, and sustainability-related metrics and targets. IFRS S1 and IFRS S2 are intended to complement each other and catalyse convergence of global ESG standards, making it easier for investors to distinguish between companies’ ESG credentials as well as standardising (and therefore, in theory, reducing) reporting burdens of companies.

Recent and Expected Developments

IFRS S1 and IFRS S2 represent the first step in the ISSB’s goal to harmonise ESG reporting standards, and the ISSB recently consulted on whether other standards may be needed (initial proposals include biodiversity, ecosystems and ecosystem services, human capital, and human rights).

The FCA has welcomed these publications, commenting that they represent an important milestone in the “mainstreaming of sustainability in finance” and encouraging the ISSB to embed IFRS S1 and S2 effectively and build out the standards beyond climate change.


The release of the ISSB standards is an indication of the importance of clear and consistent ESG reporting standards to companies, investors, and governments around the world and marks the beginning of ISSB’s role as an international standard setter for ESG disclosure. Given increasing investor attention to ESG matters as well as the proliferation of disclosure requirements in the space, it is important that companies and other entities ensure that they are fully up-to-date and in compliance with ESG disclosure requirements. As set out above, these standards will also form the baseline for UK SDS, the aim being for the “UK SDS to be globally comparable and decision-useful for investors.” Recent cases in the UK demonstrate that investors may even use non-compliance with ESG policies as a cause of action for litigation (as was the case in the recent Client Earth v. Shell case in the UK High Court, set out below).

For those corporates reporting under the EU standards (the Corporate Sustainability Reporting Directive (CSRD) and its European Sustainability Reporting Standards (ESRS), as set out below) although there is a high degree of interoperability between the different standards, some additional climate-related disclosure requirements are likely to apply.

See our client alert New ISSB Sustainability Standards: A Long-awaited Milestone for Harmonising ESG-Related Disclosure for more detail.

Sustainable Finance (EU)


The EU sustainable finance legislative framework is dynamic, and industry understanding and market practice are still evolving. Regulators continue to issue new guidance and statements on the application and interpretation of SFDR and the Taxonomy Regulation (Taxonomy). In its June 2023 new Sustainable Finance Package, the Commission stated that early evidence shows that the sustainable finance framework is beginning to work as intended to facilitate a more sustainable economy — for example, companies are applying the Taxonomy and starting to communicate their sustainable investments based on it (albeit that, for the purposes of this assessment, only certain listed market data is referenced).

It also notes that any policy developments under the wider framework will aim to enhance regulatory consistency and simplify implementation, among other objectives. There is also a commitment to facilitate cooperation at the international level. Many of the points made in the Sustainable Finance Package either reinforce recent updates and guidance or pave the way for future developments. For more detail, see our client alert The EU Sustainable Finance Package: key points for private fund managers.

Morningstar data (for the listed market but likely to be analogous for private funds) indicates that for entity-level PAI statements (comply or explain under Article 4 SFDR), differences in scope, asset mix, data sources, and methodologies render comparisons difficult — although this should improve over time; that SFDR reclassifications have slowed down (with Article 9 funds representing 3.7% of market share; Article 8, 42% and Article 6, 55%) and asset managers are increasingly keen to add carbon reduction objectives to their strategies.

Recent and Expected Developments

The following developments are of note:

  • On 14 September 2023, the Commission published two consultations to both evaluate and assess enhancements to SFDR. Through 15 December 2023, the Commission is asking for feedback on how the current SFDR framework is working in practice and — in recognition of the fact that SFDR has been mistakenly applied as a labelling (instead of disclosure) regime and that there are inconsistent market interpretations — options to make improvements. A key proposal relates to a voluntary product categorisation system, which the Commission suggests could be achieved by either: (i) discarding the existing Articles 8 and 9 categorisations and introducing a fresh approach focused on investment strategy; or (ii) converting Articles 8 and 9 into clearly defined formal product categories, which would involve building on the existing regime by clarifying and adding minimum criteria to underpin existing concepts. See our client alert The Seeds for SFDR II? Two EU Commission Consultations for more.
  • This possible overhaul will also affect other related sustainable finance legislation, such as the Taxonomy, Benchmarks Regulation, MiFID and AIFMD supplemental legislation, the CSRD and ESRS, and the PRIIPs Regulation. The impact of this is considered as part of the targeted consultation. The Commission also wants more input on whether or not the SFDR should include additional rules on labelling and marketing communications. The ESMA consultation on guidelines on fund names using ESG or sustainability-related terms (covered below) is not referenced, but the feedback already provided on this will also be relevant here.
  • Pending the outcome of this consultative process, there may be limited progress on the various other outputs still expected from the European legislators, for instance: (i) amendments to the SFDR regulatory technical standards (RTS) amendments following the April 2023 consultation (see our client alert ESAs propose adjustments to the EU SFDR rules for more); (ii) output from the ESA call for evidence on greenwashing (a final report is expected by end May 2024); and (iii) the development of a taxonomy for social investments.
  • In June 2023 the Commission adopted a proposal for a regulation to improve the reliability, comparability, and transparency of ESG rating providers, who provide ESG information and analytics for investment strategies, risk management, and rating activities. This market will now be brought under the remit of ESMA, to ensure the integrity of ESG rating providers’ operations and prevention of risks of conflicts of interest at the provider level.
  • The ESAs Joint Committee’s annual report published on 28 September 2023 cites feedback, ‘lessons learnt’, recommendations and examples of best practices on SFDR disclosures, based on ESA surveys of member state regulators. These include: (i) criticism that explanations of non-consideration of PAI at entity level (Article 4 SFDR) are short and vague and that best practice would be for firms to at least indicate a target date for when they intend to start to consider PAI indicators; (ii) positive feedback that website disclosures are now easier for regulators to find, whilst still noting room for improvement; and (iii) findings that there is room for improvement in voluntary disclosures of PAI consideration at product level (Article 7 SFDR). Also specific recommendations to the Commission in the context of its comprehensive assessment of SFDR.


There are some useful points of clarification in the Commission’s June 2023 Q&A:

  • Investments in “environmentally sustainable economic activities” pursuant to the Taxonomy automatically qualify as SFDR “sustainable investment.”
  • This complements the Commission’s response, in its April 2023 Q&A, that funds that passively track an EU climate benchmark fall within Article 9(3) and are deemed to have sustainable investment as an investment objective. Active funds that do not track a climate benchmark must explain how the carbon reduction objective is achieved.
  • The Taxonomy criteria for when an economic activity can qualify as environmentally sustainable include compliance with minimum safeguards, which links to the SFDR’s principle of “do no significant harm” (DNSH).
  • Reporting by a company in accordance with the EU’s ESRS will be deemed compliant with global standards.

A welcome change mooted in the 14 September 2023 consultations would be the ability for transitional strategies to be recognised as sustainable. This chimes with recent engagement with the EU regulators as to how some transitional strategies may be able to disclose under Article 9(3). Also welcome would be alignment with proposed labels under those outlined in the FCA’s SDR. However, Commission output following the consultations is not expected until Q2 2024; this is an initial feedback process only, with complementary workshops and roundtables to follow. At the moment, there is nothing substantive to illustrate what SFDR II (if any) may look like (for instance, legislative amendments or an outline road map of what to expect), and therefore, for the foreseeable future, the current legislative framework remains in place.

See our Overview Guide on the EU Sustainable Finance Legislative impact on Private Funds.


The goal is to assess the compliance of supervised asset managers with the relevant provisions in the SFDR, the Taxonomy, and relevant implementing measures, including the relevant provision in the UCITS and AIFMD implementing acts on the integration of sustainability risks.

Recent and Expected Developments

From July 2023 until Q3 2024, the NCAs will share knowledge and experiences through ESMA to foster convergence in how they supervise sustainability-related disclosures and sustainability risk integration in asset managers.

The main objectives of the CSA are:

  • to assess whether market participants adhere to applicable rules and standards in practice
  • to gather further information on greenwashing risks in the investment management sector
  • to identify further relevant supervisory and regulatory intervention to address the issue


Ensuring greater convergence in the supervision of risks stemming from incorrect and misleading disclosures is central to the effort to foster transparency and is identified as one of the EU’s priorities for NCAs. The CSA will promote this goal by improving the comprehensibility of ESG disclosures by asset managers across key segments of the sustainable finance value chain.

In addition, the preliminary findings on the identification of greenwashing risks at the entity and product levels will provide input to ESMA’s upcoming Final Report on greenwashing (expected by end May 2024).

See also “CSSF Sustainable Finance Report,” below.


An activist group of shareholders brought a claim for a breach of directors’ duties and sought an injunction requiring the directors to implement a strategy to manage climate risk. After their claim was rejected in May, ClientEarth requested that their claim be reconsidered at an oral hearing. In an oral hearing on 12 July 2023, the judge upheld his original decision and dismissed their claim.

Recent and Expected Developments

ClientEarth have announced that they will request that the Court of Appeal review the decision. In the meantime, on 31 August 2023, ClientEarth were ordered to pay Shell’s costs in connection with the action, which is a derogation from the typical costs rules for this stage of a derivative action.


The judge commented that it is for the company’s directors to promote the success of the company (including considering how to take into account environmental factors) and that it is incompatible with the subjective nature of a director’s duty to act with reasonable skill and care, for the court to dictate how the management of their business and affairs should be conducted.

Moreover, unless there is a “universally accepted methodology” by which climate change action can be measured, it will be difficult for claimants to prove that directors have not acted reasonably in addressing climate considerations. The weight to be attached to competing considerations is a commercial decision, which the court is ill equipped to take.

Even though the ruling might give comfort to directors, the public nature of activist litigation should still be considered. The Shell case was widely reported on in the press and drew greater attention to Shell’s climate policies.


Due to the increased regulatory focus from both national and international supervisory agencies and from NGOs and activist groups, fund managers must ensure that their governance procedures and policies are in place and followed.

Recent and Expected Developments

Ensuring compliance with ESG laws and best practices will be an ongoing consideration for managers for the foreseeable future. As laws and enforcement guidance continue to develop across jurisdictions, managers will need to continually review their policies and their implementation to protect against liability.


When managing their portfolios and marketing to investors, fund managers should ensure that:

  • they collect accurate and verifiable ESG data on their investments, including in their supply chains.
  • when preparing their investor-facing reports, they are:
    • using the correct reporting standards or frameworks
    • setting out what methodologies are being used
    • including qualifications and assumptions to set
    • maintaining a record of steps taken to verify disclosures to be used if they are investigated
  • all ESG-related claims they make are verifiable with data
  • they train all fund employees to understand ESG disclosures and the consequences for false or misleading statements


Following the Securities and Markets Stakeholder Group’s (SMSG) submission to the ESA’s joint call for evidence on greenwashing (outlined above), ESMA submitted four additional questions to SMSG requesting its input. These questions concerned whether there needs to be a more holistic definition of greenwashing, the so-called “greenbleaching” phenomenon, and what ESMA’s role should be in this area.

Recent and Expected Developments

SMSG submitted its additional responses to ESMA on 16 March 2023. These will inform the ESA’s final report on greenwashing which is due to be published by the end of May 2024.


SMSG has suggested that the current definition of greenwashing in European legislation is too narrow in scope and that there should be greater focus on ESG as a whole, rather than just the environmental aspects, which are the focus of many existing regulations.

SMSG has also taken the viewpoint that greenbleaching, where funds downplay their ESG credentials, should not be considered a misrepresentation. However, it has recommended that ESMA should monitor how many funds are undertaking this practice and if greenbleaching is widespread then ESMA should consider whether the existing sustainable finance legislation is achieving its goals. It has suggested that uncertainty in existing ESG legislation, such as what liquidity, hedging, and transition strategies are permitted for Article 9 funds, could be a cause of greenbleaching, with fund managers taking an overly cautious approach to avoid being accused of greenwashing. This could lead to ESMA recommending legislative reform to the Commission.


The purpose is to tackle greenwashing risk in funds by using quantitative thresholds for the use of ESG and sustainability-related terminology in fund names, to ensure that marketing communications are fair, clear, and not misleading and that fund managers are acting honestly.

Recent and Expected Developments

This was open for comment until 20 February 2023, and expected to be finalised by Q2 or Q3 2023. To date, there has been no further output on this (although see “Sustainable Finance Disclosure Regulation,” above, for reference to these provisions in the recent Commission consultations).

If a fund has any ESG or impact-related words in its name, a minimum proportion of at least 80% of its investments should be used to meet the E or S characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy to be disclosed in the Article 8 and 9 pre-contractual SFDR disclosures. If a fund has the word “sustainable” or any derivation of it in its name, 50% of the overall investments should be a minimum proportion of sustainable investments (as defined in Article 2(17) SFDR) (ESMA confirmed that the 50% proposal relates to overall investments not of the 80% figure referred to above).


This initiative is reflective of current developments elsewhere. For instance, in the UK, the FCA consultation CP22/20 on SDR and product labels (set out above) proposes restrictions to ensure that those marketing products to retail investors where those products do not use a sustainable label cannot promote them as sustainable through names or in marketing materials (although firms may use such terms in their disclosures). Similar initiatives have been proposed in France, Germany, and the US.


The purpose of the CSDDD, according to the Commission, is to “foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance.” It seeks to establish a corporate due diligence duty (as well as duties for directors) on companies in relation to actual and potential human rights adverse impacts and environmental adverse impacts.

Recent and Expected Developments

The proposal by the Commission was published in early 2022 and is currently in the legislative process, with the EU Council adopting its negotiating position in November 2022. On 1 June 2023, the EU Parliament published its negotiating position, and the draft directive has now entered the “trialogue” period.


While laudable for its aims, the CSDDD is yet another piece of legislation in relation to sustainability and corporate governance. The financial services industry is still getting to grips with SFDR and the interaction between this and CSDDD is currently uncertain. There are also concerns about the legislation grouping funds with their portfolio entities in which they take a majority stake, as there is currently no separation between “trade” groups and those entities linked only by financial investments.

The Parliament’s position sets out the various thresholds it believes should determine which companies are within scope: EU-based companies with a global turnover exceeding €40 million and more than 250 employees, while for EU-based parent companies, these figures will increase to €150 million and 500. Non-EU companies with a turnover greater than €150 million would also be in scope as long as €40 million or more was generated in the EU. The Parliament has also taken the position that financial services firms should be included in the scope of the Directive, while the Council’s position is that member states should decide whether to include them or not. It will be interesting to see whose view prevails at the end of the trialogue period.


The CSRD came into force on 5 January 2023 and amends several EU laws: the Audit Regulation, Audit Directive, Transparency Directive, and Accounting Directive. It is designed to strengthen the rules for companies and the social and environmental information that they have to report on.

Recent and Expected Developments

The Commission estimates that the CSRD will apply to approximately 50,000 companies, which includes a wider group of large companies and listed small and medium-size enterprises (SMEs).

It will apply to different groups of companies in stages, with the first group (public interest entities with more than 500 employees) having to report in 2025 in relation to the 2024 financial year. Large EU companies/groups (defined as an entity or group that meets two of the following three tests: (a) a balance sheet of €20 million; (b) net turnover of €40 million; (c) an average of 250 employees in the financial year) will have to report in 2026 in relation to 2025, and listed SMEs that are not micro-undertakings begin in 2027 in relation to 2026.

Lastly, non-EU parent companies with a subsidiary that is either a large EU company or a listed SME, or that has a large EU branch, will be required to report from 2029 in relation to 2028.

At the end of July, the Commission, based to a large extent on technical advice from EFRAG (the European Financial Reporting Advisory Group), adopted the ESRS, which create a common reporting framework for all companies that have to report under the CSRD. The Commission is of the view that current reporting does not contain all information that investors may deem important, and it can be difficult to compare reports from company to company. By adopting a common framework, the Commission hopes that reporting will improve in both of these areas.

The draft ESRS are now subject to scrutiny by the Council and EU Parliament, for at least two months, possibly four. The draft cannot be amended during this process, but it could be rejected in full.


The CSRD amends some of the rules brought in by the Non-Financial Reporting Directive (NFRD), but the requirements of the NFRD remain in force until the new rules start to apply.

Importantly, the CSRD widens the scope of companies that are subject to the rules when compared to the NFRD, with a major change being that listed SMEs are now included (unless they are “micro-entities”).

See also above in respect of the new ISSB standards, which are expected to form the basis for the UK’s Sustainability Disclosure Standards.


The Directive on Credit Services and Credit Purchasers, also known as the Non-Performing Loans (NPL) Directive, aims to encourage the development of a secondary market for NPLs in the EU. It forms part of the broader Capital Markets Union initiative. It is targeted at loan servicers/administrators and loan purchasers of non-performing credit agreements originated by an EU bank. Non-performance includes loans that are in default; are impaired (under the applicable accounting framework); under “probation” (where additional forbearance measures are granted if the exposure becomes more than 30 days past due); where the commitment, were it drawn down, is unlikely to be paid back without realisation of collateral; or in the form of a financial guarantee that is likely to be called.

Recent and Expected Developments

Member states have to implement the NPL Directive by the end of 2023 (although there is a grandfathering period for those already carrying out credit servicing activities on 30 December 2023 until 29 June 2024). Implementing technical standards have also been adopted. The requirements include regulation of “credit servicers” and “credit purchasers”; EU authorisation of “credit servicers”; disclosure obligations on EU banks selling NPLs; an EU passporting regime; and rules on outsourcing and communications and on the contractual relationship between credit servicer and credit purchaser.


The NPL Directive does not apply to the servicing of a credit agreement carried out by an AIFM. However, it is unclear if and how the rules impact “credit servicers” that are either MiFID investment firms or non-EU managers marketing into the EU under national private placement regimes — in particular, given that there is a specific obligation on non-EU credit purchasers to appoint an EU representative. Therefore, non-EU managers sourcing NPL loans (or a combination of performing and non-performing loans) or swaps from EU banks will want to monitor how the implementation of the NPL Directive takes shape.


On 3 August 2023, the Luxembourg regulator, the CSSF, issued a thematic review covering the implementation of the SFDR, Taxonomy, AIFMD, and UCITS Directive in relation to the integration of sustainability risks in the investment fund industry. Fund managers should consider the observations in the report when considering their compliance with the sustainability-related requirements.

Recent and Expected Developments

The CSSF is currently engaging on a bilateral basis with fund managers to ensure compliance with sustainable finance legislation, including asking fund managers to implement the necessary corrective measures in relation to any shortcomings observed. This thematic review should be seen in light of the launch of ESMA’s CSA on the integration of sustainability risks and disclosures (as set out above). On 29 August 2023, the CSSF contacted Luxembourg-based UCITS managers and AIFMs that are in scope of this CSA. This exercise is a two-stage process for UCITS managers and AIFMs to complete questionnaires: (i) focusing more closely on greenwashing risks; and (ii) dedicated to the integration of sustainability risks and factors in their organisational arrangements and to the transparency disclosures at the investment fund manager and product levels.


The report emphasised various points that Luxembourg fund managers must consider, including those set out below.

Organisational Arrangements

  • AIFMs remain responsible for SFDR compliance, regardless of whether they delegate portfolio management to a third party.
  • AIFMs should include in their due diligence details of how their delegate embeds sustainability-related provisions in their investment decisions.
  • All sustainability risks that could cause an actual or potential material negative impact are to be integrated in risk management and internal governance processes for each fund, including Article 6 funds.
  • The fund’s sustainability risk management process involves taking a holistic view (not limited to compliance with ESG-related pre-contractual disclosures) and includes: (i) reflecting relevant sustainability risks; (ii) corresponding risk indicators; (iii) a risk limitation system; (iv) corresponding reporting to the senior management and board; and (iv) stress tests and scenario analyses for the relevant sustainability risks.

Pre-contractual disclosures

  • Fund names should not be misleading and should be aligned with the relevant fund’s investment objective and policy. Terms such as “ESG,” “green,” and “sustainable” should be used only when supported in a material way by evidence of sustainability characteristics.
  • The CSSF expects AIFMs to carry out their own assessment of sustainable investments and to disclose the underlying assumptions used and that this information should be provided as part of (i) the precontractual disclosures and/or (ii) the product-level website disclosures.
  • The CSSF reminds AIFMs that Article 7 pre-contractual disclosures relate to product-level PAI disclosures. The CSSF notes that it is seeing these disclosures at the entity level instead of at the fund level.

Periodic disclosures and marketing

  • The CSSF expects AIFMs to (i) present the performance of the fund’s sustainability indicators used to measure the fund’s performance and (ii) provide contextual information on the sustainability indicators used, including information on any relevant underlying methodology or details on any quantitative assessment of a fund’s performance against its promoted sustainable investment objective.
  • Where a fund considers PAIs, AIFMs should provide investors with sufficiently detailed product-level information. This means that any reference in periodic disclosures to a global policy adopted by the AIFM and applicable to all the funds it manages, without any disclosure on individual funds, is not sufficient to meet regulatory standards.
  • The report includes a reminder that marketing communications that contain fund-specific information do not contradict or diminish the significance of information disclosed to investors.

Portfolio Analysis

  • Product-level sustainability credentials should include clear references to the entity that issued such credentials, the fund that has been granted such credentials, and the date granted (and good practice would be including hyperlinks to where further information on the credential can be found).
  • In accordance with Commission guidance, the report includes a reminder of practical issues regarding portfolio analysis. The report gives the example of where exclusion policies are set out in the pre-contractual disclosures, the CSSF expects that all portfolio holdings comply with those exclusion policies at all times and that their design is consistent with the fund’s sustainable objective (Article 9 fund) or the promoted environmental and social characteristics (Article 8 fund).

Sustainable Finance (US)


On 25 May 2022, the US SEC proposed ESG disclosure rules to address and enhance investor disclosure practices, and related policies and procedures regarding ESG investment considerations and objectives, as well as proposed changes to the existing Names Rule applicable to registered funds. The proposed ESG disclosure rules would require registered investment companies and registered investment advisers that employ ESG strategies in their investment processes to make ESG disclosures either in the fund prospectus for a registered investment company or in the brochure (Form ADV Part 2A) for a registered investment adviser. Disclosure requirements would vary based on the extent of ESG factor integration into investment strategies, characterised as “ESG Integration Strategies,” “ESG-Focused Strategies,” and “Impact Strategies.”

See our June 2022 client alert for background and more details.

Recent and Expected Developments

The SEC released final amendments to the Names Rules applicable to registered funds on 20 September 2023. Among other requirements, the rule requires that 80% of assets in a fund with a name that suggests a particular focus, including a name indicating that the fund’s investment decisions incorporate ESG factors, be invested in accordance with such focus. Also, such funds’ prospectus disclosures must define the terms used in their names and the use of those terms must be consistent with their plain English meaning or established industry use. Compliance is required by 24 months after publication of the rule amendments in the Federal Register for funds with $1 billion or more in net assets; small fund groups have an additional six months to comply.

Finalisation of the proposed rules on ESG investment considerations and objectives is still pending. The SEC, however, is already actively engaged in enforcement activity based on inaccurate or misleading ESG-related disclosures. The proposed ESG disclosure rules would apply to investment advisers to registered investment companies and private funds and other clients and are intended to provide investors with clear and comparable information about how advisers consider ESG factors.


The proposed rules and final rule amendments, meant to address greenwashing, are the US version of the EU’s SFDR that has applied since March 2021 and the UK’s SDR proposals (both of which are covered above). The focus, however, is solely on disclosures, and the SEC does not promote the adoption of a particular ESG strategy or any ESG strategy at all.

As proposed, the additional disclosure requirements in the proposed ESG investment considerations and objectives rule applicable to “ESG-Focused” funds would be very easy to trigger. For example, the use of a single negative screen seemingly would cause a fund to fall within this category.


This relates to those amendments under section 404(a) of the Employee Retirement Income Security Act of 1974 (ERISA) regarding the consideration of ESG factors by retirement plan fiduciaries. The amendments took effect on 30 January 2023.

See our January 2023 client alert for background and more details.

Recent and Expected Developments

On 20 March 2023, President Biden vetoed a resolution passed by the US Congress that would have overturned this rule. On 21 September 2023, a District Court ruled against a group of 26 states and other interested private parties that sued the Department of Labor seeking to invalidate the rule. In keeping the rule in place, the court determined that it stated that ESG factors could be considered in certain cases but, as was the case pursuant to prior versions of the rule, the consideration of ESG factors should reflect a reasonable assessment of their impact on financial returns.


The DOL’s final amendments expressly reference ESG factors but take a neutral stance on whether investment fiduciaries should consider them and, to the extent they are considered, the weight to be afforded to them, providing investment fiduciaries leeway to determine whether and to what extent ESG factors are relevant in any given case.


This is taking place via new legislation, investment policies, attorney general opinions, letters, reports, statements, and unilateral state treasurer action, such as South Carolina’s divestment from BlackRock. Some states have also “blacklisted” certain companies that they have determined to act contrary to the principles and obligations that are the subject of the anti-ESG action.

Recent and Expected Developments

States that have engaged in anti-ESG activity (pending or finalised) include: Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming. By contrast, Connecticut, Illinois, Maine, Maryland, Nevada, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia have recently proposed or adopted policies or legislation to advance one or more ESG-related cause. In response to the anti-ESG activity of certain states, representatives from California, Colorado, Delaware, Illinois, Maine, Massachusetts, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont, Washington, and Wisconsin released an open letter urging support for ESG-themed investment strategies.


The anti-ESG efforts, though widely acknowledged to promote a “red state” political agenda, are having a practical, if not a legal, impact. For example, a leading global investment company recently withdrew from the Net Zero Asset Manager initiative and was shortly thereafter excused from a hearing on ESG investment factors convened by the Texas Senate Committee on State Affairs.

Regulatory Developments (UK)


On 5 April 2023 the FCA published its Business Plan for 2022/2023 which sets out how the FCA will continue to deliver the commitments it made in its April 2022 Strategy for 2022 to 2025 as well as how it will measure progress against these commitments.

Recent and Expected Developments

The FCA Business Plan 2023/24 is structured around three areas of focus, namely:

  • reducing and preventing serious harm
  • setting and testing higher standards
  • promoting competition and positive change

Key proposed activities under the area of “reducing and preventing serious harm.” include (among others):

  • Reducing harm from firm failure. This will include introducing a new regulatory return requiring about 20,000 solo regulated financial services firms to provide a baseline level of information about their financial resilience. It will also involve continuing to imbed IFPR, developing FCA policies for crypto-assets, and assessing wind-down plans ahead of authorisation for higher-risk business models.
  • Improving oversight of Appointed Representatives (see “Appointed Representatives Regime,” below).
  • Reducing and preventing financial crime including by improving capabilities to identify, alert and request that platforms take down unauthorised financial promotions, Associated websites and social media accounts.

Key proposed activities under the area of “setting and testing higher standards” include:

  • Designing a new suite of regulatory returns for the consumer credit sector as well as making the consumer duty an integral part of the regulatory approach and further developing the consumer duty data strategy.
  • Introducing an application gateway for firms that want to approve financial promotions for unauthorised firms. The FCA Register will include information about firms’ ability to approve promotions. Intervention will be increased against authorised firms issuing noncompliant financial promotions and unauthorised firms conducting activity that could lead to mis-selling and financial loss.
  • Advance ESG aims including publishing Sustainability Disclosure Requirements and investment labels and consulting on changes to listing rules to reference the final ISSB standards once endorsed by IOSCO to strengthen sustainability-related disclosures.

A key proposed activity under the area of “promoting competition and positive change” includes (among others):\

  • Updating the regulatory framework including bringing forward proposals for changes to MiFID/MiFIR, and the Prospectus Regulation- including a new public offer regime.


The 2023/24 Business Plan largely represents a continuation of the strategies set out in the 2022/23 Business Plan with a view to fulfilling the same goals set out in the 2022-2025 Strategy. The plan shows a clear priority of combatting financial crime, following the number of warnings about potential scams rising by a third to 1,882 last year. This will result in further scrutiny of financial promotions, compliance with the new consumer duty and oversight of firms’ anti-money-laundering systems and controls. It also highlights the increasing importance of operational resilience, in particular where there is a risk to the consumer. While the document is comprehensive in its summary of the FCA’s objectives and strategies, it largely represents an update of existing workflows and so does not introduce any particularly unexpected new developments.


As part of the Edinburgh Reforms (see “The Edinburgh Reforms and the Future Regulatory Framework (FRF),” below) the Chancellor of the Exchequer announced a promise to “commence a review into reforming the Senior Managers and Certification Regime in Q1 2023.” This has resulted in the FCA and Prudential Regulation Authority (PRA) publishing a joint discussion paper (FCA DP23/3 PRA DP1/23) and HM Treasury launching a call for evidence on the reform of SMCR.

Recent and Expected Developments

On 30 March 2023, the FCA and PRA published a joint discussion paper (FCA DP23/3 PRA DP1/23) reviewing the operational aspects of the SMCR. Alongside this, HM Treasury published a call for evidence on the legislative aspects of the regime. The discussion period and consultation period ended on 1 June 2023. There is no current indication on when the regulators or HM Treasury will publish their responses.

The discussion paper requested views from firms, consumers, and other stakeholders on the effectiveness, scope, and proportionality of the current regime as well as other, more specific potential improvements to SMCR. The call for evidence requested views on the objectives of SMCR and how effectively these are being delivered, some specific aspects of the regime that cause issues for firms, as well as the scope of the regime.


The discussion paper and call for evidence represent an initial information-gathering exercise to collect views on the regime’s effectiveness, scope, and proportionality and to seek views on potential improvements and reforms. At this stage it appears unlikely that the responses will necessitate a fundamental reform of the SMCR. In particular, the discussion paper highlights the positive responses to previous reviews of the regime.

This review does, however, represent an opportunity for stakeholders to provide feedback on how effective the regime is and allow for more discrete optimisations to areas of the regime that may be creating friction. Areas that may be the subject of reform include (among others) the process for completing regulatory references and criteria for making conduct notifications, the frequency of SMCR-related submissions and the interaction of SMCR with other regulatory regimes.


The changes to the FCA’s Appointed Representative (AR) regime came into force on 8 December 2022. The changes impose additional requirements on FCA-authorised principals and on their ARs.

Recent and Expected Developments

A principal is now required to provide additional and ongoing data to the FCA about the activities of its AR. There are also new additional obligations on a principal before taking on an AR and during the AR’s appointment.

The FCA has indicated it will work with HM Treasury to make further amendments to the regime.

The FCA has updated its perimeter report webpage to outline steps it is taking to increase scrutiny on principal firms operating with ARs. This includes submitting a section 165 data request to all principal firms to request information about new and existing ARs as well as writing to all firms providing regulatory hosting services in order to set out expectations under the new rules. Going forward, the updated webpage states that when applying for authorisation, the FCA will require principals to provide more information about the reasons for appointing ARs, their business activities, and the nature of their financial relationships.

The FCA Business Plan 2023/2024 (see above) lists key activities to be started or continued by the FCA in 2023/2024, including: (i) testing that firms are properly embedding rules across the appointed representatives regime; and (ii) strengthening scrutiny and engaging with principal firms as they appoint ARs. In addition to this, in July 2023 the FCA published two webpages in relation to the AR regime. The first sets out information for firms operating as “regulatory hosts,” i.e., carrying on little or no regulated activity and instead overseeing the use of its permissions by ARs. The second provides detail about the data that principal firms must report to the FCA about their ARs.

In addition to this, in July 2023 the FCA published two webpages in relation to the AR regime. The first sets out information for firms operating as “regulatory hosts,” i.e., carrying on little or no regulated activity and instead overseeing the use of its permissions by ARs. The second provides detail about the data that principal firms must report to the FCA about their ARs.


The additional obligations are likely to result in an increase in the fees charged by third-party principals and the imposition of further obligations on ARs to ease a principal’s oversight of the AR. This may, in turn, result in further scrutiny by a principal of its ARs. The FCA’s receipt of further data will put the FCA in a position to undertake further surveillance and exercise deeper scrutiny of the activities of ARs. The specific impact on private fund advisers (noting that a manager cannot be an AR) is difficult to determine because the changes were prompted by the FCA’s concerns about financial advisers and retail investors. If a private fund adviser finds itself with significant additional burdens imposed by its third-party principal, this may prompt the question of whether the increased cost of compliance as an AR justifies an application to the FCA to become authorised instead. Data from the FCA’s updated perimeter report webpage indicates that the number of ARs operating in the UK has continued to decline, with January 2023 figures showing 36,600 active ARs compared to 41,652 in April 2021 and 38,200 in January 2022.


The FCA Consumer Duty is captured in a new FCA Principle for Businesses, Principle 12, which states: “A firm must act to deliver good outcomes for retail customers.”

Three “cross-cutting rules” underpin the duty. These require firms to: (i) act in good faith toward retail customers; (ii) avoid causing foreseeable harm to retail customers; and (iii) enable and support retail customers to pursue their financial objectives.

The FCA also sets out four sets of “outcomes rules,” intended to help “define what is required by Principle 12.” These relate to: (i) products and services; (ii) price and fair value; (iii) consumer understanding; and (iv) consumer support.

We addressed the likely impact of the Consumer Duty on private fund managers in our October 2022 client alert.

Recent and Expected Developments

The FCA rules and guidance governing the duty, which the plan will need to address, come into force for new and existing investments open for sale on 31 July 2023, and closed investments on 31 July 2024. There was also a deadline on 30 April 2023, for manufacturers, which includes in-scope managers, to have conducted cross-cutting rule reviews and shared information with distributors.

In its December 2022 Quarterly Consultation, the FCA proposed making an amendment to the scope of the rules, so that firms in a distribution chain selling investment funds to retail customers where the minimum investment is £50,000 are no longer excluded. This is to clarify the policy intention that this “non-retail financial instrument” exclusion does not cover investment funds that are distributed to retail customers. If this change is introduced (with a consequent widening of scope of the Consumer Duty), it will impose further cost and disruption on affected firms, which have been working on the basis of the rules and definitions published in the FCA’s July 2022 policy statement (PS22/9).

On 25 January 2023, the FCA published feedback for firms on the implementation plans of the duty across a range of industry sectors. This emphasises three key areas that firms should particularly focus their attention on during the second half of the implementation period (to 31 July 2023), namely: effective prioritisation, embedding the substantive requirements of the duty, and working with other firms.

On 22 February 2023, the FCA published a speech given by Sheldon Mills (executive director of competition and consumers) on the new Consumer Duty. This highlighted the final steps that firms should take to implement the Consumer Duty.

On 31 March 2023, the FCA published a portfolio letter on implementing the Consumer Duty in the Contracts for Difference (CFD) Portfolio. This letter provides detailed guidance on how the duty applies to firms (see Annex 1 of the letter) and key considerations for firms when embedding the duty in their CFD portfolio (see Annex 2 of the letter).

On 28 June 2023 the FCA published a press release titled “One month to go for the Consumer Duty.” In this press release, the FCA lists 10 key questions for firms to consider to help them to comply with the Consumer Duty.

On 8 September 2023, the FCA published a portfolio letter sent to all wholesale banks active in the UK setting out key priorities for the sector. This included an indication that the FCA will test the robustness of the assessments made and actions taken to implement the Consumer Duty.


The duty applies to managers who provide services for a retail customer, defined, in the context of an alternative investment fund, as an investor in the fund or the beneficial owner of interests in the fund, that is not a professional client. The duty will not, therefore, apply to professional investors in respect of whom the AIFMD, by default, limits the marketing of private funds.

A point of direct contact for the managers of private funds will be per se retail clients, whom a manager cannot “opt up” and treat as an elective professional client. This, in turn, highlights the role of the client categorisation processes, noted in our previous alert, and the FCA’s existing focus on these processes.

Likely retail client candidates include family offices, high-net-worth individuals, and manager employees to whom the manager may be offering carried interest or other employee incentives.


The FSM Act received Royal Assent on 29 June 2023. The FSM Act is the centrepiece for delivering the UK’s FRF.

Among its provisions are those that amend the Financial Services and Markets Act 2000 and implement proposals from the FRF review.

Recent and Expected Developments

The main features of the FSM Act include:

  • delegating more rulemaking powers to the FCA and PRA and giving them a secondary objective for growth and international competitiveness
  • setting the process for revoking onshored EU financial services regulation, including a regime for designating activities as regulated activities
  • the tightening of the process for the approval of financial promotion (see below)
  • empowering the FCA and PRA to oversee the resilience of third parties providing critical services to the financial sector
  • increasing the regulation of crypto-assets

The FSM Act received Royal Assent on 29 June 2023. Following this, the explanatory notes to the FSM Act were published on 29 August 2023.

The FSM Act also expands the scope of the regulatory and supervisory responsibilities placed on the Bank of England and the PRA. For example, the PRA is required to directly oversee financial entities designated as “critical” by the Treasury. In response to this, the House of Lords Committee Office has published a letter to Andrew Bailey (Governor of the Bank of England) from the Chair of the House of Lords Economic Affairs Committee in which it asks whether the Bank is “being asked to do too much.” Andrew Bailey’s response is expected to be published soon.

On 29 August 2023, the Payment Systems Regulator (PSR) published a “thought piece” by its managing director (Chris Hemsley) on “Making law a reality — the Financial Services and Markets Act 2023.” This article highlights the beneficial effect of the FSM Act’s changes to UK payment regulation, including in areas such as tackling fraud, protecting access to cash, and clarifying the approach that should be taken to regulating stablecoins and the crypto-asset sector.


Much has been made of the secondary objective for growth and international competitiveness, which is nearly identical to what was contained in the version of the Financial Services and Markets Act 2000 made over 20 years ago. This same provision was repealed in the wake of the financial crisis. The full impact of the secondary objective on the FCA and PRA rulemaking and policymaking powers is uncertain, but the broader policy impact can be seen in the Edinburgh Reforms (discussed below).

See our comments below on the Edinburgh Reforms and FRF.


The FCA published consultation paper CP22/27 in December 2022, which closed for feedback in February 2023. Following this consultation paper, on 12 September 2023 the FCA published Policy Statement PS23/13, which sets out the final policy position and responds to the feedback given in response to the consultation paper. This policy statement sets out how the FCA will operationalise the legislative changes under the FSM Act to create a new regulatory framework for authorised firms approving financial promotions of unauthorised firms.

The FCA states that the changes it has set out will address gaps in the financial promotions approvals regime and help it intervene faster in response to harmful financial promotions communicated by unauthorised firms in areas such as high-risk investments and “buy now pay later” products.

Recent and Expected Developments

The new regulatory gateway will impose a universal requirement on all authorised firms, prohibiting them from approving financial promotions of unauthorised firms. Any authorised firm wishing to undertake such activity will need to apply to have the requirement cancelled or varied. The FCA intends to open an initial application period between 6 November 2023 and 6 February 2024. The new statutory provisions will come fully into force on 7 February 2024, at which point firms that have not applied will no longer be able to approve financial promotions (subject to various exemptions).

The policy statement sets out the final provisions regarding how the FCA will assess applicants, the basis on which the FCA may grant or refuse permission, the questions that applicants will be asked, the requirements that will need to be met, and reporting (including half-yearly aggregate reporting) and notification requirements for eligible firms. On redress, the FCA does not extend the Financial Ombudsman Service’s compulsory jurisdiction to approval of financial promotions. Neither is the Financial Services Compensation Scheme relevant. Annex 3 of the practice statement also includes updated non-Handbook guidance for firms that approve financial promotions for investments. The new financial promotion approval regime will be subject to review within 24 months of the rules coming into force.

In addition to the practice statement, on 12 September 2023 the FCA published a webpage on “Applying to approve financial promotions for unauthorised persons” to include information on the new regime.


This practice statement will not affect the way authorised firms communicate their own financial promotions, approve their own promotions for communication by unauthorised persons, or approve promotions for their Appointed Representatives or unauthorised persons within the same corporate group. The key impact is that authorised firms will be able to approve financial promotions for unauthorised persons only where they have had the requirement to not approve financial promotions varied or cancelled.

The FCA’s December 2022 Quarterly Consultation (referred to above) also contains proposed amendments to clarify when the Consumer Duty applies to firms approving or communicating a financial promotion when there is no underlying regulated activity.


The changes to the FCA rules dealing with financial promotion address investment in "high-risk" assets and are addressed primarily at investment by retail investors.

The new rules are part of overall changes to the financial promotion regime, including changes proposed in the FSM Bill (now the FSM Act, covered above).

We addressed the changes to the financial promotion rules and the likely impact of the consumer duty on private fund managers in two recent client alerts (on new risk warnings and new financial promotion rules).

Recent and Expected Developments

Under the new rules, there are two product categories: Restricted Mass Market Investments (RMMI) and Non-Mass Market Investments (NMMI). While the mass marketing of RMMI to retail clients is prohibited, any marketing of NMMI to retail clients is subject to further requirements. Non-mainstream pooled investments (NMPI) are a subset of NMMI and the additional rules. The rules on risk warnings came into force on 1 December 2022 and the remaining rules came into force on 1 February 2023.

The rules (some of which are the same as those that currently apply) impose requirements on FCA firms with respect to: the preliminary assessment of suitability; pre-promotion personalised risk warnings and “cooling-off periods”; risk warnings in the promotions;; and restrictions on monetary and non-monetary benefits.


Firms that offer NMPI to retail investors, such as family offices, high-net-worth individuals, and employees, will need to consider the changes to the rules. For instance, where a manager offers carried interest or other employee incentives.

If the offers do not extend to retail investors but are limited to professional investors, the new rules will not be relevant.


On 9 December 2022, the Chancellor of the Exchequer, Jeremy Hunt, outlined a series of measures designed to drive growth and competitiveness in the UK financial services sector, now known as the Edinburgh Reforms. The reforms are divided into four categories: a competitive marketplace promoting effective use of capital; sustainable finance; technology and innovation; and consumers and business.

On the same day, HM Treasury published a policy statement that explained the government’s approach to repealing and replacing retained EU law on financial services. The FCA also published the FRF Review setting out its approach to the FRF.

The Edinburgh Reforms and the policy statement, together with the FSM Act, are designed to give effect to the FRF.

Recent and Expected Developments

We highlight the main items of interest for private fund managers below.

  • The publication of draft statutory instruments demonstrate how government can use the powers within the FSM Act to reform the prospectus and securitisation regimes. Overhauling the prospectus regime to widen participation in the ownership of public companies and simplify the capital-raising process for companies on UK markets.
  • The repeal of the Regulation on European Long-Term Investment Funds without replacement on the basis that the recently established Long Term Asset Fund regime provides a fund structure better suited to the needs of the UK market (covered in more detail above).
  • Publishing a PRIIPs and UK Retail Disclosure consultation (discussed below).
  • Publishing a response to the call for evidence on the Short Selling Regulation Review, which was published in December 2022.
  • Publishing a near-final version of the Securitisation Regulations 2023 together with a policy note to replace the version of the EU Securitisation Regulation (2017/2402/EU) retained in UK law after Brexit.
  • Publishing the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 (SI 2023/548) relating to the ancillary activities exemption applying to firms trading commodity derivatives or emission allowances primarily for investment purposes or to support the firm’s commercial business.

The Edinburgh Reforms also included a proposed review of SMCR, which has led to the FCA and PRA publishing a joint discussion paper (FCA DP23/3 / PRA DP1/23) on the operational aspects of SMCR. See “Senior Managers and Certification Regime (SMCR) Reform,” above.


As a political statement, the Edinburgh Reforms have a strong signalling effect. The actual impact on the extent and burden of regulation on managers in particular is, however, difficult to predict.

The FCA’s statement is interesting, noting its work to encourage innovation and comments on how best to report and measure how it can contribute to the new secondary objective for growth and international competitiveness. It states that it will expect to distinguish between the FCA’s inputs and outputs, and the outcomes for the UK economy. It emphasises the importance of focussing on drivers it can measure and those it can influence directly and how this builds on the work it has already done on metrics and increased accountability.


This legislation is to be repealed by the FSM Act as a “matter of priority” and replaced with an alternative framework for retail disclosure as part of the FRF review.

Recent and Expected Developments

A consultation (that closed on 3 March 2023) was published as part of the Edinburgh Reforms. The intention of this limb of the proposals is to remove prescriptive requirements and increase flexibility, remove PRIIPs-type comparability from the future framework, create an FCA-led regime, and facilitate the FCA to integrate UCITS and PRIIPs disclosure by 2026.

Shortly after this HMT consultation, the FCA published a discussion paper (DP22/6) discussing the future retail disclosure framework setting out how the consultation proposals provide an opportunity to tailor the disclosure framework to the UK market. This discussion paper closed to responses on 7 March 2023.

Following this, on 11 July 2023, HM Treasury published a response to its consultation paper. The response sets out a summary of the feedback received, alongside the decisions made in light of the stakeholder comments. Importantly, the response confirms that HM Treasury will remove all firm-facing retail disclosure requirements, which are currently contained in the PRIIPs regulation, and sets out more detail on the plans for a new UK retail disclosure regime.

On 14 July 2023, the FCA published a new webpage providing information on the repeal and replacement of retained EU law with FCA rules. This included a reference to a forthcoming FCA consultation paper on the new rules.

It is expected that, following publication of this FCA consultation paper, the government will publish a draft statutory instrument setting out details on the plans for a new UK retail disclosure regime by 2024. There will be a transitional period before the new rules come into force.


This is welcome news. The PRIIPs Key Information Document (KID) has been widely criticised as “not fit for purpose,” requiring misleading information to be provided to retail investors and placing an unnecessary burden on firms. This has been echoed in the response to the HM Treasury consultation. The UK regulation also diverges from that of the EU. This is therefore a welcome opportunity to create a new retail disclosure regime that is proportionate and aligns with FCA’s high-level requirements — being clear, fair, and not misleading and in a client’s best interests.


At the end of 2020, the government called for evidence on the overseas regulatory framework, including the overseas persons exemption (OPE), and published its response in July 2021. The OPE, addressed in parts of the Regulated Activities Order, allows UK fund managers and certain types of investors to receive services from advisers and managers based outside the UK without those non-UK advisers or managers having to be FCA-authorised.

The Overseas Funds Regime was introduced in the Financial Services Act 2021 with the aim of introducing new equivalence regimes for retail investment funds and money market funds established outside the UK to enable recognised funds to be marketed to the public in the UK. The majority of provisions were commenced in February 2022 and the government has begun its equivalence assessment of the EEA under the Overseas Funds Regime. However, HM Treasury has so far not made any equivalence decisions and the FCA has not yet published details on how the Overseas Funds Regime will work in practice.

Recent and Expected Developments

The FCA had concerns that the OPE was not being used correctly and was working with HM Treasury to clarify the extent of the OPE and also to address the “characteristic performance” test (CPT). This holds, in essence, that where an activity, such as investment management, is performed outside the UK on behalf of or for the benefit of a UK client, that activity will not be deemed to occur in the UK and, therefore, not be a regulated activity.

The FCA’s Regulatory Initiatives Grid published in February indicated that the Treasury will continue to undertake engagement on potential changes to the overseas person exclusion, the overseas regulatory perimeter, and the exemption for overseas long-term issuers in 2023.

The Regulatory Initiatives Grid also indicated that the FCA is now working on operationalising the Overseas Funds Regime and will be consulting on various aspects of its Handbook rules in Q2 2023 to ensure that overseas funds are appropriately captured.


The OPE and CPT are vital pillars in the current cross-border regime and ensure that non-UK businesses, such as US investment advisers, can provide services to UK managers. If the OPE and CPT were to be restricted, this would likely increase the burden on non-UK businesses and potentially restrict investor choice. In light of the growth and international competitiveness objective set for the FCA under the FSM Act (see above), it is difficult to see how a restriction could be justified.


On 10 July 2023, Chancellor Jeremy Hunt launched a package of proposals and consultations for reform of pensions and investments known as the Mansion House Reforms. This has three primary aims:

  • to boost outcomes for savers and increase funding liquidity for high-growth companies through reforms to the UK’s pension market
  • to incentivise companies to start and grow in the UK by strengthening its position as a listing destination
  • to reform and simplify the financial services rulebook to ensure the UK has “the most growth-friendly regulation of any financial services centre,” without compromising its commitment to stability

For further information, please refer to our article “Mansion House Reforms Continue the UK’s Quest to Be a Leading Destination for Growth Company Investment.”

Recent and Expected Developments

The following initiatives were announced in relation to pension schemes:

  • An industry-led compact committing many of the UK’s largest DC pension providers to the objective of allocating at least 5% of all their default funds to unlisted equities by 2030.
  • A programme of DC consolidation to ensure that schemes maintain a diverse portfolio and deliver the best possible returns for members. A new value-for-money framework will make it clear that investment decisions should be based on overall long-term returns and not simply costs. Schemes failing to achieve the best possible outcomes for members will be wound up and their assets transferred into larger schemes. A road map will be published to encourage the establishment of collective DC schemes.
  • The British Business Bank will explore the case for the government to play a greater role in establishing investment vehicles.
  • A statutory regime requiring the compulsory authorisation and supervision by the Pensions Regulator of defined benefit (DB) superfunds and other consolidation models.
  • A call for evidence to support the development of policy options for improving the skills and capability of pension trustees and removing barriers to trustees’ ability to make effective investment decisions.

In addition to these reforms, the Prospectus Regime will be reformed to facilitate secondary capital raising for public companies. This will include a new framework governing when a prospectus needs to be produced and a different liability threshold for certain categories of forward-looking statements in prospectuses.

The recommendations of the Investment Research Review, published on 10 July 2020, have all been accepted, and (subject to consultation feedback) the FCA will aim to implement the relevant rules in the first half of 2024.


HM Treasury describes the changes represented by the Mansion House Reforms as “evolutionary, rather than revolutionary”; however, the changes represent a significant level of review for the UK financial regulatory landscape. It’s expected that changes will be introduced on a tight timescale, with the implementation of the reforms being proposed to be carried out in 12 to 18 months. This will represent a shift away from many of the established regulatory frameworks that have been in place for the past couple of decades as well as a divergence from the European capital markets framework.


The Financial Services Regulatory Initiatives Forum published an update to the Regulatory Initiatives Grid 2023 in July 2023, following the FSM Act receiving Royal Assent. The members of the Forum include the Bank of England, the PRA, the FCA, the Payment Systems Regulator, the Competition and Markets Authority, the Information Commissioner’s Office, the Pensions Regulator, and the Financial Reporting Council as well as HM Treasury acting as an observer member.

The purpose of the Regulatory Initiatives Grid is to set out details of regulatory initiatives relevant to the financial services sector that are planned for the next 24 months, with the objective to help firms manage the operational impact of the implementing initiatives.

Recent and Expected Developments

The July 2023 update to the Regulatory Initiatives Grid sets out the steps that regulators are taking to operationalise changes introduced under the FSM Act. This includes the PRA publishing a consultation paper focused on its new objectives under the FSM Act, the FCA consulting on access to cash, and the Bank of England consulting on the wholesale access to cash regime. The FCA and the PRA will also establish new cost-benefit analysis panels.

The updated grid also sets out how the Financial Services Regulatory Initiatives Forum should best reflect the government’s delivery plan relating to the revocation of retained EU law and includes detail about a policy statement on the FCA’s SDR, due to be published in Q4 2023 (as set out above).

A further full update of the Regulatory Initiatives Grid is planned to be published in Q4 2023. Following this, the grid will revert to being updated twice a year.


The additional update to the Regulatory Initiatives Grid is welcome given the significant upcoming changes that will be brought about by the introduction of the FSM Act. However, the updated grid for the most part reflects the regulatory initiatives included in the February 2023 grid, which have continued to progress as anticipated with some adjustments to timeframes (which had already been separately announced).

Regulatory Developments (EU)


The Commission published its Retail Investment Package (the Package) in May 2023. The Package aims to streamline and modernise investor protection rules in EU laws, including AIFMD and MiFID, with the aim of increasing the level of retail investment in the EU. Not only is the Package relevant to private fund managers that wish to bring retail investors into their funds, but it introduces rules that would apply to all investors.

Recent and Expected Developments

Of particular interest for EU private fund managers are the proposals set out below.

  • First, the introduction in AIFMD of the concept of “undue costs” for AIFs (developing the recent ESMA Opinion) and the introduction of a value-for-money concept with respect to retail investors. These retail-investor-specific provisions would supplement other provisions in the current AIFMD II proposals on enhancing retail investor access.
  • Second, changes to the MiFID definition of “professional client” that will expand the categories of person who can invest in an AIF, noting the cross-references from AIFMD to MiFID.
  • Third, a ban in MiFID on inducements for non-advised sales of retail investment products, which may have an impact on private placement agents and other distributors of private funds.

The Package also seeks to make amendments to MiFID to improve product transparency, address marketing via social media, and improve cooperation between regulators. Further, it seeks to amend the PRIIPs Regulation, relevant to the distribution of private funds to retail investors, to improve the digital readability of key information documents (KIDs) and address the disclosure of sustainability-related information.

The proposed AIFMD, MiFID, and other changes in the Package are unlikely to come into force before the end of 2025, and for many of the proposed requirements, delegated legislation is to follow setting out further detail.

See our briefing The EU Retail Investment Strategy and Private Fund Managers for more detail.


Managers should keep a watching brief and start to make plans around compliance, in particular incorporating a more granular approach to costs and charges to supplement their governance structures in providing “value for money”; revisiting fee models for those who provide products via execution-only distribution chains; and considering if the proposed amended elective professional opt-up regime would help to recategorise any retail wealth investors.

Of particular interest is the proposed amendment to prevent undue costs from being charged to AIFs and their investors (of all categories), by setting out when costs will be considered “due.” It pertains to costs that are:

  • in line with disclosures in the fund constitutional documents and any key information documents
  • necessary for the AIF to operate in line with its investment strategy and objective or to fulfil regulatory requirements (although “necessary” is not defined)
  • borne by investors in a way that ensures fair treatment of investors (although this does not prevent provisions allowing for preferential treatment where it is disclosed in the fund’s constitutional documents under AIFMD)

In addition, in order to implement the value-for-money principle for retail investment products, new AIFMD product governance rules are proposed. These would require an AIFM to set out a “pricing process” allowing for the identification and quantification of all costs and charges borne by the AIF and its investors, and an annual assessment (and onward regulatory reporting) of whether the costs borne by retail investors are justified and proportionate, having regard to the AIF characteristics (including its investment objective, strategy, expected returns, level of risks, and other relevant characteristics). Much of the detail will follow in secondary measures, and one of particular note will be to ascertain how the objective benchmarking concept (with ESMA mandated to publish performance benchmarks) will work for diverse and cross-sector private investment fund strategies.


In December 2022, ESMA published its final report on implementing technical standards and regulatory technical standards to specify the information to be provided and the content and format of notification letters to be submitted by AIFMs (and UCITS ManCos) to national competent authorities (NCAs) to undertake cross-border marketing or cross-border management activities in host member states. These complement the EU legislative package on cross-border distribution of funds (which has applied since August 2021).

Recent and Expected Developments

This ESMA work aims to foster convergence and standardization of information and templates for cross-border management and marketing activities, so that NCAs can gather meaningful data that serves a supervisory purpose. ESMA has confirmed that the standards do not apply retrospectively. However, the new templates will result in increased costs (filing fees along with IT development and associated compliance burden), even though ESMA states this has been taken on board in developing the final report.

The Commission has three months (extendable to four) to adopt these standards, so we expect this to happen in the very near future.


The cross-border legislation includes provisions on pre-marketing, reverse solicitation, ceasing marketing and minimum requirements for retail investors. In addition, new rules on marketing communications are supplemented (since February 2022) by ESMA’s final guidelines.

There remain various grey areas in the practical application and interpretation of some of these rules, including, for instance: questions on the definition of “marketing communications”; the 36-month blackout period following a marketing de-notification; that any subscription within 18 months of the start of pre-marketing is considered to be marketing under AIFMD; and how the rules impact non-EU AIFMs/AIFs marketing under the national private placement regime (NPPR). The publication of these standards does not shed any light on these areas of uncertainty.


The CSSF launched this thematic review to verify compliance by Luxembourg investment fund managers with the applicable requirements under Article 4 of the CBDF Regulation during the period 1 April 2021 to 31 March 2023. The CSSF interpretation focuses on the ESMA guidelines on funds’ marketing communications that has applied since 2 February 2022.

Recent and Expected Developments

In this report the CSSF:

  • considers that investment fund managers shall assess what exactly constitutes marketing communications based on the guidance provided by ESMA
  • expects that all marketing communications are identified as such by means of a prominent disclosure of the term “marketing communication” (even if the support is a website or social media platform)
  • expects that the wording and indicators used in the marketing communication, the key information documents or key investor information documents, the prospectus or equivalent, and the SFDR-required disclosures are consistent
  • expects that all information contained in a marketing communication is easily readable and that all acronyms and all terms describing the investment used in the marketing communication are properly defined and understandable by the target investors
  • expects that information in notes or disclaimers is easy to find and to read
  • expects that the use of hyperlinks should be limited (if used, such hyperlinks should lead to the exact place where the relevant information may be found, and should be maintained over time to ensure that investors do not find broken links where information is no longer available)
  • recommends clearly identifying the target investor group when investment fund managers target a specific type of investors with a marketing communication
  • reminds of the requirements that all marketing communications (of UCITS and AIFs, which publish a prospectus or have the key information documents) indicate that a prospectus exists and that the key investor information documents are available
  • expects that sections related to risks are properly tailored to the fund/sub-fund promoted and that a prominent indication on where to find complete information on risks is disclosed (even for marketing communications addressed to professional investors only)
  • provides that, to be fair, clear, and not misleading, a marketing communication that presents costs should display the periodicity of these costs as well as a prominent indication that not all costs are presented, and that further information can be found in the prospectus or equivalent
  • with regard to information on performance and benchmark, highlights the most frequent elements of non-compliance and areas of improvement, and expects that (i) the periodicity criteria are respected, (ii) the consistency with fund’s documents is ensured, and (iii) any changes significantly affecting the past performance of the promoted fund are prominently disclosed
  • expects a good balance between disclosures on sustainability-related aspects and other aspects of the investment strategy of the promoted fund/sub-fund
  • with regard to short marketing communications, expects that hyperlinks used in marketing communications refer to webpage(s) where the actual information document of the fund/sub-fund is available


This CSSF review contains general findings and observations for managers to take into account when reviewing their procedures, establishing new marketing communications under the CBDF Regulation, and/or verifying their consistency and use. It builds on the ESMA guidance as to what the CSSF expects in practice (and where it may issue corrective measures, if it so choses).


Since the Commission’s October 2020 consultation on a proposed Amending Directive, the Council of the EU and the European Parliament have been proposing further amendments. Once finalised, the Amending Directive will enter into force 20 days following its publication in the Official Journal of the EU; EU member states will then have 24 months to implement. The passage of a directive through the legislative process is typically 18 months (this would mean implementation in 2025), but it can be quicker.

See our December 2021 client alert for background on the original AIFMD II proposals and our most recent client alert (AIFMD II gathers momentum: the European Parliament finalises its proposed text) in relation to the European Parliament proposals published in late January 2023.

Recent and Expected Developments

The key areas of review relate to loan-originating AIFs, third-party delegation, minimum stable substance within the AIFM, cross-border access to depositary services, and the use of liquidity management tools. In addition, new transparency requirements on providing information on AIF loan portfolios are to be fed into investor disclosures and reporting to NCAs.

The final shape of these rules is yet to be determined, but a provisional agreement was reached between the Commission, the Council, and the EU Parliament in July (the text of which is not available). The European Parliament has indicated that it will consider AIFMD II during its plenary to be held 5-8 February 2024, meaning full implementation by member states would be in 2026. Detail on implementing legislation is due to be produced by ESMA.

UK AIFMs will not be directly impacted by the proposed amendments, unless the UK applies equivalent changes through the FCA Handbook and UK AIFM Regulations.


Loan-originating/private debt funds are an important and growing source of financing; they are also expected to help facilitate the transition to investing in a sustainable green economy.

Even if the UK does not take an aligned approach, the changes could still be relevant — for example, when marketing cross border using the NPPRs, or contractually when acting as a delegate of an EU27 AIFM (or, if a UK AIFM chooses to voluntarily comply, on a grouped basis or in response to investor demand).


Available since December 2015, a European Long-Term Investment Fund is a collective investment framework for both professional and retail investors looking to invest in long-term assets. A review of the ELTIF Regulation was finalised in March 2023, and the Amending Regulation — the introduction of the “ELTIF 2”) entered into force on 9 April 2023 and applies nine months later (i.e., from 10 January 2024).

The aim of the amendments is to make ELTIFs more appealing to investors, in particular retail investors; minimise restrictions and reduce barriers; and provide more flexibility and accessibility to the regime and more favourable redemption options.

Although AIF structures are likely to continue to dominate the institutional end of the non-listed fund market, the ELTIF may be an appealing alternative for those managers targeting retail investors (e.g., local government pension schedules, HNWIs, affluent retail markets, charities, and institutions) as well as professional investors. The ELTIF marketing passport extends to both retail and professional investors (and may also appeal to sub-threshold managers who do not have AIFMD passport rights).

See above (under ”The Long Term Asset Fund”) in respect of the UK’s repeal of the ELTIF Regulation.

Recent and Expected Developments

Level 2 regulatory technical standards (RTS) to supplement the amending regulation were consulted on earlier this year. The main topics of interest are around:

  • an ELTIF’s redemption policy (including criteria for determining the minimum holding period when redemptions cannot be granted and redemption limits), liquidity management tools, and circumstances for the use of secondary market matching
  • information to be disclosed to investors and to the member state regulators
  • use of hedging derivatives
  • disclosure of costs (including a requirement to disclose an overall ratio of the costs to the capital of the ELTIF)

The RTS are expected to be finalised by the time the Amending Regulation comes into force on 10 January 2024. See our client alert ELTIF Regulation RTS: Important detail in the ESMA consultation.


The aim of the amendments is to make ELTIFs more appealing to investors, in particular retail investors; minimise the restrictions and reduce the barriers; and provide more flexibility and accessibility to the regime and more favourable redemption options. Helpfully, the amending regulation reduces barriers for retail investors (by removing the €10,000 initial investment requirement and 10% exposure threshold for retail investors with portfolios below €500,000) and aligns the suitability test with that of the Markets in Financial Instruments Directive II.

There is also clear differentiation between ELTIFs to be marketed exclusively to professional investors and those that are marketed to retail investors. For instance, provisions on diversification and concentration are disapplied for ELTIFs marketed only to professional investors.

In the Level 2 RTS Consultation preamble, ESMA confirms that AIFMs (whether of preexisting or new ELTIFs) can take advantage of the revised rules only from 10 January 2024, when the Amending Regulation comes into force — in other words, there is no earlier opt-in for preexisting ELTIFs.


Regulation 2022/2554 on digital operational resilience for the financial sector (DORA) establishes uniform requirements for the security of network and information systems used by businesses in the financial sector. It imposes requirements on EEA-regulated companies and organisations operating in the financial services sector as well as unregulated EEA and non-EEA-based critical third parties providing services relating to information and communications technology (ICT).

The regulation prescribes rules relating to firms’ ICT governance structures targeting enhanced ICT risk management, incident reporting, information sharing, and operational resilience testing. The rules also require critical third parties providing ICT services to financial institutions to establish a presence in the EU within 12 months of being designated as a critical ICT third-party service provider.

In addition to the internal governance requirements, DORA implements rules for the establishment and conduct of a new oversight framework for critical ICT third-party service providers providing services for financial entities.

DORA is complemented by Directive (EU) 2022/2556 amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU, 2014/65/EU, (EU) 2015/2366, and (EU) 2016/2341 as regards digital operational resilience for the financial sector (the DORA Directive). This amends existing risk management provisions in certain financial services directives to better complement DORA.

Recent and Expected Developments

Both DORA and the DORA Directive were published in the Official Journal of the European Union on 27 December 2022 and entered into force on 16 January 2023. The provisions of the Act and the Directive will apply from 17 January 2025, requiring EU member states to apply national measures implementing the DORA Directive from the same date.

The Regulation requires the ESAs to develop various delegated acts and technical standards to supplement the provisions of DORA. The ESAs are required to deliver technical advice to the Commission on two delegated acts before 30 September 2023 and submit technical standards required under Articles 15, 16, 18, and 28 before 17 January 2024. Before 17 July 2024, the ESAs are required to submit technical standards to the Commission under articles 20, 26, 30, and 41 as well as guidelines under Articles 11 and 32.

In May 2023 the Joint Committee of the ESAs published a discussion paper on two delegated acts to be adopted under DORA. These specify the criteria to consider when assessing the critical nature of ICT third-party providers. They also set out the proposals concerning the amount of fees levied on critical third-party providers and the way in which they are to be paid.

In June 2023, the ESAs published consultation papers on various draft RTS and ITS under DORA. Alongside this, the ESAs published an introductory note setting out further information on the draft technical standards. This consultation closed on 11 September 2023, and it is expected that draft technical standards will be submitted to the European Commission by 17 January 2024.

On 18 September 2023, the European Commission published a communication (2023/C 328/02) setting out guidelines on the application of the provisions of Directive (EU) 2022/2555 (the NIS 2 Directive) relating to cybersecurity risk management measures or incident reporting requirements to financial entities that are also subject to DORA.


DORA and the DORA Directive represent a very significant step up in the regulatory requirements placed on firms’ ICT operational resilience. While some financial entities and critical service providers may already be fulfilling some of the requirements as a matter of good practice, many will have to implement significant changes to their systems and controls to comply with the detailed new rules.

Given the significant scope of the changes required and the relatively short implementation time frame, it is important that firms undertake a detailed review of their ICT risk management framework and leave adequate time to implement the requirements before they come into force on 17 January 2025.


This EU regulation is designed to address “distortions caused by foreign subsidies” and to ensure a level playing field for all companies in the EU single market. It targets companies that receive “subsidies” from third-country state entities, as subsidies from member states are subject to close scrutiny while those from outside the EU are not.

Recent and Expected Developments

This regulation came into force on 12 January 2023, and from 12 July 2023 applied to EU entities with a turnover of €500 million or more (generated in the EU). The notification obligations apply from 12 October 2023 if the transaction involves a “foreign financial contribution” of more than €50 million.


Fund managers acquiring larger companies whose turnover threshold will meet the €500 million test will need to take note of this requirement. It is drafted extremely widely, and those managers with commitments from sovereign wealth funds and potentially public pension funds of non-EU countries may well be caught by the notification obligations. The €50 million test is on a cumulative basis, so all relevant financial contributions must be aggregated. The notifications must be made prior to the transaction and cannot complete until approval is received.


The EU Markets in Crypto-Assets Regulation (MiCA) was published in the Official Journal of the European Union on 9 June 2023. MiCA is a major step toward an EU-wide uniform code governing crypto-assets, such as BTC, ETH, and stablecoins. Although MiCA came into force on 29 June 2023, there is a period of time before its provisions come into effect:

  • the provisions governing certain stablecoins will apply from 30 June 2024
  • the provisions governing the remaining crypto-assets will apply from 30 December 2024

MiCA will bind EU businesses directly without the need for individual EU member states to implement laws to put it into effect. Individual EU member state authorities will be responsible for enforcing MiCA in their respective territories. MiCA addresses the following:

  • the issuance and marketing/offering of crypto-assets
  • the performance of activities/offering of services connected with crypto-assets, such as the custody and administration of crypto-assets on behalf of third parties, the operation of a trading platform for crypto-assets, and the exchange of crypto-assets for fiat currency or other crypto-assets
  • the prevention of market abuse involving crypto-assets

MiCA will be relevant not only to those involved in carrying on these activities but also to those who acquire businesses involved in carrying on these activities.

Recent and Expected Developments

MiCA places obligations on the EBA and ESMA to publish various pieces of secondary legislation to reinforce and provide further detail in relation to the requirements under MiCA. Secondary legislation published so far includes:

  • In January 2023, the Commission sent provisional calls for advice to the EBA on (i) the criteria for classification of certain stablecoins as “significant” and (ii) the type of fees that the EBA is empowered to impose on issuers of significant stablecoins. The EBA is asked to provide the technical advice by 30 September 2023.
  • On 12 July 2023, the EBA and ESMA both launched consultations on their first set of RTS and ITS under MiCA. The deadline for comments on the EBA consultation papers is 12 October 2023, and the consultation period for the ESMA consultations closed on 20 September 2023.

ESMA is expected to consult on a second package of level 2 measures in October 2023 and a third and final package of level 2 measures in Q1 2024.


Regulation of crypto-assets in the EU is currently fragmented, with each EU member state having its own regulatory regimes for the regulation of crypto-assets that are not financial instruments within the meaning of MiFID. There is significant variation between the regimes for different member states. For example, Germany follows a strict approach to regulation, requiring some firms to be fully authorized, whereas countries such as Denmark and the Netherlands do not have any specific regulation beyond the requirements of MLD5 . The uniform rules governing crypto-assets across the EU therefore present welcome clarity on the treatment of crypto-assets across the EU.

For further information on MiCA, please see our articles Marketing Crypto-Assets in and Into Europe: MiCAR, the EU’s New Uniform Crypto Code, Doing Crypto Business in Europe: MiCAR, the EU’s New Uniform Crypto Code – Part 2, and Acquiring or Investing in EU Crypto-Asset Businesses: MiCA’s Impact.

Tax Topics (UK)


The Luxembourg Parliament ratified the DTT on 19 July 2023. The changes in the DTT will now take effect in 2024.

Recent and Expected Developments

Under the revised DTT, the changes agreed in July 2022 between the UK and Luxembourg will take effect from 1 January 2024 in respect of UK income tax withheld at source, from 1 April 2024 in respect of UK corporation tax, and from 6 April 2024 in respect of UK income tax and capital gains tax. The UK had previously ratified the DTT in October 2022.


The revised DTT will allow the UK to tax Luxembourg investors on any capital gain made on the disposal of a UK real estate-rich entity (including gains accrued prior to the amendments taking effect).

However, certain helpful changes to the DTT will also come into effect next year. For instance, the revised DTT provides most UK parent company recipients with an exemption from withholding tax on dividends paid by Luxembourg holding companies (whereas the existing DTT reduces only the withholding tax rate), in circumstances where Brexit had meant that UK dividend recipients were not, under Luxembourg law, automatically benefitting from a full exemption available to EU recipients. The DTT changes will also extend the treaty’s benefits to certain Luxembourg corporate collective investment vehicles, where the relevant qualifying conditions are met.


A number of amendments to the UK’s QAHC regime took effect from 11 July 2023 (with certain exceptions), when the Finance (No.2) Act 2023 received Royal Assent. The amendments were initially proposed in the Spring Finance Bill 2023 (FB).

Recent and Expected Developments

The UK QAHC regime was implemented to provide for a tax-efficient UK-resident corporate holding vehicle that enables qualifying investors (including funds) to invest using a UK asset holding structure, with minimal additional UK tax leakage.

The amendments in the Finance (No.2) Act 2023 include changes to enable:

  • certain funds constituted as a body corporate (e.g., Delaware LPs) to meet the diversity of ownership (GDO) condition, such that the fund is a “good” investor for QAHC purposes
  • QAHCs to hold listed securities (provided the QAHC elects to be taxable on dividend income from such securities)
  • certain qualifying alternative finance arrangements to constitute a relevant interest, for the purposes of determining whether the ownership condition is met
  • the widening of the GDO condition so that it can more readily be satisfied in the context of “multi-vehicle arrangements” (e.g., where there are feeder, parallel, and aggregator vehicles)


The government has made a number of targeted changes to the initial rules since implementation to deal with points that were raising practical issues, and it has continued to discuss further helpful changes with the industry.

Through our participation in industry working groups, we are closely involved in working with HMRC to continue to refine and improve the operation of this regime. Please contact us if you would like to receive a more in-depth summary of the QAHC regime, including the potential advantages, conditions of eligibility, and practical points to note.


Certain amendments to the UK’s REIT rules, aimed at increasing the attractiveness of the regime, have now taken effect following Royal Assent of the Finance (No.2) Act 2023. The amendments were originally included in the FB.

Recent and Expected Developments

The amendments include:

  • removing the requirement for a REIT to own at least three properties, where it holds a single commercial property worth at least £20 million
  • amending the rule that deems the disposal of a property within three years of its being significantly developed to be outside of the property rental business, so that the valuation used when calculating what constitutes a “significant development” better reflects increases in property values
  • allowing the payment of a property income distribution (PID) to a partnership to be made partly with tax withheld and partly gross, with the components determined based on the extent to which the partners would be entitled to gross payment of the PID if they held an interest in the REIT directly.

The changes took effect from 11 July 2023, save for the amendments to the three-year development rule (which have effect in relation to disposals made on or after 1 April 2023).


These amendments are welcomed amid the growing trend for large and midsize pan-European real estate funds to structure UK investments using a REIT rather than, e.g., a master holding company taking the form of a Luxembourg S.à r.l. (see also the comments above on the changes to the UK-Luxembourg double tax treaty).

The amendment to allow differential withholding on PIDs may be of limited practical impact for many funds, given that only a handful of categories of investor have gross payment status (almost exclusively UK entities). For example, sovereigns do not have gross payment status, despite being able to reclaim all UK withholding tax on PIDs.


The government published its consultation on the VAT treatment of fund management services on 9 December 2022. The consultation closed on 2 February 2023.

Recent and Expected Developments

The government proposes codifying the UK’s existing policy (based on UK law, retained EU law, general principles, case law, and guidance) to provide certainty on the VAT treatment of fund management. VAT is chargeable on supplies of fund management services to most private funds in the UK (e.g., AIFs), other than certain, limited exempt supplies (including supplies to special investment funds (SIFs)). It is not proposed that this VAT treatment will significantly change following the review.

The government proposes establishing criteria to identify SIFs as follows:

  • the fund must be a collective investment operating on the principle of risk-spreading
  • the investment return must depend on the performance of the investments with holders bearing the risk connected with the fund
  • the fund must be subject to the same conditions of competition, and appeal to the same investors, as a UCITS (retail investors)

However, a fund will not need to be subject to “state supervision” to qualify as a SIF. A definition of “collective investment,” broadly mirroring that in FSMA 2000, will also be introduced.

Views on the proposals, as well as whether any further VAT related modifications would improve the fund management regime for taxpayers, are being sought.


Greater certainty over whether a fund is a SIF is welcome and may improve the UK’s attractiveness to funds. However, ruling zero rating for fund management services out of the consultation’s scope (as announced in the government’s response to its call for input on the review of the UK funds regime) will disappoint some, as this would have addressed irrecoverable VAT for UK private fund managers.


The Finance (No.2) Act 2023, which received Royal Assent on 11 July 2023, sets out the UK’s new multinational top-up tax (MTT) and qualified domestic minimum top-up tax (QDMTT), both of which have effect in respect of accounting periods beginning on or after 31 December 2023. HMRC has now begun to consult on relevant draft guidance.

Recent and Expected Developments

The legislation expands upon the first form of draft legislation (published in July 2022), with the changes made in respect of the MTT primarily reflecting various technical clarifications that had been included in the OECD’s Administrative Guidance (published in February 2023).

The new QDMTT, broadly speaking, imposes a UK top-up tax on the UK members of a group (domestic or multinational) in respect of UK profits, which are otherwise taxed at below the minimum rate of 15% required by OECD Pillar 2.

On 15 June 2023, HMRC published three chapters of draft partial guidance, intended to cover both the MTT and QDMTT. Amongst other things, the guidance covers the calculation of ownership interests of entities, excluded entities (including definitions of “investment fund” and “REIT” but, at present, without adding further colour to the statutory text), and the revenue threshold tests, and includes a table cross-referencing the UK provisions against the relevant OECD model rules. These chapters will be supplemented by future guidance in due course, which together will form a new HMRC manual. HMRC has been inviting comments from stakeholders on the draft guidance. The consultation closed on 12 September 2023.


While many funds will be excluded from the scope of Pillar 2 (because, for example, their consolidated revenues fall below the €750 million threshold, or because the “excluded entity” provisions apply to the fund vehicles and their holding companies), it is still possible, depending on the fund structures and/or accounting policies adopted, that their portfolio investments will be caught by the rules. In particular, the implementation of QDMTTs means that it should not be assumed that a fund will fall outside of the rules simply because it operates in only one jurisdiction.

A number of fund managers have started to examine the impact of the rules on their portfolios, whether they might fall outside the scope of the regime and/or how to manage compliance with any applicable provisions.


The Finance (No.2) Act 2023 contains legislation that allows UK individual taxpayers who expect to receive carried interest to make an election for their carried interest to be taxed on an accruals basis. The provisions have effect for the tax year 2022/23 and subsequent tax years.

Recent and Expected Developments

The time at which carry is treated as arising to a carry holder in the UK for tax purposes can be significantly later than the time at which it arises for tax purposes in other jurisdictions (e.g., the US). This can be problematic for individual fund managers holding carried interest rights who are subject to tax in both jurisdictions. In particular, issues can arise regarding the availability of tax refunds and credits for tax paid across the relevant jurisdictions.


The new legislation aims to resolve the difficulties arising in relation to refunds/credits by allowing individuals to make an (irrevocable) election, the effect of which will be to bring forward the point at which UK tax becomes due on carried interest (i.e., taxation on an accruals basis).

The legislation is expected to primarily benefit individual fund managers who are UK tax resident but who also have US citizenship.

Tax Topics (EU)


The European Parliament adopted the proposed text of the ATAD 3 Directive, as amended by the European Parliament’s Committee on Economic and Monetary Affairs (ECON), on 17 January 2023.

Recent and Expected Developments

It remains the case that the EU Council needs to vote on whether to adopt the Parliament’s proposal as the final text of ATAD 3 (the timing of this is still unclear).

The softening of the minimum substance indicators required to be reported by in-scope undertakings has made its way into the Parliament’s proposed text (such softening, broadly, allows group companies to share premises and removes certain restrictions in relation to their directors), as has the requirement that the Commission submit a report five years from the date of transposition that, among other things, assesses whether it is appropriate to extend the obligation to report on minimum substance requirements to “regulated financial undertakings” and, if necessary, review the exemption that such undertakings would (on current drafting) benefit from.


There had been support during committee debates for removing the exemption for “regulated financial undertakings” (broadly, vehicles established as an AIF managed by an AIFM) from the in-scope undertakings. However, this exemption has been retained in the Parliament’s proposed text (although there is no guarantee that this key carve-out will be included in the directive’s final text).

ATAD 3 had made significant progress under the Swedish presidency of the Council, which concluded on 30 June 2023. However, as expected, given the need for unanimous approval by all 27 EU member states, the timetable for adoption has slipped beyond the first half of 2023. This is likely to be pushed back further still, with ECOFIN having reported to the Council on 16 June 2023 that while progress had been made on a number of controversial issues, further discussions are needed in order to find compromise on outstanding points. While the Council’s current Spanish presidency has renewed its focus on reaching political agreement before the next ECOFIN meeting (on 9 November 2023), it is now expected that the directive will not take effect until 1 January 2025 at the earliest, notwithstanding that (as currently drafted) it is still scheduled to take effect from 1 January 2024.

As the Parliament’s January 2023 proposal is non-binding, the EU Council does not need to adopt this draft version of ATAD 3. Therefore, it remains to be seen whether the member states can find a way through the current political deadlock in order to agree on a final form of the directive.


On 12 September 2023, the Commission proposed a Directive on Business in Europe: Framework for Income Taxation (BEFIT). The proposed regime is designed to harmonise the calculation of the tax base of BEFIT group members and allocate the tax base between them. If adopted by the Council, the proposals will come into force on 1 July 2028.

Recent and Expected Developments

The rules will apply mandatorily to groups headquartered in the EU which have an annual combined revenue of at least €750 million, or where the group is headquartered in a third country but the EU group members raise an annual combined revenue of €50 million in two of the last four fiscal years or account for at least 5% of the total group’s revenue. For these purposes, a group comprises the parent entity and any subsidiaries in which it holds directly or indirectly at least 75% of the ownership rights or rights giving entitlement to profit. Smaller groups may opt in to BEFIT if they prepare consolidated financial statements.

Where BEFIT applies, the tax base of each group member will be calculated (based on the consolidated financial accounts, subject to a common set of tax adjustments) and aggregated into a single tax base, which will in turn be allocated according to each group member’s weighted share in the previous three fiscal years. This “transition allocation rule” will apply in the first seven fiscal years following implementation, after which the Commission may adopt a formulary appointment approach on a permanent basis. Once allocated, member states may apply further deductions, tax incentives, or base increases to their allocated part (provided they do so in compliance with Pillar 2).

Within the BEFIT group, losses can be utilised cross border, and no withholding tax on interest and royalties will be applied where the beneficial owner is a BEFIT group member. The rules will also allow one group member to fill in the group’s information returns with the tax administration of one member state.


The proposed directive broadly follows the same scoping thresholds as the Pillar 2 GloBE rules but, unlike Pillar 2, does not currently include a similar concept of “excluded entities,” which could otherwise serve to de-scope certain fund structures. While many funds will be excluded from the mandatory scope of the regime because their consolidated revenues fall below the €750 million threshold (or they do not constitute an EU-headquartered group and do not meet the 5% or €50 million thresholds), it is possible (as with Pillar 2) that portfolio investments will be caught depending on the fund structures and/or accounting policies adopted. We will continue to monitor the effect of the BEFIT proposals on the private funds industry as the rules develop over time.


The feedback period for the Commission’s proposed Directive on the Faster and Safer Relief of Excess Withholding Taxes (FASTER) ended on 18 September 2023. The proposal was originally published on 19 June 2023 and aims to introduce a common EU-wide system for withholding tax (WHT) on dividend or interest payments. If adopted, the directive will need to be transposed by member states by 31 December 2026 and will come into force from 1 January 2027.

Recent and Expected Developments

The proposal is limited in application to payments of dividends (or interest) from publicly traded shares (or publicly traded bonds) and has four main features.

  • Member states will need to implement one (or both) of two new procedures for WHT relief: (i) “relief at source” (i.e., the correct WHT rate under the appropriate double tax treaty is applied at the time the payment is made); or (ii) “quick refund” (i.e., the tax is withheld at the higher rate, but with the excess tax repaid within 25 days from the date of the request or the report (below) being made).
  • Common reporting obligations, which require financial intermediaries to report information relating to relevant dividend or interest payments within 25 days, so as to enable tax authorities to identify abusive practices and confirm entitlements to reduced WHT rates.
  • EU digital certificate of tax residence (eTRC), containing standardised content such as the identity of the requesting taxpayer and confirmation of residence. The eTRC must be issued by member states within one working day of submission, must be recognised by other member states as proof of residence, and must cover at least the full calendar year for which it is issued.
  • The proposed regime applies only where a certified financial intermediary (CFI) registered with competent authorities of member states is involved. Amongst other things, CFIs will need to obtain and verify the beneficial ownership and tax residence for every investor who applies for relief. In the current draft proposal, only the largest financial intermediaries are mandatorily within scope (e.g., broker-dealers who trade in and/or custody public securities or play a role in the life cycle of a securities trade), with all financial intermediaries that are large institutions (as defined in Capital Requirements Regulations (CRR)) and that handle payments of interest and dividends being obliged to register; however, certain other financial intermediaries (as defined in the CRR, Central Securities Depositories Regulations and MiFID II) may opt to register. The definition of financial intermediary includes investment firms (which includes portfolio managers and adviser/arrangers but not AIFMs).


While the proposals are broadly welcomed, a more streamlined process for WHT reclaims will come at a compliance cost for CFIs falling within the new requirements, particularly as they may be held liable for lost withholding tax should they fail to comply with their obligations. Additionally, it is likely that a number of difficult issues will need to be resolved before the final text of the directive is adopted, such as the how the concepts of “residence” and “beneficial ownership” can be applied consistently by member states, CFIs, and investors under the regime.

Through our participation in industry working groups, we are closely involved in working to continue to refine and improve the operation of this proposal; although its implications for the private funds industry are at present limited, if it is expanded in scope at a future date, there are some key concepts where further engagement is needed in order to allow the regime to function as intended in the context of funds.



The Marketing Rule came into effect on 4 November 2022.

Recent and Expected Developments

The new Marketing Rule overhauls the regulatory requirements for SEC-registered investment advisers (RIAs) with respect to placement agents for their private funds. It captures a wide range of communications by placement agents as “advertisements” of the RIA and imposes oversight requirements on the RIA with respect to placement agents.


For non-US fund managers, the Marketing Rule will not apply to “exempt reporting advisers” (ERAs), nor will it apply to non-US RIAs in relation to non-US funds (even if US investors commit to these non-US funds). If a non-US RIA is marketing a fund based in the US, then the Marketing Rule will apply.

Non-US RIAs marketing non-US funds should take care to minimise references in marketing documents to the fact that the manager is SEC registered, and include appropriate disclaimers/qualifications where they do make such references.


On 9 February 2022, the SEC proposed a package of new rules in relation to private fund advisers. There followed a period of lobbying and consultation, and the new rules were adopted on 23 August 2023.

Recent and Expected Developments

While the final rules were not as onerous as the original proposal, they still represent a substantial expansion of the SEC’s regulation of private fund advisers that will have a significant impact on future SEC examination and enforcement activities. Non-US managers may escape many of the new rules (although there are still circumstances in which they will apply), but US-based fund managers are grappling with how to ensure compliance. The new rules are subject to challenge, though, as the Managed Funds Association and others in the US have filed a lawsuit challenging the SEC’s power in this area.


Please see our recent client alert for more detail on the new rules. For how the SEC’s rules on preferential treatment of investors compare with the AIFMD, click here.


On 3 May 2023, the SEC published rules that amend the Form PF, which is a confidential reporting form for certain SEC-registered investment advisers.

The new rules will become effective on the date that is six months following publication.

Recent and Expected Developments

The changes apply to hedge fund and private equity advisers, and in some cases only to “large” private equity advisers (those with more than $2 billion in assets under management). Please see our client alert from 2022, which highlights the fact that these terms are very wide-ranging and not totally aligned with how they are used in the market. For example, some private equity, credit, and real estate funds actually fall within the definition of “hedge fund.”

The new requirements include an obligation to report events that could indicate “significant stress at a fund or investor harm.” For private equity advisers, this includes reporting within 60 days of a quarter end if there is a removal of a general partner, a fund termination event, or a GP-led secondary transaction.

Large private equity advisers will also be required to report annually on any LP or GP clawbacks, and provide more information on their fund strategies and borrowings.


Please see our recent client alert for further information and comment.

Other Topics

  • Consultations on Local Government Pension Scheme (LGPS) asset pooling
  • HM Treasury consultation and call for evidence on a future financial services regime for crypto-assets
  • HMRC consultation on the modernisation of UK stamp taxes on shares (including potential removal of partnership interests from scope)
  • A review of UK MiFID (including the unbundling of research rules)
  • FCA report on diversity and inclusivity in financial services
  • FCA and Bank of England Discussion Paper on Artificial Intelligence and Machine Learning (DP5/22)
  • FCA discussion paper on ESG governance, remuneration, incentives, and training
  • FCA concerns about sustainability-linked loans market
  • New regulatory framework on proposals to introduce a new regulatory framework on diversity and inclusion in the financial sector
  • Solvency II reforms

  • Additional requirements for cross-border tied agency passporting
  • Amendments to MiFID II rules and guidance for NCA on supervision of investment firms’ cross-border activities
  • Deforestation Regulation
  • Forced Labour Regulation

  • IOSCO report on financial stability risk in private markets
  • Taskforce on Nature-related Financial Disclosures (TNFD): finalised disclosure framework
  • Global Task Force on Nature-Related Financial Disclosures and implementation of a Global Biodiversity Framework, as part of the COP15 goals
  • The US government’s “Outbound Investment Program” will impact private fund managers investing in China, as US investors will be looking closely at investment restrictions and excuse rights.