Regulatory outlook for UK investment funds in 2023
Geopolitical challenges last year led to an energy crisis which will have long-term implications for the world economy. Past market experiences such as inflation and higher interest rates seem unlikely to abate during 2023, as the recession deepens. The fund managers that will succeed in 2023 and beyond will be those who are able to embrace uncertainty and seek out opportunities for efficiency and innovation to support both their portfolios and their investors during this period of market dislocation.
With recessions looming for most economies in 2023, investment fund managers will need to deal with ever-increasing regulatory obligations while potentially facing cost pressures on their margins. They will need to explore ways to restructure or downsize operations to fit into leaner but also more operationally resilient models.
In 2023, funds must deliver efficiencies, and this will include a strong focus on costs, especially those incurred in connection with the launch and operation of funds. A cost-focused mindset can be a catalyst for innovation in the fund market. Indeed, cost efficiency is a particular advantage of the new UK Professional Investor Fund (PIF) initiative (see also here).
Professional Investor Fund initiative
In December 2022, the UK government amended the Financial Services and Markets Bill to recognise the PIF, technically an unauthorised co-ownership alternative investment fund (AIF), as a UK fund structure. This set the scene for further developments in 2023, including continued constructive dialogue between the government and industry to address other legislative provisions to make it easier for UK fund managers to operate PIFs.
PIFs will provide the UK funds industry with speed to market and, in terms of launching and operating PIFs, low-fee advantages. They will also plug a gap in the UK funds offering and are expected to attract much-needed institutional investor capital for indirect investment in long-term productive assets including affordable and social housing, town centre regeneration and assistance with levelling up, as well as accelerating transition to net-zero strategies.
Climate change targets
The Financial Conduct Authority's (FCA) continuing commitment to ambitious climate change targets remains encouraging. Driven by investor pressure, in 2023 regulators will continue to crack down on greenwashing, calling out those businesses which spend more effort marketing themselves as ESG-aligned than actually delivering positive impacts. This needs to dovetail with the UK government delivering on its Greening Finance Roadmap and making progress with a Green Taxonomy, given its commitment to achieve a net-zero economy by 2050.
The FCA's Q4 2022 proposals in its consultation paper on sustainability disclosure requirements (SDR) and investment labels represent a regulatory environmental, social and governance (ESG) game-changer. The real estate funds market will hopefully respond positively to these proposals. The FCA requires compliance with the overriding anti-greenwashing principle from June 2023, compelling UK managers to adopt the new SDR sustainable investment labels for products — "sustainable focus", "sustainable improvers" and "sustainable impact" — well in advance of the provisional implementation date of June 2024.
The guidance draft includes updated proposals for real estate ESG metrics. The real estate sector very much needs for investors, fund and asset managers, occupiers, regulators and other stakeholders, thought leadership on consistency of disclosures that are transparent, quantifiable and objective. The UK funds industry needs to contribute to accelerating the net-zero agenda, including through compliance with ESG regulations.
2022 was yet another busy year for the UK's financial services regulator, with topics such as ESG and digital assets taking the top spots on regulatory agendas. While economies have begun adapting to a post-COVID 19 world, inflationary trends coupled with unstable financial markets have put stability and the need to protect investors at the top of the agenda for 2023. There remains capacity for continued innovation in the UK funds regulatory landscape, however, including the need for more efficient fund structures and effective regulation of ESG.
This article was written by Melville Rodrigues, Head of Real Estate Advisory at Apex Group and was first published by Thomson Reuters Regulatory Intelligence on January 9, 2023.