FCA expectations regarding funds in light of coronavirus (Covid-19)

Firms have asked us about our rules and guidance on funds. The queries focus mainly on the associated challenges firms are facing both operationally and as a result of significantly increased volatility in global markets.

We acknowledge the significant challenge firms are facing in the current environment. Nevertheless we expect them to continue to uphold the best interest of their investors at all times. But we set out our answers to these queries here.

Delaying annual and half-yearly fund reports

Some firms have asked whether publishing annual and half-yearly fund reports can be delayed. We agreed to do this[1]. On 9 September 2020 we set out how this temporary relief would be brought to an end. 

Virtual general meetings

In April 2020 we published supervisory forbearance concerning virtual general meetings[2]. We do not have supervisory concerns under the existing rules about meetings of unitholders being held virtually, if the fund documentation did not prevent this. We recognise firms have been relying on the forbearance since then, and some firms may be planning to hold meetings in the near future on that basis. 

In December 2023, we consulted on rule amendments in a quarterly consultation paper CP23/25[3] to provide additional options or clarifications to our fund rules to reflect modern practices. One of the proposed amendments was to make explicit rules around holding general meetings of unitholders in a virtual or hybrid format, if firms choose to do so. To give firms time to make any necessary adjustments, the amendments to the rules relating to unitholder meetings will apply only to meetings held on or after 3 June 2024. The new rules will replace the existing forbearance, which is withdrawn with effect from the same date.

Ensuring compliance with limits on value at risk (VaR)

We understand some authorised fund managers have experienced issues ensuring compliance with limits on value at risk (VaR) as part of their risk-limit systems. Risk controls play an important role in protecting investors’ interests and ensuring the fund is managed appropriately. We expect firms to have plans in place already to deal with such events and to take appropriate remediation action, considering market conditions and what is in the best interests of their customers. 

If individual firms continue to face issues managing their funds within risk limits generally, and VAR limits specifically, they should speak to their supervisory contacts in the first instance, or contact [email protected].

Electronic signatures

We are aware that some firms are making fund-related applications to us and are struggling to obtain wet signatures (ie physically signed) on their application documents.

During the coronavirus crisis, we are willing to accept electronic signatures on applications to authorise funds or approve changes to funds. Applicants may use such electronic signatures where appropriate and relevant forms should be construed accordingly. Where it is possible for the applicant to validate accompanying documentation electronically they may do so. In all cases where an electronic signature is used, we need to be assured that the signatory has seen and agreed with all the information in the form. 

This clarification applies only to information sent by firms to the FCA.

10% depreciation notifications 

For the last twelve months we have adopted temporary coronavirus (Covid-19) measures on the requirement for firms to issue 10% depreciation notifications to investors (COBS 16A.4.3 UK).

These measures were put in place to help firms support consumers during periods of actual/potential market volatility linked to the spread of Covid-19 and the Brexit transitional period. We said we would show supervisory flexibility on firms’ ongoing compliance with the requirement so long as certain criteria were met.

This period of flexibility has given us the opportunity to consider the effectiveness of the 10% depreciation notification requirement.

We intend to consult on changes to the requirement later this Spring. We are therefore extending the temporary measures for firms until the end of 2021 while we undertake policy work on the future of the requirement.

During this period, we won’t take action for breach of COBS 16A.4.3 UK for services offered to retail investors provided that the firm has: 

• issued at least one notification in the current reporting period, indicating to retail clients that their portfolio or position has decreased in value by at least 10% 
• informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period 
• referred these clients to non-personalised communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualise potential drops in portfolio or position value to help consumers meet their objectives, rather than making impulse decisions about their investments) and 
• reminded clients how to check their portfolio value, and how to get in touch with the firm 

Firms must still pay due regards to the interests of their customers and treat them fairly (Principle 6), and pay due regard to the information needs of their clients, and communicate information to them in a way which is clear, fair and not misleading (Principle 7). 

If we have concerns that potential serious misconduct may cause (or has caused) significant harm to consumers, then we will consider the appropriate response, which may include opening an investigation. 

For services offered to professional investors, we will not take action for breach of COBS 16A.4.3 UK provided that firms have allowed professional clients to opt-in to receiving notifications.

Repo use for liquidity management

Firms have been in contact with us to ask whether repo transactions can be used within UCITS schemes and non-UCITS retail schemes for liquidity management purposes. Repo transactions should only be used for efficient portfolio management (COLL 5.4[4]). If repo transactions are entered into for the sole purpose of liquidity management, then we consider it unlikely that they will meet the requirements under applicable rules. AFMs must ensure that repo transactions entered into on behalf of authorised funds are permitted under, and meet the conditions in, COLL 5.4. We also refer AFMs to paragraphs 32 to 33 of ESMA’s guidelines[5] concerning the use of repos.

Client assets

We have received several queries on client assets (CASS) compliance related to the current disruption caused by coronavirus. On 6 April we published guidance[6] on this topic. Firms should review the guidance to understand our expectations of firms.

Paper-based and manual processes

AFMs may allow unitholders or potential investors to deal in units in an authorised fund by post, fax or other physical means. AMFs must not prejudice the interests of certain unitholders versus others’. AFMs also have duties and obligations to unitholders under the terms of the Prospectus and instrument constituting the fund, which are not derived from our rules. If dealing by one or all of those physical means ceases to be possible because of the pandemic, AFMs should consider whether they can provide alternative means for unitholders to deal in units in the fund and how they can manage such alternative processes without disadvantaging unitholders. If AFMs cannot provide alternative means for unitholders to deal in units in the fund, and if that means that some unitholders may be prejudiced, AFMs should consider whether there are any other options for ensuring that all unitholders in the fund are treated fairly.

AIFMD transparency reporting

We do not intend to change the usual deadlines for reporting transparency information to us under the AIFMD Level 2 Regulation (Regulation 231/2013/EU). We have previously summarised[7] the relevant requirements.

Firms that suspect they may not be able to meet the usual deadlines should inform their usual supervisory contact or contact [email protected] to explain the reasons.

Our page on changes to regulatory reporting[8] sets out our position more broadly.