Recent Regulatory Developments in the UK Asset Management Sector: March 2025 Update
As of March 2025, the UK's asset management industry has experienced significant regulatory changes aimed at enhancing transparency, investor protection, and market competitiveness. Below is an overview of the key developments:
1. VAT on Investment Fund Services: Government Intervention
The UK government is considering intervening to prevent HM Revenue & Customs (HMRC) from imposing a 20% Value Added Tax (VAT) on investment fund services. This potential tax, estimated to add an annual cost of £147 million, has faced strong opposition from senior City executives and industry groups. They argue that such a move could harm the UK's reputation as a stable and competitive business environment, especially when compared to EU fund hubs like Dublin and Luxembourg, which do not apply VAT on these services.
2. FCA's Call for Improved Valuation Processes
The Financial Conduct Authority (FCA) has urged firms managing private assets to enhance their valuation processes and effectively identify and disclose potential conflicts of interest. This comes amid a surge in retail investor interest in non-public assets such as private equity, venture capital, private debt, and infrastructure. The FCA's review highlighted the need for more independent valuation processes, especially during volatile market periods, to maintain market confidence and ensure fair investor outcomes.
3. Regulatory Focus on ESG Rating Providers
In November 2024, the UK published draft regulations to bring Environmental, Social, and Governance (ESG) rating providers under the FCA's supervision. Once finalized, providing ESG ratings will become a regulated activity requiring prior authorization by the FCA. This move aims to enhance the credibility and reliability of ESG ratings, ensuring that both UK and non-UK providers offering services to UK users adhere to consistent standards. The final legislation is expected in early 2025, with the FCA set to consult on detailed rules and guidance before the regime comes into force.
4. Updates to Research Payment Options
Effective from August 2024, the FCA introduced new rules allowing UK MiFID investment firms the option to bundle payments for investment research with execution services, subject to specific conditions. In November 2024, the FCA proposed extending this payment flexibility to fund managers, including UCITS management companies and alternative investment fund managers. A policy statement with final rules is anticipated in the first half of 2025, aiming to provide firms with greater flexibility while ensuring transparency and investor protection.
5. Implementation of the Overseas Funds Regime (OFR)
Since September 2024, the OFR has been operational, allowing non-UK funds recognized by the FCA to be marketed to retail investors in the UK. This regime replaces the Temporary Marketing Permissions Regime (TMPR) that permitted certain EU UCITS to continue marketing post-Brexit. Funds are assigned a three-month "landing slot" between October 2024 and September 2026 to transition into the OFR, depending on the operator's name.
6. Enhancements to UK EMIR Reporting Requirements
Notable changes to derivative reporting requirements under the UK European Market Infrastructure Regulation (EMIR) came into effect on 30 September 2024. These include the obligation to report additional information and promptly address reconciliation failures. There is also a mandate for reporting entities to notify the FCA of any material errors or omissions as soon as they are identified. A grace period until 31 March 2025 has been provided to update reporting for existing derivative transactions.
These developments underscore the UK's commitment to refining its regulatory framework, ensuring that the asset management sector remains robust, transparent, and competitive on the global stage.
