Consumer Composite Investments, the Reserved Investor Fund, ESG and other updates for asset managers

Financial Institutions 360: Asset Management update

Read other sections of this edition of the Financial Institutions 360:

• Regulatory update
• Payments and retail banking update

Consumer Composite Investments

On 19 December 2024, the FCA published Consultation Paper CP24/30 on a new product information framework for Consumer Composite Investments (CCIs) (the replacement for PRIIPs and the disclosure requirements in UCITS). A CCI is an investment where the returns are dependent on the performance of or changes in the value of indirect investments.

The FCA has set out explicit inclusions, including funds in the current PRIIPs and UCITS regimes, derivatives, structured deposits, a security issued by a closed-ended investment fund, CFDs and insurance-based investment products. The FCA has proposed excluding products, including pension and pure protection products.

The FCA’s research indicates that nearly a quarter of adults hold an investment falling within their definition of CCIs. The FCA wants to make significant changes to the requirements for the way product information is presented, which are aimed at helping consumers understand the products they are buying while giving firms flexibility to innovate. The new rules move away from the templated format of PRIIPs and the UCITS KIID and the FCA hopes that firms will use the changes to make their information documents more consistently engaging which will lead to better outcomes for their customers.

The consultation closed on 20 March 2025. Some trade associations, including the Investment Association and PIMFA, have expressed concerns about the new regime in their consultation responses.

Reserved Investor Fund

The Government has launched the Reserved Investor Fund (RIF), a new type of Alternative Investment Fund (AIF) which is modelled on co-ownership authorised contractual schemes. It will require a UK Authorised Investment Fund Manager and, due to its co-ownership structure, at least two investors. As an AIF it will only be available to professional and institutional investors. It is designed to have lower costs and more flexibility than the existing authorised contractual scheme. It is expected that it will be a popular vehicle for investment in commercial real estate.

This has required both primary and secondary legislation due to the tax implications. At the end of February 2025 the Government laid the Unauthorised Co-Ownership Alternative Investment Funds (Reserved Investor Fund) Regulations 2025 and the Co-Ownership Contractual Schemes (Tax) Regulations 2025, which were the final parts of the legislative regime. They come into force on 19 March 2025. As of this date, fund managers are able to launch or convert existing structures into an RIF.

Private market valuations 

On 5 March 2025, the FCA published the findings of its review of private market valuations. The FCA notes that, as firms have to estimate private asset values using their judgment in order to meet accounting standards, these estimates could be incorrect for various reasons including a lack of expertise and in particular, conflicts of interest. This can lead to investor harm and poses a risk to market integrity.

The FCA assessed firms’ valuation processes and governance against the relevant Principles, and UK AIFMs were also assessed against other rules including FUND 3.9. They found many examples of good practice, but did identify some actions for firms including considering whether their governance arrangements ensure there is clear accountability for valuation, and robust oversight of the valuation process.

The FCA will be undertaking further multi-firm work looking specifically at conflicts of interest in private markets.

Asset Management & Alternatives portfolio letter

On 26 February 2025, the FCA published its portfolio letter for the Asset Management & Alternatives sector, setting out its current supervisory priorities.

Their priorities and areas of focus are:

• supporting confident investing in private markets;
• building firm and financial system resilience against market disruption; and
• securing positive outcomes for consumers.

The FCA provides updates on its work in this sector, noting that there are appx 2,500 firms in the sector and some of what they are doing may not be relevant to all firms:

• As part of its work to promote growth and international competitiveness, the FCA wants to develop a “vision” for this priority growth sector, and will be engaging with firms to discuss initiatives to unlock capital investment and liquidity, accelerate digital innovation and consider ways to reduce the regulatory burden.
• The FCA will be undertaking a review of AIFMD with a view to streamlining regulatory requirements.
• It will shortly publish the findings of its multi-firm review on Private Market Valuation Practices (see above).
• It will start a multi-firm review focusing on conflicts of interest at firms managing private assets, due to concerns that if these are poorly managed this can increase the likelihood and severity of investor harm.
• The FCA’s multi-firm review of unit-linked funds is ongoing, and they will publish their findings later this year.
• It will start a multi-firm review of model portfolio services and how they are applying the Consumer Duty.

FCA expectations for authorised fund applications

In February 2025 the FCA published a document setting out its expectations for authorised funds applications. It is aimed at firms applying for collective investments schemes to be authorised as authorised unit trusts, authorised contractual schemes, and authorised open-ended investment companies. It sets out the minimum information the FCA requires to determine an application, based on its experience of the main areas where firms have not provided sufficient information.

The document provides the FCA’s general expectations across all applications, such as that the application form must contain consistent information and should not refer to other documents such as the prospectus for further information.

There are then further application-specific sections, referring to topics including names, benchmarks, investment objectives and some further guidance on using SDR investment labels. The document is a useful reference point for firms involved in authorised fund applications. 

Handbook update: COLL

In FCA Handbook Notice 126, the FCA announced that it had made changes to an existing rule that sets limits on the ability of a UCITS scheme to hold units of other collective investment schemes (second schemes). This aims to reinforce appropriate risk diversification in a UCITS fund of funds. The changes clarify how the rule applies to umbrella/sub-fund structures, and disapply the rule in certain situations where the investing UCITS scheme and second scheme are managed by the same firm. These changes were made further to consultation in July 2024 and came into force on 31 January 2025.

ESG

On 11 March 2025, the FCA published a statement reiterating its position that its sustainability rules do not prevent investment in or finance for defence companies. Firms may of course wish to disclose defence investment as part of their ESG disclosures.

The FCA notes that where benchmark administrators offer benchmarks aligned with the Paris Climate Agreement, FCA rules require any activities relating to “controversial” weapons to be excluded from the benchmark portfolio.

Delay of extension of SDR to portfolio management

On 14 February 2025, the FCA announced that it was no longer planning to publish a policy statement in response to its consultation (published last April) on extending the SDR to portfolio management before the summer, and instead will continue to “reflect” on the feedback received.

Omnibus package on sustainability

On 26 February 2025 the European Commission proposed an Omnibus Sustainability Package, aimed at simplifying the reporting requirements under the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). The CSRD requires companies to report on relevant sustainability issues and the CSDDD imposes a sustainability due diligence duty on large EU companies and companies outside the EU with substantial EU activity. 

As part of the proposed simplification, the first directive would postpone the CSRD reporting requirements by two years for companies that would otherwise need to comply from 2025 or 2026. It would also postpone the incorporation of the CSDDD into member states’ law until July 2027 and company adherence until July 2028. This is intended to avoid a situation in which companies are required to adhere to the CSDDD and then no longer need to do so following the proposed simplification.

The second directive proposed would make substantial changes to the sustainability reporting requirements. The number of organisations subject to these requirements would be reduced significantly by taking various undertakings out of scope and the directive would relax the reporting requirements for smaller organisations that are part of an in-scope company’s value chain. It would also make EU “green-list” taxonomy reporting optional for some organisations and abolish the upcoming requirement for sector-specific standards.

While member states were previously permitted to impose stricter requirements than those set out by the CSDDD, the proposed second directive would prevent this (with some exceptions). It would allow greater scope for ongoing relationships with businesses with known adverse sustainability impacts and reduce the required stakeholder engagement during due diligence. The review cycle for undertakings to monitor their due diligence policies would also be extended from 12 months to five years, and the cap on fines of not less than 5% of worldwide net turnover would be abolished.

These changes, along with others proposed by the second directive, would present a significant departure from the previous EU position on sustainability reporting requirements. 

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, March 2025