Investment Briefing

The Investment Briefing takes a look at current issues of interest to pension schemes and investors.

In this Briefing:

• FATCA
• AIFM Directive
• NAPF: Stewardship
• TPR: DC Focus
• New regulatory structure for UK financial services
• Henderson Case

FATCA

• The US Foreign Account Tax Compliance Act (FATCA) is designed to crackdown on tax avoidance by US tax residents using foreign accounts. In September 2012, a bilateral agreement was signed between the US and UK governments to implement FATCA in the UK.1 This is designed to enable UK financial institutions to meet their FATCA obligations without having to enter into an agreement with the US Internal Revenue Service (the IRS), by reporting information to HMRC.

• The key questions for pension schemes (and trustees) to ask are:

• Are you a Financial Institution? It is intended that Financial Institutions will need to register with the IRS.

• If you are a Financial Institution, do you hold any “Financial Accounts”? If so, there are various reporting obligations. If not, the Financial Institution has to make a nil return.

• HMRC published draft regulations in December 2012 to implement the US/UK agreement, together with draft guidance.2 As trailed in the September 2012 bilateral agreement, there are specific exemptions in the draft regulations for UK pension schemes which are registered with HMRC, namely:

• pension schemes or other retirement arrangements established in the UK are generally exempt from the need to register as a Financial Institution, being categorised as “non-reporting UK Financial Institutions”; and
• HMRC registered pension schemes3 are regarded as exempt products and are therefore not treated as Financial Accounts.

• The exemptions are good news for pension schemes, although the wording of the first exemption potentially leaves a slight ambiguity in some cases by focusing on the pension scheme as the Financial Institution rather than the trustee(s) themselves. In most cases this will not matter because the draft regulations (and accompanying guidance) also specify that trustees will only be reporting Financial Institutions for the purposes of the regulations if they are independent legal professionals or a trust or company service provider (“TCSP”). TCSP has the same meaning as in the Money Laundering Regulations 2007.4

• The upshot is that the vast majority of trustees (and trustee companies, including their directors and officers) will not need to register. However, professional independent trustees may wish to consider whether they are TCSPs and whether this means that they need to register in their own right, notwithstanding the pension scheme exemptions.

AIFM Directive

• The Alternative Investment Fund Managers Directive (AIFMD), which aims to create a regulatory and supervisory framework for alternative investment fund managers (AIFMs) within the EU, came into force on 21 July 2011. The AIFMD applies to managers of “collective investment undertakings” (other than those which are subject to UCITS5) including hedge funds, private equity funds and real estate funds. EU Member States (including the UK) have to implement the Directive in national law by 22 July 2013.

• In December 2012, the EU Commission issued the final text of the “implementing rules” for the Directive.6These include provisions on:

• the conditions and procedure for the determination and authorisation of AIFMs, including the capital requirements applicable to them; and
• the operating conditions for AIFMs, including rules on remuneration, conflicts of interest, risk management, liquidity management, organisational requirements, and rules on valuation.

• HM Treasury has also issued a consultation paper7 addressing various aspects of incorporating the AIFMD into national law, such as the marketing of Alternative Investment Funds (AIFs) and what amounts to an AIF.

• Following the publication of the implementing rules and the consultation document, AIFMs will now be addressing both whether and how to organise any AIFs which they manage. It is implicit within the consultation document that the cost of any re-organisation by AIFMs will be pushed down to investors.

NAPF: Stewardship

• The National Association of Pension Funds (NAPF) has launched its Stewardship Policy8 to give pension funds a “clear roadmap” to address their investment responsibilities, stating that “the time is right for pension funds to review their approach to Stewardship.”

• The policy sets out six best practice principles for pension schemes to follow, including the setting of mandates for their asset managers that explicitly cover stewardship responsibilities, and reporting to pension scheme members on implementation of their policy.
• The policy also sets out three simple actions which can be expected of pension funds as the owners and providers of capital. They can:

• include a section on ‘stewardship’ within the fund’s Statement of Investment Principles;
• include stewardship criteria in manager searches; and
• incorporate the monitoring of stewardship activities into manager reviews.

• The NAPF has announced that in relation to this third element, it will regularly publish some topical questions to aid trustees in reviewing the effectiveness of their managers’ stewardship activities.

TPR: DC Focus

• The Pensions Regulator (TPR) is consulting9 on a new code of practice, regulatory guidance and a regulatory approach relating to the administration and governance of work based DC pension schemes. The new DC regulatory framework will be based on delivering good member outcomes and is built around “quality features” representing the standards and behaviours that TPR expects trustees to attain.10

• The quality features with an investment focus include a requirement for those running schemes to “seek to predominantly invest scheme assets with entities regulated by the Financial Services Authority (FSA) or similar regulatory authorities” and a requirement to provide a default strategy which is suitable for the needs of members (default funds are required in schemes used for auto-enrolment). TPR also recommends that regular information is provided to members on the importance of reviewing the suitability of their investment choices and a process to help members optimise their income at retirement.

• The draft code focuses on setting an investment strategy (including the security and profitability of scheme assets, investment performance, investment decision making and trustee knowledge, and acting in the best interests of members and beneficiaries), while the draft guidance looks at the investment aspects of communications to members.

New regulatory structure for UK financial services

• From 1 April 2013, the FSA will be replaced by:

• the Financial Policy Committee (FPC). Set up within the Bank of England, the FPC will be responsible for protecting and enhancing financial stability, monitoring and responding to systemic risks and for the macro-prudential oversight of the financial services system as a whole;
• the Prudential Regulation Authority (PRA). As a subsidiary of the Bank of England, the PRA will be responsible for ensuring the safety and soundness of individual firms, promoting the stable and prudent operation of the financial system through regulation of all deposit taking institutions, insurers and investment banks; and
• the Financial Conduct Authority (FCA). The FCA will be responsible for regulation of conduct in retail, as well as wholesale, financial markets and the infrastructure that supports those markets. It will also be responsible for the prudential regulation of firms that do not fall under the PRA’s scope.

• The PRA and the FCA will take charge of most of the functions currently performed by the FSA.

Henderson Case

Twenty-two investors in the Henderson PFI Secondary Fund II brought a case against the investment manager for breach of its obligations in relation to the fund. 

1 HM Treasury Press Release (14 September 2012)
2 FATCA: Draft regulations and guidance (18 December 2012)
3 Registered with HMRC under Part 4 of the Finance Act 2004
4 Please see our Alert: “Anti-money laundering – HMRC U-turn” (31 July 2008)
5 Undertakings for Collective Investment in Transferable Securities
6 Commission adopts implementing rules for the Directive on Alternative Investment Fund Managers (19 December 2012)
7 Transposition of the Alternative Investment Fund Managers Directive (11 January 2013)
8 NAPF Stewardship Policy (22 November 2012)
9 Regulating work-based defined contribution (DC) schemes (10 January 2013)
10 Please see our Alert: “TPR “sets the standard” for DC schemes” (15 January 2013)