10 things to watch in 2022

1. UK: end of EEA legal standstill

UK temporary transitional powers (TTPs) are set to expire on 31 March 2022.

Until now, interim UK legal standstill has deferred post-Brexit impacts of onshored legislation facing EEA UCITS and AIF entities (notably, their non-UK third country legal status).

Ahead of the TTP deadline, EEA-based AIFMs will need to re-register their products with the Financial Conduct Authority (FCA) under the UK National Private Placement regime (NPPR) rules, which will require ongoing filing of Annex IV supervisory reporting.  Meanwhile, any EEA-UCITS that remain formally unrecognised by the FCA will revert to a non-UK third country AIF status.

2. EU-sustainable Finance: green path ahead becomes clearer

The EU’s challenging sustainable finance regime will continue apace, starting with one imminent deadline. Before 1 January 2022, any UCITS / AIF product actively promoting environmental / social factors or with a sustainable investment objective is obliged to formally disclose alignment with the Taxonomy regulation (TR) climate change objectives in an updated prospectus or offering document.

The draft European ESG template (EET) administered by FinDatEx (including Kneip as a key member) will become available during 2022.  This will precede the January 2023 re-scheduled application of the European Supervisory Authority (ESA) detailed level 2 rules, which address the Sustainable Finance Disclosure regulation (SFDR) requirements, now formally aligned with the TR.

2022 will also see the finalisation of additional technical screening criteria for the remaining TR environmental objectives, ahead of their activation in January 2023.  Further details will also emerge of the proposed Corporate Sustainability Reporting Directive (CSRD) and an EU Ecolabel for financial products.

3. UK-sustainable Finance: key FCA policy statements to follow

The UK government will maintain their chosen sustainability pathway next year.

Before the end of 2021, the FCA are expected to issue a Policy Statement detailing their climate-related disclosures regime for asset managers, insurers, and pension providers. Based on recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), these are proposed to apply for larger firms exceeding GBP50 billion AUM from 1 January 2022, with initial disclosures to follow 18 months later.

Q1-2022 will also see another FCA Policy Statement outlining their separate Sustainability Disclosure Requirements (SDR) regime (to apply at corporate, asset manager and product levels), while the Green Technical Advisory Group (GTAG) will publish low-carbon standards for inclusion in the UK Green Taxonomy.

4. EU-PRIIPS: additional preparation time, L1 review pending

The ESA proposals to address the acknowledged flaws of the current PRIIPS key information document (KID) have been adopted by the European Commission (EC). The recent legal “quick-fix” approved by the European Parliament means that firms have until 31 December 2022 to complete their transition to the revised PRIIPS-KID, including UCITS products marketed to retail investors.

FinDatEx’s revised European PRIIPS template (EPT 2.0) is anticipated for deployment during Q2/Q3 2022.

In the meantime, the EC are expected to undertake an analysis of the original PRIIPs Regulation as part of their 2022 retail investment strategy; a public consultation is scheduled to commence during April 2022.

5. UK-PRIIPS: FCA policy statement imminent

In Q1-2022, the FCA are expected to issue a further Policy Statement outlining the final rules and timeframe for their localised PRIIPS regime, applicable also to EEA firms “in the same way that they apply to UK businesses”. The UK PRIIPS-KID will contain a simplified performance indication narrative (in contrast with the detailed methodology retained for presentation in the revised EEA edition).

The UK has already extended the UCITS exemption from UK-PRIIPS rules until the end of 2026.

6. AIFMD: ESMA to re-write Annex IV framework

As part of the latest set of Capital Markets Union (CMU) proposals, the EC published a legal package of long-awaited AIFMD changes, with ESMA tasked to proceed next year with draft specifications for a replacement AIFMD supervisory reporting framework.  This will cover revised Annex IV data standards, templates and timings and is likely to take effect from late 2024 / early 2025.

7. EU-UCITS: NCA filing, supervisory reporting

Another key CMU proposal is the introduction of supervisory reporting for UCITS management companies (similar to AIFMD).  Next year, ESMA are required to produce a feasibility study containing a draft periodic template to be used by UCITS firms.  Presumably, this will be implemented in a timeframe similar to ESMA’s replacement AIFMD reporting regime.

In the shorter-term, a recent UCITS “quick-fix” removes the obligation to produce a key investor information document (KIID) for non-retail UCITS investors when a PRIIPS-KID is issued instead.  However, the matter of subsequent UCITS filing to national competent authorities (NCAs) from 1 Jan 2023 has not been addressed.
Unless the EC announce further changes to UCITS / PRIIPS level 1 legislation next year, it seems likely that each NCA will be left to determine respective member state KIID / KID filing rules applicable in due course.

Meanwhile, a reminder of the application of ESMA’s Performance Fee Guidelines; these will now extend further to cover those existing UCITS with a fiscal year end of 31 December 2021.  With all NCAs now intent to comply, the content of revised prospectus and KIIDs (pending during Q1-2022) will require disclosure of the relevant performance fee information where applicable.

8. LTAF v ELTIF: long-term rivalry ahead

A series of amendments to the current European Long-Term Investment Fund (ELTIF) regulation is a further recent CMU recommendation.

In order to generate more demand for long-term investments, the EC propose to reduce barriers facing retail investors such as the minimum initial investment threshold, while broadening the scope of eligible assets.  These may become applicable next year (i.e. 6 months following adoption by EU co-legislators).

Over in the UK, the FCA have already finalised their rules for a new UK fund regime Long Term Asset Fund (LTAF), which came into force in November.  During H1-2022, the FCA will consult on whether a broader range of prospective LTAF investors will be required.

9. Cross-Border Distribution of funds: the dust will settle

During 2022, the Cross-Border Distribution of Funds (CBDF) regime activated last August should continue to settle.  While residual EEA member states formalise the legal adoption of the CBDF directive, NCAs will clarify their revised local UCITS and AIF notification processes, accordingly.

Meanwhile, the separate CBDF regulation will apply from 2 February 2022, including the application of ESMA’s marketing communication guidelines alongside their launch of a new UCITS / AIF cross-border central database to be made available on their website.

10. Digital Transformation accelerates

Finally, 2022 may well herald an acceleration of FinTech deployment within the funds industry.

The number of asset managers seeking crypto-product launch opportunities is set to increase, as the regulatory toolbox focussing on digital currencies continues to develop.  The CSSF recently issued guidance on virtual assets (highlighting the “potential benefits” for professional investors), while the UK now permit the use of distributed-ledger technology DLT “smart-contracts” within current legislation.

Similarly, the deployment of artificial intelligence seems a logical step for investment firms facing the challenge of ESG data extraction, including the emergence of more technical screening criteria, over the next twelve months.