EU regulatory catch-up

A) Latest: Retail Investment Strategy

1. EX: extend RIS feedback period

The European Commission (EC) has extended the feedback period for their draft Retail Investment Strategy legal package (published on 25 May). This was meant to close on 20 July 2023 (i.e. eight weeks after the RIS proposals were first published in English). However, it was recently extended to allow the source materials to be made available in all EU legal languages.  The revised deadline for feedback is now 28 August 2023.

2. EFAMA: fearful of “far reaching” RIS measures

Meanwhile, the EC’s RIS legal package has attracted profound concerns from the European Fund and Asset Management Association (EFAMA) in a joint statement made with other finance industry groups.

While supporting the EC objective to streamline EU retail disclosures – including a proposed shift toward “digital-by-default” communication – the sector grouping express their alarm in many areas proposed by the EC, notably:

• The “significant number of new processes, policies, organisational requirements, technical disclosures and compliance obligations”, said to “deviate” from the EC’s objectives;
• The “overwhelming volume of requirements”: which will lead to “an even longer, more complex and more burdensome investment process …highly likely to discourage consumer engagement”;
• ESA new quantitative ‘value for money’ benchmarks: this concept is not only “extremely complex to execute, with limited benefits for clients”, but also legally questionable; it will create “regulation-driven price intervention into capital markets”, with a “clear detrimental impact on the international attractiveness of the EU’s capital market”;
• The “unfeasible” timeline: the RIS proposals will impact “millions of contractual relationships” within the EEA, with firms in scope left to face “impossible” legal transposition dates to comply.

The industry coalition pledge to “contribute in a constructive manner”, as they progress with their formal RIS responses within the (extended) time now available.

3. ESMA: welcome VfM, Digital KID; seek more RIS measures

“Despite gradual improvements over the years, high costs remain a key disincentive for retail participation in the EU markets. ESMA’s analysis has demonstrated that funds costs can easily climb-up up to 30% of the initial investment over a period of 10 years. We welcome the concrete solutions to ensure investors do get the value for their money that are now on the table”.

Verena Ross, European Securities & Markets Authority (ESMA) chair, 29 June 2023

In contrast, the head of the European Securities and Markets Authority (ESMA) pledged her “overall support to the Retail Investment Strategy and its desired outcomes”, in her recent statement to the European Parliament.

ESMA now “welcome the concrete solutions to ensure investors do get the value for their money that are now on the table”; they are also “very pleased” their recent opinion paper on ‘UCITS / AIF Undue costs’ was considered “a key part” of the EC’s proposed ‘Value for Money’ [VfM] framework.

Elsewhere, ESMA “stand ready to assist” with the EC’s proposed retail disclosure digitalisation measures (e.g. information layering in the PRIIPs KID).

Moreover, Ms. Ross cited ESMA’s appetite for “possible further” RIS enhancements, including:

• “A broader review” of the PRIIPs Level 1 regulation: to “tackle the issues related to the KID performance section”, notably “the need to include past performance”
• ESMA to develop a ‘fund comparison tool’: as previously suggested by the European Court of Auditors

However, in relation to the EC aim to enhance EU financial literacy, it is acknowledged that “financial regulation alone may not deliver the desired shift in the retail investment culture in Europe”.

B) ESMA activity round-up

ESMA have been very productive since the last catchup. Here is a summary of their recent notable activities:

1. AIFMD Annex IV reporting: more changes published

ESMA recently published another version of their AIFMD reporting IT technical guidance.

The latest ‘revision 6’ materials introduce more validation rules to improve Annex IV reporting data quality, by making more fields mandatory or applying stricter rules.

NB: Although ESMA state “the IT technical guidance revision 6 replaces the IT technical guidance revision 5 published in January 2023”, their Change history tab retains the previous set of changes, with additional amendments now listed within the latest AIFMD reporting technical guidance.

As before, these amendments are to apply from November 2023 (exact date to be confirmed), with firms left meantime to contact their EEA regulators directly (to learn how each intend to manage respective XML filling).

2. MiFID II costs and charges: improvements highlighted

Last week, ESMA presented the results of their Common Supervisory Action (CSA) on MiFID II retail costs

and charges disclosure rules, conducted last year with their EEA national competent authorities (NCAs).

• Ex-post costs and charges information: shortcomings include infrequent disclosure of implicit costs, with some firms not displaying costs as a percentage (as well as the nominal amount)
• Ex-ante cost and charges information: findings from a separate ‘Mystery shopping exercise’ indicate a routine supply of incomplete cost information (e.g. “only a KIID/KID, or only marketing material”), with disclosure only at a late stage of the client’s decision process.

ESMA say they will now prepare work on a “possible standardised EU format for the provision of information about costs and charges to clients”.  NB: this is already part of the EC’s draft RIS legal package.

3. Cross-border funds marketing rules: latest NCA analysis

Also last week, ESMA published their latest report analysing the regulation of fund marketing within the EEA.

This follows the application of the Cross-border Distribution of Funds Regulation [CBDF/R] in August 2021, with ESMA’s own Guidelines on funds’ marketing communications now adopted by most NCAs.

ESMA’s 153-page report provides a country-by-country overview of marketing requirements for both UCITS and AIF products across EEA member states.  In summary, there are very few NCAs enacting ex-ante verifications of marketing communications (including factsheets), with an increasing number conducting ex-post checks.

4. Review of UCITS eligible assets rules pending

ESMA have been formal requested by the EC to prepare a technical advice report on the review of the UCITS delegated Directive on eligible assets.

This legislation has remained unchanged since publication in March 2007. ESMA must now consider market and regulatory developments that have occurred over the past 16 years, including regional divergences.

They will analyse the risks and benefits of UCITS gaining exposures to asset classes that are not currently directly investable (e.g. ‘delta-one’ instruments, embedded derivatives and financial indices).  ESMA have been mandated to specify any necessary UCITS Levels 1 and 2 amendments; they can also assess the merits of linking specific legal definitions and concepts to other EU regimes (e.g. money market funds).

To allow for a “comprehensive public consultation”, the EC has requested ESMA to deliver its technical UCITS advice before 31 October 2024.

NB: ESMA have also been busy constructing their five-year Data Strategy and MiCA consultations.

Check out our separate EU Fintech update.

C) Regional round-up

1. Luxembourg: NCAs “struggling” with EU rules

NCAs are now “struggling to implement new rules introduced by the EU”, according to the head of the Commission de Surveillance du Secteur Financier (CSSF).

Claude Marx told the recent Cross-Border Distribution Conference in Luxembourg there is currently “very big regulatory activity at the European level, which provides a challenge for both regulators and market players”.

Alongside sustainable finance, specific legal challenge areas identified by the CSSF include the Markets in Crypto-Assets (MICA) regulation and other FinTech areas such as blockchain, tokenisation and artificial intelligence.  Again, more details can be found in our latest EU Fintech post [insert website link].

2. France: local PRIIPs KID costs disclaimer agreed

The Association Française de la Gestion financière (AFG) has advised their members to include an additional statement in their local PRIIPs KID [‘Other relevant information’ section] whenever products are marketed as unit-linked support for a life-assurance or capitalization contract. This clarifies that specific costs have not been disclosed and that the investor is legally entitled to obtain these details from their insurer or broker.

This was informally agreed with the local regulator,  L’Autorité des marchés financiers (AMF).

NB: this is similar (but not identical) to the Swedish local disclaimer instance reported earlier this year.

Other local EU fund associations may follow suit, unless the ESAs formally provide level 3 guidance. or directly revise their PRIIPs KID RTS (e.g. an additional narrative text in the ‘What are the Costs’ section).

3. Ireland: no changes to UCITS naming; fund sector consultation in-progress

The Central Bank of Ireland (CBI) has ruled out relaxing naming rules for mutual fund ranges with Exchange Traded Fund (ETF) share classes, despite their “competitive disadvantage” with EEA rival Luxembourg.

The CBI currently oblige UCITS funds to include the words “UCITS ETF” in the sub-fund name, if any ETF share classes are launched, alongside unlisted mutual fund classes.  By comparison, the CSSF require only those listed share classes to include “UCITS ETF” in their name (i.e. without having to amend the name of the sub-fund).

In order to launch ETF share classes in Ireland, HSBC AM had to re-name four Fixed Income index funds.

However, the Irish regulator confirmed that unless there is a change to ESMA’s fund naming convention guidelines (level 3), their local UCITS naming rules will remain unchanged.

Elsewhere, the CBI will assist the Irish Department of Finance’s wide-ranging ‘Funds Sector 2030’ review.

The current consultation paper is required reading for those wishing to brush-up on their EU financial services history, with many useful terms of reference, summary tables and interesting statistics.

The consultation is open until 15 September 2023, with the list of questions summarised in Annex I [p49-51]. 

A draft report of recommendations from the Eire Review Team will appear next Summer.