20 December 2024

EU Regulatory catch-up

A) EU strategic updates

1. ‘Competitiveness Compass’ tops new EC priority list

On 1 December, the newly appointed European Commission (EC) begun their work on a five-year mandate (running up to October 2029).

Topping their new list of seven key priorities is a ‘plan for Europe’s sustainable prosperity and competitiveness’.

This will be framed by an EU ‘Competitiveness Compass’, announced by President von der Leyen as “the first major initiative” of the new Commission. it seeks to address three areas stressed by Mario Draghi (ex-head of the ECB):

Boosting EU innovation (i.e. closing the gap with US and China);
A joint plan for decarbonisation and competitiveness;
Reinforcing EU economic security.

The EC are expected to publish and formally adopt their new ‘Competitiveness Compass’ on 15 January 2025.

Their overall Annual Work Programme for 2025 is set to follow on 11 February 2025.

2. EU Retail Investment Strategy latest

“Overly complex and overlapping rules risk stifling retail investor engagement and increasing firms' operational costs, which are ultimately borne by consumers.”
EFAMA, EBF, AIE (et al): Joint statement on EU Retail Investment Strategy [28 Nov 2024].

The EC’s pending adoption of the new ‘Competitiveness Compass’, alongside rapidly evolving geopolitical events, means the overall priority of their 2023 Retail Investment Strategy (RIS) is now unclear.

The EU ‘trilogue’ negotiations to finalise the RIS legislation are still expected to begin in January, once Poland assume the Council of the EU presidency. Talks between the European Commission, Parliament and Council will likely be prolonged, given complexity of the proposed legal amendments.

Meanwhile, the RIS remains actively disputed within the industry.

a) EFAMA: RIS ‘re-assessment’ now required

Following the EC’s unveiling of a new ‘competitiveness’ plan, the European Fund and Asset Management Association (EFAMA) issued a joint statement (with ten other finance sector groups), calling for the RIS to be re-assessed. They now urge, “at a bare minimum”, an alternate EU focus, covering:

Simplification for firms and retail investors: rationalised EU regimes, to avoid “imposing new, disproportionate compliance requirements that create obstacles for both investors and the market”;
Streamlined sales processes for retail investors: an “easy, affordable, and simplified investment journey”, said to be “vital to attracting more retail investors”;
Reduction of information overload: the RIS should “improve and focus on meaningful and relevant disclosures, emphasising key product benefits such as financial guarantees, ESG characteristics and other qualitative features that drive consumer investment decisions”.

b) ESMA, EIOPA: push back against Value for Money proposals

On 14 November, the heads of ESMA and EIOPA shared a joint letter to the EU lawmakers, pushing back against specific RIS amendments from both the European Parliament [EP] and the Council of the EU [CoEU].

While broadly supporting the EC’s widely-disputed ‘Value for Money’ [VfM] framework, specific concerns relate to:

‘National benchmarks’: managed by each local NCA (as suggested by the EP);
Firm ‘peer grouping’ analysis: per ‘non-public database’ (proposed by the CoEU);
The “modified nature” of the VfM benchmarks: e.g. the EP said these should “serve the sole purpose of identifying outliers in the market”.

ESMA/EIOPA also highlight resource implications to both EU public and private sectors, inviting a formal impact evaluation of the new RIS elements proposed, “in terms of human, operational and consumer testing costs.”

Elsewhere, both EU supervisory authorities “very much support” the EP’s proposal for a new PRIIPs ‘online comparison tool’, as “a means to provide an unbiased source of information on all relevant product features – including performance, guarantees, costs and fees charged at every step of the investment process”.

c) DG-FISMA: proposed RIS “not so powerful now”

Speaking to a recent EFAMA conference, the EC’s director-general for financial services seemed to admit the initial RIS may not meet its key objective of increasing retail investment in the EU market. His remarks were later quoted in the press.

B) EU-ESG disclosure latest

1. ‘Omnibus approach’ to EU regulation surprises industry

Another item listed on the EC’s 2025 Agenda is an ‘Omnibus simplification package’, expected on 26 February.

This seems to originate from recent comments by the EC President, who said the EC are now “planning to propose an Omnibus Regulation to reduce red tape”; this will be “a huge approach to reduce, in one step, across all the different fields agreed to be too much; …we will look at the triangle of the Taxonomy Regulation, the Corporate Sustainability Reporting Directive and the Corporate sustainability due diligence Directive.”.

Ms. von der Leyen’s radical remarks were said to have “surprised” her EC colleagues. These were made as the EU Council made their ‘Budapest Declaration’, committing the EC “without delay” to make “concrete proposals on reducing reporting requirements by at least 25% in the first half of 2025”.

2. Latest: SFDR Level 1 legal review

Many in the industry now assume any new ‘Omnibus’ legislation to streamline EU corporate sustainability reporting will not involve the Sustainable Finance Disclosure Regulation (SFDR). As a consequence, however, the EC’s publication of results from their continuing SFDR Level 1 legal assessment will likely be delayed until H2-2025.

In the meantime: this week, the Platform on Sustainable Finance (PSF) published 88-pages of proposals for a new SFDR categorisation system. They recommend 3 x product categories with the following sustainability strategies:

‘Sustainable’: Contributions through ‘sustainable investments’ (incl. those Taxonomy-aligned) with no significant harmful activities, or assets based on a more concise definition consistent with the EU Taxonomy.
‘Transition’: Investments supporting the transition to net zero and a sustainable economy, avoiding carbon lock-ins, in line with the EC recommendations on facilitating the transition to a sustainable economy.
‘ESG collection’: Excluding significantly harmful investments/activities, investing in assets with better environmental and/or social criteria or applying various sustainability features.
All other products should be identified as ‘unclassified’.

These categories aim to “reflect the overarching sustainability objective of financial products, focusing on the needs of retail investors”. It is proposed to align these SFDR categories with the investor’s sustainability preferences (i.e. per MiFID/IDD regimes). A transition mapping for SFDR article 8 and 9 products is also depicted (p.33).

NB: As the EC’s appointed ESG expert group, the PSF’s opinion will be of key importance to the ongoing Level 1 legal assessment (and resultant future ‘SFDR II’ regime).

3. Latest: draft SFDR Level 2 RTS

There is still no news on whether the EC will adopt the draft Level 2 SFDR RTS, delivered over a year ago by the European Supervisory Authorities (ESAs). The decision now rests with the new Financial Services Commissioner.

As before, we should recall that IF the EC will adopt this draft SFDR RTS, co-approval from the EU Parliament and Council entails a formal 3-6 month scrutiny period; the industry were also led to believe a transition period of “at least one year” would be granted, given the substantial impact to the current SFDR disclosure framework.

4.ESMA’s ESG-fund naming guidelines

On 13 December, ESMA finally provided UCITS/AIF firms with ‘Q&A’ advice on three disputed areas within their Guidelines on funds’ names using ESG/sustainability-related terms:

Controversial weapons: ESMA verify the specific exclusions are ‘anti-personnel mines, cluster munitions, chemical weapons and biological weapons’ [per indicator 14, Table 1 of SFDR Level 2, Annex I].
Green Bonds: ESMA explain that investments in officially issued European Green Bonds do not need to be assessed per exclusion rules; investing in other types of ‘green’ bonds will require a “look-thru approach”.
‘Meaningful ’investment in ‘sustainable’ investments*: ESMA inform EU fund firms their local regulator may determine that sustainably-named funds investing less than 50% of their total assets in ‘sustainable’ investments “…are not meaningfully investing in sustainable investments“. In some cases, “that amount could be higher, subject to the circumstances”.

*NB: this specific advice is now attracting significant media coverage, with legal firms concluding an effective re-introduction of ESMA’s original minimum 50% ‘sustainable investment’ threshold; this was officially removed from their draft guidelines, amid heavy industry criticism and a self-cited EC opinion (i.e. as stated in a separate Q&A document).

5. CSSF underline intent to enforce local SFDR compliance

“Regardless of whether they are disclosing under Article 6, 8 or 9 of the SFDR, financial market participants are expected to carry out a self-assessment of the applicability of the Guidelines to the products they manage and to ensure compliance of fund names with the Guidelines”.
CSSF communiqué: ESMA Guidelines on fund names with ESG-related terms [18 Dec 2024]

This week, the latest CSSF communiqué emphasises ESMA’s latest ESG fund naming ‘Q&As’, with a firm reminder the Guidelines already apply to new funds, with pre-existing funds expected to align before 21 May 2025.

Their updated local ‘FAQs’ document also now provides guidance on the precontractual disclosure of fund exclusion strategies.

6. FinDatEx EET V1.1.3 published

Also this week, FinDatEx confirmed publication of a new version of their European ESG Template (EET).

EET V1.1.3 contains “minor amendments” of data fields in relation to product alignment with both ESMA’s Fund Naming Guidelines and the Climate Transition and Paris-Aligned benchmarks (CTB, PAB).

FinDatEx recommends using EET V1.1.3 as of 1 January 2025 (with V1.1.2 decommissioning scheduled as of 1 July 2025).

7. Eurosif publishes regulatory roadmap for EU policymakers

The European Sustainable Investment Forum (Eurosif) is a leading pan-European ESG finance association.

They gained widespread press attention in publishing their new sustainable regulatory roadmap, based on five key steps, as a means for EU policymakers to achieve “…a just transition towards a sustainable and resilient economy”.

Notable proposals include “supporting investments with positive real-world outcomes” by “clear legal definitions” of ‘sustainable’, ‘transition’ and ‘impact’ investment types. Other recommendations relate to the EU-PRIIPs, MiFID, IDD and UK-SDR regimes. Alongside the PSF’s latest SFDR proposals, this document is another must-read.

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C) other EU updates

1. UCITS/AIFMD: “one-off” cost data collection

The ‘AIFMD II’ / ‘UCITS VI’ Directive enacted in March 2024 also aligns with the EU’s retail investment strategy. The long-list of supervisory authority mandates include:

EU regulators: to “collect cost data to be shared with ESMA on a one-time basis” to “increase ESMA’s expertise in the area of cost reporting”; this enables a provision of cost data collection technical advice “in the context of the EU’s retail investment strategy”.
ESMA: to submit a report to the EU co-legislators assessing the costs charged by fund firms, covering “the level of, reasons for, and differences in, the costs charged to retail investors, including differences resulting from the nature of the AIFs and UCITS concerned, and analysing whether the criteria set out in its supervisory briefing are to be complemented with regard to the notion of undue costs”.

On 14 November, ESMA officially launched their cost data collection exercise. Their two-stage data collection process involves both fund manufacturers and distributors.

ESMA say this initiative “contributes to shedding light on pricing practices in a key part of the EU financial markets, information that has until now not been accessible to retail investors and supervisory authorities.”

The CSSF were quick to confirm they would soon contact “a representative selection” of local UCITS/AIF firms and distributors, “to complete a specific questionnaire” for submission via the eDesk portal.

ESMA have until 16 October 2025 to deliver their fund costs report to the EU co-legislators. Meanwhile, very little information of this exercise is readily available (i.e. either from ESMA, or key EU regulators).

NB: a copy of ESMA’s ‘data collection instructions for UCITS and AIF firms’ is currently available from the Slovenia fund regulators’ website. The document lists the data items within both ‘Manufacturers data’ and ‘Distributor data’ templates, explaining how firms need to complete each field. It also covers the overall scope of the exercise, respective processes, with an overall timeline presented (p.30-32).

2. UCITS/AIF: consultation status

Last week, ESMA opened another consultation, this time covering open-ended Loan Originating alternative investment funds [LOFs]. Their initial draft technical standards set out future rules this type of AIF will be expected to follow, to maintain an open-ended structure. The consultation is open until 12 March 2025.

NB: Although ‘AIFMD II’ mandates ESMA to deliver this RTS before 16 April 2025, it is stated they now “expect to publish a final report and submit the draft technical standards to the European Commission by Q3/Q4 2025“. ESMA were previously tasked to supply finalised Liquidity Management Tools (LMTs) outputs on the same date.

3. EU FinTech latest

a) AI developments

Earlier this month, the CSSF confirmed signing a strategic agreement on artificial intelligence with Clarence, “…Luxembourg’s sovereign air-gapped cloud designed to meet the needs of businesses, administrations, and public institutions”. It is said this solution “will enable the CSSF to leverage and apply cutting-edge technologies to its sensitive data while ensuring confidentiality, complete control and full sovereignty”. The agreement “marks the beginning of an ambitious project to enhance the efficiency of the CSSF’s internal processes while meeting current regulatory requirements.”

NB: This press announcement followed the EC’s recent EU-AI Act consultation. This covered future guidelines on the ‘AI system’ definition and the implementation of AI practices that pose ‘unacceptable risks’.

b) Crypto-asset latest

Finally, for now: last week, the ESAs published joint Guidelines in an effort to provide a consistent regulatory classification of crypto-assets. A ‘standardised test for crypto-assets’ is also now depicted on their websites.

One day later, ESMA issued a formal Warning on Crypto-assets. This reminded investors that despite protections put into place by the new Markets in Crypto-Assets (MICA) Regulation, “the inherent risks of investing in crypto- assets remain. Many crypto-assets are highly speculative and volatile, with prices subject to sudden and extreme fluctuations, also overnight.”

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Article written by Mark Kilbride.

Feel free to contact me at [email protected].