29 May 2024

EU & UK regulatory update

A) EU latest: retail investment strategy

Since the last update, there has been notable progress from both the European Parliament and Council (i.e. as EU co-legislators) in their review of the European Commission’s initial RIS legal proposals.


1. RIS latest: European Parliament (EP)

On 23 April, the EP plenary voted to approve the draft RIS legal texts that were marked-up by their Committee on Economic & Monetary Affairs (ECON); these are formally available for review:


The EP’s starting position has now been agreed, ahead of formal negotiations with the Council of the EU (CoEU) to finalise the legislation (per standard EU ‘trilogue’ process).  Key RIS counter-proposals from the EP include:

a) MiFID II ‘Value for Money’:

EU firms manufacturing packaged retail investment products (PRIIPs) would have to perform ‘peer-grouping’ analyses of product costs & charges and historical performance. these would be based on a “relevant European fund classification system”.  They would also have to disclose additional costs and charges information (e.g. distribution costs, costs for advice): to their national competent authority (NCA).

At the same time, EU Supervisory authorities would be empowered to deploy ‘VfM’ benchmarks as a ‘supervisory tool’, namely:

  • ESMA to develop pan-EU benchmarks: covering similar products offered in several member states;
  • NCAs to develop national benchmarks: for products only available within one EEA member country

These would not be made available publicly: they would be used by NCAs to conduct product assessment of ‘qualitative and quantitative features’, in order to identify ‘potential market outliers’.

NB: If these EP amendments are accepted, the European Securities and Markets Authority (ESMA) would be tasked to develop the relevant Level 2 ‘VfM’ rules and guidelines.


b) PRIIPs L1 updates:

  • ‘Independent online comparison tool’: based on the European Single Access Point, the ESAs will develop a means for investors to compare information from different PRIIPs KIDs (e.g. Performance, Risks, RHP, Costs & Charges);
  • KID ‘Comprehension alert’: replaced by “appropriate warnings to alert on the specific risks of potential losses carried by particularly risky financial instruments”;
  • KID Page limit: should be increased from 3 to 4 pages;
  • Entry into force and application: PRIIPs regime changes to apply 18 months after the respective Level 2 technical standards are either adopted by EC, or legal publication in EUOJ [“whichever happens last”].


NB: the EP’s briefing document provides a useful (simplified) overview of the RIS long journey, so far; it remains to be seen if the CoEU will agree with their current recommendations.



2. RIS latest: Council of the EU (CoEU)

The CoEU only recently started their review of RIS legislation, with the Belgian Presidency suggesting changes to the draft PRIIPs legal text on 8 April.  To date, no public statement has been issued.

The RIS Council Working Party recently met on 21-22 May.  It was reported that CoEU delegates received an advance “comprehensive set” of proposed changes to the draft Omnibus Directive. Several experts believe this indicates the Council may now be on track to achieve consensus on their RIS negotiation stance, before the end of June. Otherwise, the task will be passed onto the next Hungarian Presidency, during their H2-2024 remit.

NB: the next meeting of the Economic and Financial Affairs Council [ECON] takes place on 21 June 2024.


3. RIS latest: legal text forecast

Even if the CoEU finalise their legal negotiating position before end-June, the bilateral talks with the EP (mediated by the EC), are most likely to begin during the autumn.

There is only one post-election EP plenary scheduled, ahead of the summer holiday (26 July – 2 September); moreover, the newly appointed Commission’s term of office starts only on 1 November 2024.

Once underway, the duration of these discussions is anyone’s guess; however, given the extent of the legal changes (i.e. complex updates to four EU cornerstone Directives, plus one problematic retail disclosure regime), it seems realistic to assume these will take at least 12 months to resolve.

NB: the legal application dates of both RIS legal texts remains a crucial part of the 2024 EU dialogue agenda.



B) Other recent EU legal events

1. AIFMD II/UCITS VI: ESMA progress with fund names guidance

As mentioned previously, the recent AIFMD II / UCITS VI legal publication includes a mandate for ESMA to develop (before 16 April 2026) new guidelines to specify conditions where a fund name is “unfair, unclear or misleading”.

Last week, ESMA delivered the first part of this deliverable, in the form of final report outlining ‘harmonised criteria for use of ESG and sustainability terms in fund names’ (i.e. under development since November 2022).

As before, this seeks to provide firms “with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names”, while ensuring investors are protected against “unsubstantiated or exaggerated sustainability claims in fund names”. Once all EU language versions are available on ESMA’s website, these guidelines will apply within 3 months.

In the longer-term, as part of their overall AIFMD/UCITS fund naming assignment, ESMA will consider “other situations than sustainability-related ones”, in separate future consultations.  Meanwhile, ESMA acknowledge the caveat that new “sectoral rules that will set standards for fund names or marketing of funds [e.g. future SFDR legal regime changes] “…will take precedence” over their latest guidelines.

NB: We will re-examine ESMA’s finalised ESG naming guidelines in more detail in our next Sustainability Update.


2. Cross-border notification standards published in EUOJ

Back in late-2022, ESMA published a draft report, outlining proposed specifications in order to converge notifications for cross-border marketing and management of AIFs and UCITS within the EU.

The EC have now published Level 2 legislation, legally applying the finalised regulatory and implementing technical standards for both fund regimes:

a) UCITS Directive: information, plus form & content notified in relation to:

  • cross-border activities of UCITS funds, management companies;
  • exchange of information between NCAs on cross-border notification letters.

b) AIFM Directive: information, plus form & content notified in relation to:

  • cross-border activities of AIF managers;
  • exchange of information between NCAs on cross-border notification letters.

NB: The UCITS Implementing Technical Standards (incl. form and content of seven templates, e.g. model notifications and attestations) will start to apply from 14 July 2024.


3. ESMA revise ELTIF II technical standards, following EC rejection

ESMA have formally responded to EC’s rejection of their draft RTS for EU Long-term investment fund (ELTIFs).

Their opinion includes more proposed amendments to the draft Level 2 legal text (i.e. highlighted in yellow).

The EC’s change to the ‘overall cost indicator’ calculation [per ELTIF art. 25] is deemed “acceptable”; this is  now based on the ‘percentage of the ELTIF NAV per annum’, instead of ‘percentage of the capital of the ELTIF’.

ESMA also outline two options to achieve “a complete alignment” with the PRIIPs KID ‘annual cost impact’:

  • no.1: link prescribed ELTIF costs to the PRIIPs ‘reduction in yield’ indicator [L2 RTS, Annex VI, pt.62); or
  • no.2: link prescribed ELTIF costs to the PRIIPs ‘summary indicator’ [L1, art. 8(3)(f)].

In terms of next steps, ESMA invite the Commission to selectively adopt this RTS version, or reject it entirely; if formally adopted, the EP and CoEU will have three months to raise any objections.


4. ESMA request input on assets eligible for UCITS

The UCITS Eligible Assets Directive [EAD] has been in place since March 2007. Pre-dating ‘UCITS IV’, it was introduced to verify the permitted asset types in which UCITS products can invest.

In June 2023, the EC requested ESMA to deliver technical advice on how the UCITS EAD should be revised “to keep it in line with market developments” that have occurred over the past 16-17 years.

ESMA have now responded by publishing a Call for Evidence as part of their UCITS EAD assessment.

Stakeholders have until 7 August to provide their feedback regarding:

  • Convergence issues and clarity of key concepts: including liquidity risk management;
  • Direct and indirect UCITS exposures to certain asset classes: in particular, the merits of expanding the current UCITS EAD to include crypto assets, unlisted stocks, real estate, commodities and precious metals.

ESMA was previously tasked with delivering their final advice before by 31 October 2024.  This will enable the EC to proceed with a “comprehensive public consultation” at some stage.



 C) UK latest

1. OFR: HTM/FCA publish joint roadmap

On 1 May, the UK Treasury (HMT) and Financial Conduct Authority unveiled their long-awaited Roadmap for the Overseas Funds Regime (OFR).

The OFR will be the long-term gateway for EEA-UCITS products marketed in the UK; it will formally replace:


a) OFR Timeline, incl. SDR (p.5)

The key milestones laid out in the joint OFR implementation timeline include:

  • Jul 2024: FCA publish a Policy Statement to finalise their OFR rules (which apply immediately);
  • Q3-2024: HMT consultation: extending Sustainability Disclosure Regime (SDR) to OFR funds;
  • Sep 2024: OFR gateway opens: new non-TMPR funds;
  • Oct 2024: OFR gateway opens: TMPR stand-alone schemes;
  • Nov 2024: OFR gateway opens: TMPR umbrella scheme schemes;
  • End-2024: HMT legislation: SDR extended to OFR funds (i.e. if decision taken);
  • TBC 2025: FCA consultation: draft SDR/OFR policy statement and guidance;
  • H2-2025: SDR and labelling rules apply to OFR funds;
  • Dec 2026: TMPR ceases (although HMT can choose to extend this date).


b) Application process (p.6-7)

The document outlines the OFR application process, administered via the FCA’s Connect system.

EEA firms need to register for access to the functionality needed to submit the forms required for OFR application and pay the FCA’s application fees.

  • Existing fund operators within the TMPR will be allocated a ‘landing slot’ to apply for OFR transition;
  • Slots will be allocated in alphabetical order, per fund operator name;
  • Firms will have 3 months to make their OFR application for all funds within the TMPR;
  • Funds which miss their allocated slots will cease to be a recognised scheme (i.e. removed from the TMPR, until a later OFR application is successfully approved);

In contrast, new funds to the UK market can apply as soon as the gateway is open in September (and at any time, afterwards).

The FCA will decide within 2 months whether to formally recognise each EEA scheme within the OFR.

NB: firms can now check their OFR landing slot dates in advance, within the FCA’s overall schedule.  Products within the TMPR can continue to be marketed to UK retail customers, until the FCA issue a binding ‘direction’ to the respective fund operator.  Firms are now encouraged to verify their current records align with the details held in the FCA’s Register.


c) Retail disclosure (p.8)

Firms are reminded of the Consumer Composite Investments (CCI) framework, currently planned to replace the EU-PRIIPs key information document (KID). Once the required legislation is approved by the UK Parliament, the FCA will consult on their proposed CCI disclosure rules.  It is stated in advance that OFR funds (alongside domestic UCITS) are expected to follow finalised CCI policy statement rules, from 1 January 2027at the latest”.

NB: There is no mention (yet) of additional Consumer Duty and/or Assessment of Value obligations to be faced by OFR funds, ongoing.



2. OFR ‘equivalence’ legislation

The legal amendment to the local Financial Services and Markets Act (FSMA),enacting the equivalence of EEA-UCITS, was laid before the UK Parliament on 14 May 2024.  Published alongside an explanatory memorandum, this now comes into force on 16 July 2024.


3. ‘Smarter Regulatory Framework’: next phase revealed

The UK Treasury also recently provided an update note on their Smarter Regulatory Framework (SRF). 

  • The ‘progress’ chapter (p.8-10) confirms they will finalise draft legislation to repeal the PRIIPs regulationin due course… when parliamentary time allows”.
  • The ‘Tranche 3’ chapter (p.11-12) and Summary table (p.14) reveals their intention to review “allof the UCITS and AIFM Directives onboarded by the UK, as part of the next SRF phase.


NB: while HMT do not specify a timeframe, they say they will:

  • Undertake “a policy review…to determine what should be retained in legislation, and the respective future roles of HMT and the FCA”;
  • Adopt “a multi-staged approach” to review/replacement, given the “significance and size of the files”;
  • Share the FCA’s regulatory initiatives grid to inform firms of SRF changes, “as far in advance as possible”.



4. FinDatEx publish EMT v4.2

On 22 April, FinDatEx officially published the latest version of their European MiFID Template [EMT V4.2].

As explained during the recent consultation, this will contain:

  • Supplementary UK-specific section: detailed on-going costs [per Investment Association proposal, c/o FCA cost-forbearance statement in Nov 2023];
  • New indicator: production of UK-SDR Consumer-Facing Disclosures.

FinDatEx say that on 30 June 2024: “EMT V4.2 will be mandatory within the UK and EMT 4.1 will be retired”.

NB: although it is now stated that “both V4.2 and V4.1 will remain valid from 30 June 2024”, we assume that V4.0 will continue to be used by EU/EEA fund firms that do not distribute products into the UK.


5. FCA: reveal ‘common errors’ when firms seek authorisation

The FCA have created a new webpage: ‘Asset management: common errors when applying for authorisation.

During the 2023/4 UK financial year, 18% of FCA applications were either withdrawn due to concerns, or rejected due to the poor-quality of information provided.  Ongoing, the FCA seek to highlight issues frequently encountered during the application process of asset manager firms.

‘Common errors to avoid in applications’ now cited include:

  • Senior management lacking experience or qualifications;
  • Office locations outside the UK;
  • Business models that expose clients to risk;
  • Underestimating accountability when outsourcing;
  • Failure to adequately consider conflicts of interest;
  • Applications that are “unready, unwilling or unorganised”.

The FCA request applicant firms to review both their supervisory correspondence and business model; they also suggest a request is sent to their pre-application support service (PASS).


6. FCA, BoE: verify alignment with UK AI principles

“New rigid and onerous legislative requirements on businesses could hold back AI innovation and reduce our ability to respond quickly and in a proportionate way to future technological advances.”
AI White Paper, UK Government (March 2023)


Finally, a reminder that in contrast to the EU-adopted Artificial Intelligence Regulation, the UK do not (currently) plan to apply specific AI laws.  The UK Government’s 2023 White Paper declared a framework based on ‘five principles for responsible development and use of AI’:

  • Safety, security and robustness;
  • Appropriate transparency and explainability;
  • Fairness;
  • Accountability and governance;
  • Contestability and redress.

These were issued on a non-statutory basis, to implemented by existing regulators, representing the entire UK economic sector.

Earlier this year, Initial Guidance for Regulators to implement the UK’s AI principles was published; the UK Government also requested regulators to verify their strategic AI approaches were aligned.

In their recent replies, both FCA and the Bank of England re-confirm they can broadly mitigate AI risks within the current UK legal structure, while flagging key activities now underway:

  • The Bank of England’s response letter confirms they are exploring four potential areas where further clarification on our regulatory framework that are relevant to AI and machine-learning: Data Management; Model Risk Management; Governance; Operational Resilience & Third-Party Risks.
  • The FCA’s AI Update admits their own use of web scraping and social media tools; they continue to track the ‘data asymmetry’ detected between ‘Big Tech’ and traditional financial services firms; they will also assess competition risks from the concentration of third-party AI modelling and cloud service providers.

Both are now co-producing operational resilience standards for “critical third parties”, along with an updated version of their survey covering machine learning in the UK financial sector.




Article written by Mark Kilbride
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