23 October 2023

EU & UK regulatory update

A) EU Retail Investment Strategy (RIS) package update

Last time around, we considered the likely next steps of the European Commission’s Retail Investment Strategy (RIS) legal package, following the recent industry consultation.

Since then, the European Parliament (EP) Committee on Economic and Monetary Affairs (ECON) have made available draft reports in response to the EC’s challenging Retail Investment Strategy proposals:

‘Omnibus’ Directive (aka ‘EU Retail investor protection rules’)
PRIIPs L1 regulation changes (aka ‘modernisation of the key information document’)

The lead EP rapporteur’s marked-up versions of the legal texts are now available for scrutiny, ahead of an ECON approval vote on 23 January 2024 and later Parliamentary debate. Notable key counter-proposals include:

‘Value for Money’ benchmarks: deleted entirely, as this could “disrupt the market, lead to reduced diversity of products and suppress innovation”. Further discussions are required.
‘Data providers’ transparency: an entirely new set of MiFID II amendments in relation to provision of specific ‘financial and non-financial market data’;
Digital PRIIPs KID: the proposed ‘Product at a glance’ section is deleted; more analysis required on a new ‘Sustainability’ section (to align with evolving SFDR/TR rules).
Timelines: the amended PRIIPs regulation should apply 18 months after the next Level 2 RTS is published in the EUOJ [i.e. once finalised by the European Supervisory Authorities (ESAs) and adopted by the EC].

The Council of the EU’s RIS working party also met this month, ahead of ‘trilogue’ discussions set for early 2024.

Separately, EFAMA recently commented further on their “substantial concerns” over the proposed “value for money” benchmarks.

B) EU-AIFMD latest

1.ESMA confirm ‘application date’ of revised technical guidance

Last week, the European Securities and Markets Authority (ESMA) finally confirmed an application date of 15 November 2023 for their revised AIFMD supervisory reporting technical guidance (versions 5 and 6).

NB: As before, the reference period for the first set of amended Annex IV reporting remains Y1,H2,Q4-2023.

2.CSSF announce new means to submit AIFM reporting

On 18 October, the CSSF held an event to explain details of a new communication means for their AIFM reporting.

The Luxembourg regulator had announced a new transmission solution, which will allow AIFMs and service providers to directly submit their ‘Annex IV reports’ using the S3 reporting channel (via API technology), following enrolment on the CSSF eDesk digital portal.

Starting from 2 November, firms have until 30 June 2024 to arrange their transition to this new solution.

From 1 July 2024, current external transmission channels will be disabled by the CSSF.

NB: Kneip have already enabled this CSSF platform for their SFDR data collection exercises, now in-progress.

3.ELTIF II update

ESMA recently updated their list of authorised ELTIFs. Their draft ELTIF II RTS (which includes a proposed ‘overall cost ratio’ calculation) needs to be finalised and endorsed by the EC before the 10 January 2024 legal application date.

4.AIFMD/UCITS: revised legal texts still to appear

There is currently no sign of updated draft AIFMD II /UCITS legal text (including respective regime supervisory reporting). As before, legal publication of the finalised version is not expected to occur until Q1-2024 (with a general 24-month transition period, thereafter).

C) 2024 EU workplans unveiled

The EU Commission and regulatory authorities have all recently announced their plans for 2024.

1.EC issues remaining legal work programme (to June 2024)

Last week, the EC published a final work programme (with Annexes) for the remainder of their current mandate.

Sub-titled ‘Delivering today and preparing for tomorrow’, this sets out EC legal priorities in the runup to the EU elections in June 2024. Apart from a proposed review of the Benchmark Regulation (BMR), which applies to ‘investment funds’ defined by UCITS and AIFMD, referral to asset managers’ regulatory reporting is limited.

2.ESAs publish joint 2024 workplan

Earlier this month, the ESAs shared their joint workplan for 2024, with specific activity areas including:

PRIIPs: the ESAs will prepare an Annual Report summarising administrative sanctions imposed by national competent authorities. They will continue to monitor the application of the current PRIIPs KID RTS and may update their ‘Level 3’ Q&A guidance. They also “stand ready to work” on the next draft PRIIPs RTS (as required by the Retail Investment Strategy package).
Digital Operational Resilience (DORA) Regulation: key ESA development areas will cover:
- EU Systemic Cyber Incident Coordination framework (EU-SCICF);
- Oversight framework of designated ICT critical third-party providers (CTPPs);
- Applications necessary to support the direct DORA oversight tasks (ahead of Jan 2025 deadline).
European Single Access Point (ESAP): next year, the ESAs will jointly deliver a draft Implementation Technical Specification (ITS) to supporting the establishment of the ESAP system and its functionalities.
SFDR/TR disclosures: this will be covered (shortly) in our next ESG update.

3.ESMA also publish 2024 work programme

ESMA have also issued their latest annual work programme (running in parallel with their joint ESA activities). Their ‘Strategic Priorities and Thematic Drivers’ and ‘Key regulated sectors and entities’ cover similar ground to the ESA workplan, notably:

Investor Protection: in 2024, ESMA say they “will assist in the finalisation (and possibly start of implementation) of the new Retail Investment Strategy” (i.e. contrary to the expectation of most industry experts). They will also assess whether the NCAs have sufficiently improved their supervision of investment firms’ cross-border activities.
Investment management: next year, ESMA will deliver:
Technical standards: revised UCITS Eligible Assets Directive (as recently requested by the EC);
Technical advice: continuing Level 1 reviews of UCITS, AIFMD and PRIIPs (including “additional single rulebooks”).
Digital finance: in relation to DORA, ESMA will deliver a feasibility study for the establishment of a “single EU Hub for centralising major ICT-related incidents reporting”; they will supply technical standards and guidelines for both ESAP and the new Markets in Crypto Assets regulation (MiCA) regulation.
Sustainable Finance: the European Green transition is one of ESMA’s top priorities in 2024: more details to follow in the next ESG update.

ESMA say they will also support the new EP and Commission following the June elections, to help them determine priorities for the next 5-year legislative period.

D) UK latest

1.FCA confirm priorities for asset manager reform

“Following our asset management discussion paper, we will be pursuing three main priorities for reform. We won’t be pursing change just for the sake of it.  So, I’m keen that there is sensible and proportionate sequencing and management of such an intensive multi-year reform agenda.”

Ashley Alder (FCA chairman) – IA annual dinner, 12 October 2023

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The Chair of the Financial Conduct Authority (FCA) attracted major press coverage with his recent speech to the Investment Association (IA).

Following industry reaction to the Updating and Improving the UK regime for asset management discussion paper, he confirmed the FCA would not proceed with a single rulebook for all funds (i.e. replacing current UCITS and AIFMD regimes), or develop a “basic authorised funds” category for retail investors.

Instead, he outlined three main priority areas for reform:

Proportionate AIFMD regime: consistent rules, easing of certain reporting (consultation process 2024-5);
Updating the regime for retail funds: simplified rules for non-UCITS products (including “re-branding”);
Supporting technological innovation: a blueprint for fund tokenisation and ‘Direct2Fund’ proposals.

2.FCA will “roll out overseas fund regime in April”

“We are working towards opening the OFR from April next year in order to facilitate the transition of funds… into the OFR. We'll also be giving all of the funds currently within the TMPR landing slots to go through that recognition process.”

Mhairi Jackson (FCA policy lead) – ALFI UK conference, 19 October 2023

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The FCA also intend to activate their Overseas Fund Regime (OFR) in April 2024.

Post-Brexit, the UK-OFR was meant to be the long-term framework for EEA UCITS products.

Although this came into effect in February 2022, UK-OFR remains legally inactive, because the UK Treasury (HMT) have not decided if EEA-UCITS should be granted legal equivalence in the UK.

There are currently 8,000 EU funds authorised for sale in the local temporary marketing permissions regime (TMPR), scheduled to end on 31 December 2025.

Speaking at last week’s ALFI London conference, a senior official confirmed the FCA is now planning to “open” the OFR from April 2024. This follows their new webpage ‘Landing slots for funds in temporary marketing permissions regime’, which prompts EEA firms to ensure contact details are up to date.

An OFR consultation will now follow “in a few weeks”.

NB: meanwhile, the FCA also confirmed the matter of UCITS equivalence is left for the UK Treasury (alone) to decide. It remains unclear if EU products launched since 1 January 2021 will be able to apply for “immediate recognition” in the UK-OFR, or whether the FCA must first clear the existing TMPR backlog as a priority.

3.HMT “still to decide” on non-UK Value Assessment

"It is definitely fast becoming a commercial imperative for UK distribution – no assessment of value, no distribution”.

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Will EEA firms be expected to provide the FCA with Assessment of Value (‘AoV’) reports for their funds, next year?

It was reported that the FCA are poised to “slap additional information requirements on overseas funds, such as a UK value assessment”. This follows recent “behind-the-scenes briefings” that EU-UCITS firms have been told they must commit to producing AoV statements within the next 12 months, as part of the future UK-OFR.

However, the FCA have since confirmed that no decision has yet been taken by HMT.

NB: This follows Abrdn’s recent decision to produce AoV reporting for Luxembourg-domiciled funds sold in the UK, even though these were “not strictly necessary”.

4.FCA issue TPR reminder

The FCA recently updated their separate temporary permissions regime (TPR) webpage, reminding EEA financial services firms this will expire on 30 December 2023.

TPR was activated on 1 January 2021 for a 3-year period; this was to enable EEA firms to temporarily provide services to UK customers (as per previous passporting regime) while seeking FCA authorisation to access the long-term (post-Brexit) UK market.

The FCA now state: “As expected we have now determined most of the applications for full UK authorisation from firms in the TPR”; they advise any EEA firms requiring an update to contact their case officer.

5.Finalised: Distributor Feedback framework and template

The Joint Trade Associations Group (including the IA) have announced finalising their Distributor Feedback Template (DFT v1.0). This was devised to support Distributor data provision to product Manufacturers, as required per FCA Consumer Duty ‘product lifecycle’.

The finalised DFT now contains 46 data fields, covering six categories:

Data Set Information
General Product Information
Sales Information
Sales Outside Manufacturer Target Market
Holdings Information
Early Redemptions

Distributors are expected to provide their data within 6 weeks of end-Q1 2024, with re-iterations supplied every six months. The first tranche will cover an initial 8-month period to 31 March 2024.

NB: another reminder the FCA have confirmed in their Handbook Notice (no. 108) that the Consumer Duty regime will apply to EEA fund managers operating within the TMPR.

6.FCA to mitigate “industry split” over cost disclosure

Finally, the FCA are said to be reviewing “synthetic” ongoing charges calculated by funds investing in other funds, following an apparent “industry split” between certain fund managers, UK Peers and local consumer groups.

This specific subject will reportedly be covered as part of an imminent ‘Future Disclosure Framework’ consultation, following on from the FCA’s 2022 discussion paper).

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