A) EU Retail Investor Strategy (RIS) package latest
The feedback period for the European Commission’s epic Retail Investment Strategy package ended on 28 August. The EC has now made available the 115 responses received from across the finance industry.
In terms of next steps (as an indication):
- EU member states: have until this week to submit comments on the proposed ‘Omnibus Directive’
- European Parliament and Council of the EU: expected to discuss negotiating positions until Q1-2024
- EU trilogues (EC, EP, Council): may begin Q1-2024 (but this could be delayed until after MEP elections)
In the meantime, a reminder of EFAMA’s interim RIS statement, made alongside fellow European representatives.
Further updates to follow.
B) EU-AIFMD updates: short, medium, long-term
There are many Alternative Investment Fund Manager regime developments currently unfolding in the EU.
Here is a summary (in ascending order of occurrence):
1. FIN-FSA: publish guidance ahead of Annex IV reporting platform switchover
We have been tracking the transitional timetable of the Finnish Financial Supervisory Authority (FIN-FSA) new regulatory reporting platform since 2021.
Earlier this year, we highlighted the pending migration of AIFMD report filing to the replacement Suomi.fi system (c/o the Finnish Digital and Population Data Services Agency). This was later deferred until 30 September 2023.
Last week, FIN-FSA published their formal ‘Detailed instructions for service providers and their client entities’ ahead of the switchover. This 7-page document specifies the process necessary for foreign (non-Finnish) AIFMD reporting firms to access the replacement portal, on behalf of their clients. Both service providers and client entities impacted are required to apply for respective system mandates. The deadline for the filing the first set of local Annex IV reporting (reference period Q3-2023) on the new portal is 31 October 2023.
NB: Kneip are now in the process of finalising their access authorisations, alongside those clients impacted locally.
2. Reminder: ESMA technical guidance updates pending Q4
Another item previously followed is the European Securities and Markets Authority’s revised AIFMD supervisory reporting technical guidance, set to apply this November. The reference period for the first set of amended Annex IV reporting is Y1,H2,Q4-2023. Firms impacted were instructed to contact directly the relevant national competent authorities “to know how the filling of the XML reports will be handled at national level”.
NB: although we have clarified local transition arrangements with most EU-NCAs, we await some details from a small minority. Kneip have also offered to assist those regulators planning to include external parties in their advance testing of revised AIFMD supervisory reporting processing.
3. ELTIF II latest
European long-term investment funds (ELTIFs) are a type of AIF based in the EU, whose revised regime entered into force in April this year. The latest list of authorised ELTIFs can be found here.
ESMA’s recent ELTIF II consultation paper included a summary of the latest key Level 2 amendments (p.7-8).
There are also revised Costs & Charges rules referring to:
- ELTIF costs definitions: related to management, performance, distribution and others
- ELTIF ‘overall cost ratio’: calculation methodology, presentation format (per Appendix)
ESMA state the ELTIF prospectus must disclose the specified ‘overall cost ratio’; when marketed to retail investors, a narrative explaining any potential differences with the PRIIPs overall RIY figure is also required.
The final RTS is now expected ahead of the 10 January 2024 legal application deadline.
4. AIFMD/UCITS: legal texts pending as firms “regret” delegation changes
Delegation arrangements seem set to come under increased scrutiny, after EU policymakers provisionally signed off draft long-term changes to the AIFMD and UCITS Level 1 regimes.
The long running EU Parliament and Council negotiations finally ended, following reported member state disagreement (Luxembourg, Ireland and France) over the risk of portfolio management outsourcing to third country asset managers. You may recall that since Brexit, this is a sensitive area for UK-based firms.
According to an insider, the agreed EU position means continental UCITS and AIF firms will face more quantitative reporting to their NCAs (e.g. the amount and percentage of their delegated assets under management, alongside due diligence arrangements information). This will likely “cause disquiet among firms delegating portfolio management outside the EU”.
An updated version of the EC’s draft AIFMD/UCITS legal text (including a converged supervisory reporting regime) is now expected to appear before the end of this month. However, a legal publication in the EU official journal is not expected to occur until Q1-2024.
The new rules are expected to take effect after a 24-month transition period (i.e. Q1-2026 at the earliest).
C) EU Cross-Border Distribution of Funds update
1. CSSF publish guidance on CBDF marketing communications
On 23 August, the CSSF published the findings of their 2-year ‘thematic review’ of local marketing communications (‘MCs’), following the legal application of the Cross-border Distribution of Funds Regulation (CBDF/R).
Based on their recent MC observations, the CSSF now generally expect from their Investment Fund Managers (IFMs):
- Prominent disclosure of the term ‘marketing communication’ on each MC item;
- Clear identification of targeted investor type (i.e. products open to retail and/or professional investors);
- All marketing communication information should be:
- Consistent with the fund’s legal documents (e.g. prospectus, UCITS KID and PRIIPs KID);
- Easily readable, with all acronyms and terms describing the investment “properly defined”
- Display of labels, ratings or certifications: “sufficiently precise” information regarding fund/sub-fund rewards, applicable year and source entities (with a website hyperlink for further information);
- Hyperlinks: to be used sparingly, pointing to the exact place where relevant fund/sub-fund information may be found; regular maintenance is required to avoid broken links
- Mandatory references to available fund documents: a big improvement now required from IFMs to comply
The CSSF also highlight specific types of MC information that demand IFM attention:
- Risk & rewards: summary information should be “properly tailored” to the promoted product, with a “prominent indication” where complete information can be found
- Costs: information should be ‘fair, clear and not misleading’; the MC should refer to the relevant period with prominent caveat that all costs are not presented (with more information available in the prospectus)
- Performance and benchmarks:
- Past performance: reference period should be the required 10-year period for UCITS and AIF funds
- Performance for the current year should be corrected updated (to the most recent quarter)
- Sufficient details on the use of the benchmark should be prominently disclosed, where relevant
- Sustainability-related aspects:
- MCs should contain “a good balance” between disclosures on sustainability-related aspects and other aspects of the investment strategy of the promoted fund/sub-fund
- Website links should point to information for the specific product marketed
NB: the CSSF refer to both CBDF/R Level 1 text and ESMA’s Guidelines on Marketing Communications in their report.
They previously verified that fund factsheets are to be identified/flagged as a type of marketing communication.
2. ESMA extend EC deadline to adopt draft CBDF/R technical standards
Last December, ESMA published their draft technical standards (106 pages) on the notifications for cross-border marketing and management of AIFs and UCITS. This Level 2 document outlined ten communication templates to be used by both fund firms and regulators (home and host), including model notification letters to either market or manage investment funds established in other EU member states.
The EC’s decision to adopt ESMA’s draft RTS / ITS templates was originally meant to happen before 15 March 2023.
However, since the original publication, there has been no further update from either side.
ESMA’s latest technical standards dashboard states the EC deadline to adopt is now extended to 15 December 2023. The finalised Level 2 measures were intended to legally apply 3 months after EU-OJ publication.
D) UK latest
1. FCA Consumer Duty regime
The Financial Conduct Authority’s recent activation of their UK Consumer Duty was said by the Financial Times to be the “biggest shake-up to financial regulation in decades”. This followed a local Financial Services Compensation Scheme (FSCS) survey which concluded that only 25% of consumers trust UK financial services firms to act in their best interests, with 31% distrusting the industry entirely.
The FCA had previously estimated the total one-off direct cost to firms of complying with the Duty’s four outcomes (i.e. ‘product & services’, ‘fair value’, ‘support’ and ‘understanding’) could be as high as GBP 2.4 billion.
2. ‘Distributor feedback framework’ proposed by joint trade associations
Ongoing, the FCA’s Consumer Duty will also require distributors to provide information to fund manufacturers, in order to assist the longer-term product review life-cycle.
The UK Investment Association (IA) recently outlined details of a proposed ‘Distributor feedback template’ (DFT) as a means to meet these additional Consumer Duty obligations within the industry.
The IA form part of a joint UK trade group including the Investing and Saving Alliance (TISA), the Association of Investment Companies (AIC) and the Association of British Insurers (ABI). Their recent guidance note provides further detail on the agreed structure of the distributor feedback framework and the six core data items now being requested by manufacturers.
A draft version of the DFT (v0.1) is now available, with 38 data items (in a format akin to FinDatEx templates).
The first tranche of the finalised DFT template will cover an initial 8-month period to 31 March 2024.
Distributors are expected to provide their required data within 6 weeks of end-Q1 2024, with re-iterations provided every six months. This timeframe was designed to enable Fund Boards to review their annual reports, ahead of the first anniversary of the Consumer Duty taking effect for existing open products.
More information to follow.
3. AoV: a “costly, seven-figure exercise”, that saves investors “millions”
Another reminder that Authorised Fund Managers (AFMs) can refer to their latest Assessment of Value (AoV) report to demonstrate products have been offered at a ‘fair value’, to meet the specific Consumer Duty outcome.
The FCA made the AoV report obligatory back in September 2019, following their 2017 market survey.
In their latest 2023 review, the FCA state the continuing maturity in fund firms’ AoV processing has yielded “savings for fund investors of millions of pounds”.
FT Ignites also conducted additional research; their interview with a senior Fund Boards Council (FBC) adviser included the claim that firms now face a “costly, seven-figure exercise” to meet the FCA’s challenging criteria. Responding to those querying why the FCA did not issue a “simple” AoV reporting template, the FBC state the value assessment process is dependent on nature of each firm’s business model and specific fund objectives and is “not meant to be a box-ticking exercise”.