Latest regulatory update (PRIIPs, AIFMD II and more)

1. PRIIPS / UCITS: no EC RTS update, UK-KID consultation continues

Following the European Commission’s (EC) “legal quick fixes” to extend the revised PRIIPS KID application and UCITS grandfathering exemption until 30 June 2022, there is no news to report on their legal adoption of the European Supervisory Authorities (ESAs) draft RTS supplied back in February.

Meanwhile, the EC has requested ESMA to produce two technical assessments in relation to PRIIPS driven by their Capital Markets Union (CMU) strategy with resultant legal adjustments likely (see no.4 below).

Over in the UK, the FCA proposed UK-PRIIPS changes remain open for comment until 30 September 2021.

As mentioned before, recommended local KID revisions include a streamlined performance information narrative alongside revised summary risk indicators and transaction costs calculation methodologies.

The FCA seem intent on applying these local changes on  01 January 2022 (i.e. 6 months ahead of the current EU schedule), given their citation of the current EEA-PRIIPS KID containing “misleading and inaccurate information” which can lead to the investor “purchase of unsuitable products or being miss-sold products”.  Moreover, ‘the harm’ facing UK retail consumers is both re-stated frequently (incl. a chapter on p.25) and depicted (p.27) within the FCA consultation paper.  This appears to indicate the FCA are not minded to provide additional preparation time to UK and EEA manufacturers / distributors falling into scope (i.e. regardless of respondent feedback supplied ahead of Q4-2021).

2. UCITS / AIFMD: ESMA Q&As updated

Last month, ESMA updated several Q&A documents including those covering UCITS and AIFMD directives.

Both contain updated referral to their own Performance Fee Guidelines (effective since 05 Jan 2021 in every EEA member state apart from Sweden).  The AIFMD document also includes latest clarification on the Reporting of Risk indicators in AIFM / AIF reporting (i.e. DV01, NET CS01, Net Equity Delta) in relation to their original Annex IV reporting guidelines.

NB: a reminder that the EC’s AIFMD II legislative proposals (which may include specific UCITS regime alignment) are expected late-November 2021.

3. MiFID II: ESMA CSA results; FCA revise advisory expectations

ESMA has also recently presented the results of a Common Supervisory Action (CSA) undertaken last year in relation to MiFID II suitability requirements (i.e. a key determinant of the overall target market concept).

Following their analysis of 206 MiFID entities (including 83 investment firms), ESMA have cited examples of both “good and poor practices” to be reflected in an updated version of their current suitability guidelines.

These will also be aligned with the appropriateness / execution-only guidance (under consultation).

Across in the UK, the FCA has recently modified website content summarising their recent Review of host Authorised Fund Management firms in order to “align the text more closely to the assessment of value [AoV] rules”, prompting FT Ignites to report instances of certain intermediaries not providing fund firms with required information to carry out their distribution obligations, “such as MiFID II target market assessments.”

4. ESMA: tasked with 2 x retail calls for advice

Yesterday, the EC issued two CMU-related Calls for Advice to ESMA (feedback required end-April 2022):

• Retail Investor Protection (i.e. obviously, including PRIIPS KIDs): this includes advice on how to enhance investor engagement with disclosures, the benefits of digital disclosures and an assessment of new digital tools & channels
• PRIIPS regulation: six lengthy individual assessments including a general survey on the use of the PRIIPs KID across the EEA, the practicality of current regime rules and digital media prospects.

ESMA’s findings will a be key influence on the EC’s strategy for EEA retail investments (expected H1-2022).

5. CBDF: a new EEA regime

Yesterday, a new EEA legal regime began to apply. The Cross-Border Distribution of Funds (CBDF) framework is a key part of the CMU strategy.  It is a legal package of measures incorporated in:

• Directive 2019/1160: including revised NCA (home and host) notifications in respect of marketing UCITS / AIFs and a new pre-marketing regime for AIFs.
• Regulation 2019/1156: containing revised requirements for fund marketing communications and a new UCITS / AIF cross-border marketing central database (expected before Feb 2022).

In their initial 112-page overview published last month, ESMA drew attention to the varying CBDF starting positions across their member state national competent authorities (NCAs – including the CSSF in Luxembourg and the Central Bank of Ireland).  ESMA also stated their expectation of a more uniform NCA cross-border fund modus operandi to be reported next time (in July 2023).

Meanwhile, in relation to the CBDF regulation, ESMA supplied a draft ITS outlining standardised forms, templates and procedures for NCAs (adopted by the EC and applicable since Monday) with their separate marketing communications guidelines now translated (applicable from Feb 2022).

However, for their revised CBDF directive obligations, UCITS, AIFM firms have limited EEA-level guidance for referral; instead, they must continue to rely on advice made available from each NCA respectively (i.e. based on local legal adoption).

One area of continued ambiguity is the revised, collective NCA notification process facing UCITS firms marketing their products in other EEA jurisdictions.  Until last week, art.93, UCITS IV directive obliged authorised EEA firms to notify only their host NCA in the event of a change to either the original marketing arrangements  stated in the pre-approved notification letter or “regarding share classes to be marketed”.

Ongoing, the CBDF directive revised this UCITS article to oblige their notification to both their home NCA and host NCA, at least one month in advance of either instance.

By comparison: AIFMs remain obliged to notify only their home NCA one month in advance of material changes to a passported AIF (i.e. not including the launch of new share classes).

UCITS and NCAs operating within larger EEA cross-border fund domiciles now appear to face distraction.

In Luxembourg, the CSSF last week published a circular updating the original UCITS IV law to conform with the new regime, revised their Marketing of UCITS shares/units website and issued a new CBDF FAQ document highlighting the changes to their notification procedures.  In short:

• The CSSF state that each new UCITS share class is to be treated as a separate initial notification (the template letter is outlined in the FAQ).
• The 30 day pre-advance notice period apples only in relation to subsequent changes of the fund documentation attached to the original notification letter (i.e. following CSSF authorisation).
• UCITS firms are also directed to check with each / every host NCA to establish what additional CBDF notification rules are to apply on their side (i.e. at sub-fund and share class level) ongoing.

In Ireland, although the Central Bank has now updated their UCITS website in relation to certain CBDF regulation provisions, there is no specific mention (so far) of any revised notification process rules / advance notice periods in relation to the CBDF directive.  Similarly, the latest Q&A published last week (UCITS no. 32) contains no updates about the new regime.

With additional legal developments unfolding elsewhere (e.g. Austria, Belgium, Netherlands) and some within the industry questioning the specific dual NCA notification procedure to be followed, it seems that unless / until the EC or ESMA make available interim supporting guidance, UCITS firms marketing throughout the EEA will remain facing significant complications arising from this (apparently small) CBDF/D revision.