8 April 2022

Latest regulatory update

1. PRIIPS latest

a) Market reaction to UK-PRIIPS policy

There have been notable mixed reactions following the recent UK-PRIIPS policy statement from the Financial Conduct Authority (FCA).

One advisory firm predict a “very challenging” 9 months ahead for manufacturers and distributors, now required to prepare for at least three different European regimes (see next item, also).

Another consultancy firm forecasts increased EEA / UK processing costs, plus additional “…compliance considerations to ensure the documents meet regulatory requirements and sales teams [and investors] understand the differences.”

While a smaller UK asset manager firm highlights the diverging UK investor disclosure and inactive Overseas Fund Regime as “high barriers” for new EU entrant firms, the UK Investment Association (IA) continues to call for a review of the disputed Transaction costs “slippage” methodology (which remains intact on both sides).

Although the Association of Investment Companies (AIC) give the FCA credit for their latest efforts, they also point to continued “disparity across investment products… to the detriment of [UK] investor confidence”. They now call for the FCA to proceed with a “radical PRIIPS review… without delay”.

b) Swiss disclosure equivalence: EU vs UK

One additional complication is established links to the Swiss Financial Services Act (FinSA), which entered into force in January 2020. Commonly known as the known as the ‘Swiss MiFID’, this regime includes the supply of a local information document (Basisinformationsblatt – ‘BIB’) for all financial instruments offered to non-qualified (retail) clients.

The Swiss FinSA expressly recognizes the EU-PRIIPS KID as a foreign disclosure document that is both comparable and equivalent to the local FinSA-BIB. The act is also directly aligned with the application of the updated EU-PRIIPS KID (i.e. including transition of EEA-UCITS).

From January 2023, the UCITS KIID will no longer be accepted; firms will instead have to issue either an updated EU-PRIIPS KID or a FinSA-BIB to local non-qualified investors.

Until now, the Swiss regulator FINMA has not commented directly on local implications of the ensuing UKPRIIPS divergence. Although the recently confirmed UK-PRIIPS KID template now closely resembles the FinSABIB, we expect a statement to clarify expectations from UK-UCITS firms (i.e. exempt from local PRIIPS regime until 2027).

2. EU sustainable finance latest

There has been a frenzy of ESG activities over the past few weeks. Here is a brief summary of the more significant developments:

a) EC finally adopt SFDR / TR RTS

This week, the European Commission (EC) finally adopted the Sustainable Finance Disclosure regulation (SFDR) technical standards delivered by their European Supervisory Authorities in batches last year (February and October ). You may recall these detailed level 2 measures (to be applied at both entity and product level) required specific alignment with the Taxonomy regulation (TR).

Although the vast majority of the European Supervisory Authorities (ESAs) disclosure rules and templates seem to remain intact, there are minor amendments and additional narratives throughout the 100 pages that now require careful scrutiny. Certain changes (e.g. the removal of soil erosion from the Principal Adverse Template legal definitions and citations) may be queried by Green members of the European Parliament, which now has at least 3 months to scrutinise the level 2 delegated regulation.

Meanwhile, this announcement will most probably focus attention on the herculean ESG efforts now required by the industry (i.e. together with the challenging PRIIPS transition) before 31 December 2022.

b) ESAs interim SFDR / TR statement

The ESA’s recent supervisory statement about interim SFDR / TR disclosure efforts (ahead of level 2) has attracted comments throughout the industry.

In particular, the expectation that “explicit quantification should [now] be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomyaligned” has been widely questioned, given the incomplete status of the taxonomy and the scarcity of available data and reporting information at this stage.

NB: the ESA document includes their latest Summary Table of SFDR / TR disclosure (pages 6-10).

c) CSSF: granted SFDR / TR sanction powers

In Luxembourg, the Commission de Surveillance du Secteur Financier (CSSF) now have legal power to impose fines and criminal sanctions on local funds that have not sufficiently applied the necessary SFDR / TR requirements. Their recent Communiqué underpins the ESA supervisory statement (including referral to the interim guidance and medium-term timetable).

d) Taxonomy latest

A reminder the EU Parliament and Council will have at least until the end of May 2022 to accept the EC’s adoption of gas, nuclear inclusion in the EU taxonomy.

Meanwhile, the EC’s Platform on Sustainable Finance (PSF) expert group issued nearly 1,000 pages of Taxonomy-related publications last week.

Firstly, they published a 13 3 page report exploring options available to extend the current EU taxonomy (in relation to the first two TR environmental objectives (climate change mitigation and adaptation).

The PSF have further developed their earlier proposal to amend activity labelling, including an ‘amber’ status for disputed “transitional activities” such as gas and nuclear industries.

The next day, the PSF delivered another report (125 pages) covering finalised recommendations for the remaining four TR environmental objectives, i.e. :

Sustainable use and protection of water and marine resources
Transition to a circular economy ▪ Pollution prevention and control
Protection and restoration of biodiversity and ecosystems

Their 675 –page Annex contains the necessary detailed technical screening criteria (TSC), which is currently scheduled to apply from 1 January 2023.

3. Eastern Europe: market reactions

Unfolding events in Ukraine continue to reverberate in the global financial markets.

Following the swift application of unprecedented wave of sanctions against Russia, some European asset managers were prompted to suspend emerging European funds, amid sharp divestments last quarter. Throughout the industry, discussions continue about the deployment of suitable liquidity management tools (LMTs). These range from “ordinary” (e.g. swing pricing) to “extraordinary” (e.g. side pockets and redemption restrictions).

Last week, the CSSF issued a FAQ document on the application of LMTs by local investment funds.

ESMA continues to co –ordinate regulatory responses with their national competent authorities (NCAs), prepared to “use its relevant tools to ensure the orderly functioning of markets, financial stability and investor protection”.

Over in the UK, the FCA are holding stakeholder discussions about options to allow authorised retail funds make exceptional use of ‘side pockets’, given the current “significant practical challenges” linked to Russian assets held.

In addition, recent events are now shaping the already polarized European sustainability debate.

The head of the French Treasury said the invasion of Ukraine had justified the inclusion of nuclear industry in the EU taxonomy. Elsewhere, many MEPs warned that including gas in the taxonomy (i.e. unlike oil and coal) as proposed by the EU commission will increase reliance on Russia energy sources.

4. FinTech trends

The UK Government have announced plans to transform Britain into a “global crypto asset technology hub”. Initial steps include a non-fungible token (NFT) to be launched this summer, alongside the recognition of stablecoins as a legal form of payment.

Over in Dublin, the Central Bank of Ireland has (for the first time) approved professional-only alternative investment funds holding a low level of cryptocurrency and bitcoin futures.

Across the channel, the European Supervisory Authorities (ESAs) strike a far more vigilant tone. Their recent statement directly warns of the “many highly risky and speculative” crypto assets for retail consumers, who face “the very real possibility of losing all their invested money”.

The EC also warned that crypto assets could be used as a way to avoid sanctions against Russia and Belarus. Speaking at a recent ALFI event, the EU financial services commissioner highlighted a clear need “to bring crypto assets into the regulated space”.

Although the EU Markets in Crypto-assets (MiCA) regulation was recently adopted by the EU parliament, it is currently unlikely to apply until 2024.