Latest Regulatory Update
1. EU-PRIIPS updates
a) FinDatEx: publish EPT V2
Firstly, a reminder that Kneip have been closely involved within the Financial Data Exchange Group (FinDatEx) since its formation 3 years ago and remain ideally positioned to assist those firms facing the increasing challenges of data exchange within the fast-evolving financial services industry.
You may have heard last week that FinDatEx formally published their revised European PRIIPS Template (EPT V2.0), long awaited in the marketplace. While intended to be used for products sold from January 2023 onwards, it is emphasised that “data contained in the EPT is communicated by asset managers to insurers in good time before this date”; further guidance may be issued in the meantime.
Kneip have already confirmed in our product release announcement on 9 February that we stand ready with our end-to-end PRIIPs solution to support asset managers in their timely production of the EPT 2.0 template.
We are also a member of the European Fund and Asset Management Association (EFAMA) and will co-host the latest PRIIPs update seminar on 26 April 2022. More details to follow.
b) EC: PRIIPS-KID RTS updates
The EU Official Journal (OJ) of 10 February 2022 included a corrigendum (correction) to the PRIIPS delegated act (DA) containing the ESA’s revised KID RTS. This fixes placement of content within two Annex VI methodology for calculation of cost section headings:
- Specific requirements for insurance-based investment products
- Specific requirements for PRIIPs with a recommended holding period of less than one year.
NB: while the PRIIPS RTS application date remains unchanged (1 July 2022), the EC are said to be proceeding with another draft DA amendment to align with the end of the extended UCITS transition period on 31 December 2022. It is expected this latest PRIIPS RTS “quick-fix” will be published in the EU-OJ before end-March 2022.
c) ESAs hold PRIIPS L1 public hearing
Last Friday, the European Supervisory Authorities (ESAs) held a public hearing covering their recent PRIIPS Call for Evidence (CfE). The extensive agenda for this all-day event covered:
1. Scope of the PRIIPs Regulation differentiation between different types of products
2. Adapting the Key Information Document (KID) including:
a) Digital media
b)The overall structure of the KID (i.e. complexity and readability)
3. Content of the KID including:
a) The comprehension alert
b) Information on environmental or social objectives
c) Performance scenarios (i.e. future)
d) Information on past performance
4.PRIIPs offering a range of options for investment (i.e. “Multi-Option Products”)
The hearing was held “at a very early stage” of the European Commission’s PRIIPS level 1 legal review of key regime rules, expected to commence Q2-2022 (i.e. as part of their retail investment strategy). Meanwhile, the ESAs heard a varied range of opinion from stakeholders across many financial sectors (asset managers, pensions, insurance) facing retail client disclosure challenges.
At this stage, most participants seem to support digitalising the PRIIPS KID and introducing data layering to solve the acknowledged “information overload”. However, there remains much debate about the direct inclusion of a past performance section and suitable ESG disclosure within the KID template in due course.
The ESA final PRIIPS CfE report is expected before the end of April 2022. While changes to the current PRIIPS level 1 legislation are unlikely to be enacted for “several years”, the ESAs reminded those present they are legally positioned to implement PRIIPS amendments at level 2 (delegated legislation) and level 3 (guidance) stages where necessary required during the interim period.
2. EU-sustainable finance latest
a) ESMA: “greenwashing at core of sustainable finance roadmap”
Last week, the European Securities and Markets Authority (ESMA) published a 3-year Sustainable Finance Roadmap. The three main areas to be tackled during the 2022-2024 period are:
- Tackling greenwashing and promoting transparency
- Building NCAs and ESMA’s sustainable finance capacities
- Monitoring, assessing and analysing ESG markets and risks
Key challenges and required actions are re-stated, as the continuing legal application of the Sustainable finance disclosure regulation (SFDR) and Taxonomy regulation (TR) lay ahead. ESMA include an Annex summarising next steps to follow both generally and within the various sectors of the industry, notably Investment management (incl. UCITS and AIFMD regimes), Investment services (incl. MiFID II firms), Benchmarks and Financial innovation.
b) UN-PRI: EU taxonomy risks losing sustainability ‘gold standard’ status
The EU Parliament and Council now have at least four months to scrutinise the revised Complementary Climate Delegated Act which places both nuclear and gas activities within the EU taxonomy scope.
Germany is currently considering whether to formally support a lawsuit from Austria and Luxembourg contesting the legal basis for their inclusion.
Meanwhile, the UN-backed Principles for Responsible Investment (PRI) network has warned that if the revised legislation is formally adopted, the EU taxonomy “can no longer be considered the gold standard for a sustainability performance benchmark”. Instead, the PRI cite the “additional burden onto investors” left to “carefully review the disclosures to ensure that their taxonomy-aligned investments reflect criteria that are science-based”.
c) Morningstar: declare ESG winner firms, “cull” funds universe
According to Morningstar’s 2021 analysis of European funds, sustainable funds recorded annual net inflows of EUR 477 billion: a 90% increase compared to EUR250 billion inflows during 2020. The top ten best-selling European sustainable fund houses are also named.
Reuters also quote Morningstar research showing that since the sustainable finance disclosure regulation (SFDR) applied in March 2021, almost 50% of all new fund launches have been classed “sustainable” (per SFDR article 8 or article 9); these products captured 64% of total Q4-2022 inflows and now represent almost 40% of all assets managed in EU-domiciled funds.
Separately, the Financial Times reported last week that Morningstar has removed 1,200 funds (i.e. total AUM of EUR1.2 trillion) from its list of European sustainable funds after detecting “ambiguous language” within legal documentation (e.g. prospectuses and annual reports).
While Morningstar declined to name any funds removed from their list, many media outlets picked up on their analysts’ reversion to their pre-SFDR criteria, where a product was only considered “sustainable” where its name included sustainability-related terms and there was “a clear description of ESG-focused processes in key investor information documents”.
NB: Morningstar’s post-SFDR report last November concluded the initial European sustainable fund universe then stood at 6,147 funds as at end Q3-2021 (cf. 3,730 funds the previous quarter).
d) MiFID II: sustainability preferences will create ‘considerable costs’
ESMA are also currently consulting on proposed updates to their MiFID II Suitability requirements guidelines ahead of the EC’s first MiFID II sustainability delegated act (DA) which applies from 2 August 2022.
These will oblige firms in scope (portfolio managers, investment advisers) to take the client’s sustainability preferences (“SPs”) into consideration as part of the suitability assessment (i.e. in addition to the investor’s investment objectives, knowledge and financial situation).
These proposals have provoked a sceptical reaction, with EFAMA highlighting the “considerable” impact and costs for MiFID firms required to collect “highly detailed information” from each prospective client on their preferences for sustainable investments, to enable them to identify suitable products.
e) Kneip stands ready to Introduce the new EET
FinDatEx have launched a public consultation on their proposed new European ESG template (EET V1.0) alongside an updated MiFID data template (EMT V4.0).
The EET is a cross-sectoral template (banking, asset management, structured product, insurance and pensions industries) reflecting the intricate SFDR, TR and pending MiFID II sustainability DA.
The EET V1.0 template is currently at “near-final draft” stage with a finalised structure; market participants have been asked to supply comments only on the proposed content of data fields (currently 600+ items).
FinDatEx have also presented a revised EMT V4.0 (to replace V3.1), as they propose all ESG data will be included in their EET template, ongoing.
The joint template consultation is open until 25 February 2022.
Once respondent feedback has been applied, FinDatEx intends to make both templates available by mid-March 2022 to enable sufficient time for the technical implementation and coding required from product manufacturers. The EET v1.0 should be deployed on 1 June 2022, alongside the EMT v4.0.
NB: With the June deadline little more than 3 months away, Kneip has decided in advance to establish the current version of the EET v1.0. Following another official product release announcement on 10 February, we also stand ready to support Asset Managers not only with their SFDR disclosure preparations, but also for their EET V1.0 template. Our updated EMT V4.0 solution will also be completed by end of February.
Finally, Kneip, alongside EFAMA and PWC will co-host a seminar formally Introducing the European ESG template (EET) to the EEA funds market on 30 March 2022. Agenda to follow soon.