Latest regulatory update
1. PRIIPs latest: EU, UK
a) EU-PRIIPs: updated RTS deferral not yet endorsed
The updated EU-PRIIPs KID regulatory technical specification (RTS) prepared by the European Supervisory Authorities (ESAs) is currently scheduled to apply from 1 July 2022. With only a few days remaining, we can confirm today that the EU lawmakers have now finished scrutiny of the latest “PRIIPs quick-fix” to defer RTS application until 31 December 2022 (to align with the EU-UCITS exemption period).
Presumably, the key delegated act will now be published in the EU official journal, at the earliest.
NB: confirmation update to follow.
b) CEPT: updated by FinDataEx
On 31 May, the European Comfort PRIIPs Template (CEPT v.2.0) was formally updated by the FinDatEx PRIIPs technical working group (including Kneip). This is necessary to reflect the modified rules and data specified within the latest EU-PRIIPS KID RTS (i.e. as per recently updated EPT v2.0).
c) FinSA: recent Swiss KID developments
Back in 2014, the Swiss Federal Collective Investment Schemes Act (CISA) was updated to categorise qualified investors and non-qualified investors. CH-CISA scope includes UCITS and non-UCITS foreign open- ended collective investment schemes, domiciled within the EU/EEA and the UK.
There are around 8,500 of these funds currently registered with the local Financial Market Supervisory Authority (FINMA). From 1 January 2023, the latest 2020 Financial Services Act (FinSA) will oblige any foreign fund authorised for sale to Swiss non-qualified investors to produce either a local basic information sheet (BIB) or a EU-PRIIPS KID (both deemed legally ‘equivalent’). This will replace the current option for firms to disclose a UCITS KIID, which ends on 31 December 2022 , as per EU-PRIIPs regime.
NB: At this stage, we understand that most firms impacted intend to deploy the EU-PRIIPS KID to meet their Swiss distribution obligation. Meanwhile, FINMA have yet to comment on whether the new UK-PRIIPS KID will be accepted on behalf of those (minority) UK funds currently registered.
d) ESMA: PRIIPS “key plank” in pending EU retail strategy
Speaking at the recent Irish Funds Global Funds Conference (co-sponsored by Kneip), the head of the European Securities and Markets Authority (ESMA) re-affirmed that PRIIPs remains “a key plank in the EU retail investor disclosure framework”.
Verena Ross acknowledged that “a significant number of changes to the PRIIPs regulation are needed” and urged the European Commission (EC) to “consider a broad review of the PRIIPs framework”. Ms. Ross also referred to the 150-pages of PRIIPS technical advice published last month, which she now hopes will be “taken on board” in the EC’s milestone retail investor strategy, expected to appear within the next few weeks.
e) UK-PRIIPs: short, long term prospects
Across the channel, the longer-term outlook for the UK-PRIIPs regime seems more doubtful.
Citywire / New Model Adviser recently reported that the UK Treasury are “having preliminary discussions” with the FCA, including either “scrapping PRIIPs entirely” or “massively revamping the regulation.”
Meanwhile, the year-end deadline creeps closer for fund firms preparing for the diverging UK regime. Product manufacturers have until 1 Jan 2023 to produce a UK-PRIIPS KID, as specified by the Financial Conduct Authority (FCA) in their UK-RTS. The UK has already extended the local exemption for all UCITS firms by five years (to 31 December 2026). However, the UK Government has yet to formally verify whether the FCA can accept an updated EU-PRIIPs KID issued by EEA UCITS firms (authorised to market funds to UK investors), within the same timeframe.
It also remains unclear what will locally transpire with the European PRIIPS template (EPT). Since 2018, the EPT has been recognised as a standard means for data disclosure within both the UK and EU fund markets; it has already been updated in accordance with the latest EU-KID RTS.
2. AIFMD latest: UK, EU
a) UK-AIFMD: new reporting deadline extended by 3 months
Within the past few days, the FCA has notified AIFM firms of a three-month extended deadline for submission of their first set of UK-AIFMD reporting, based on the recently revised local Annex IV data definitions and schema. AIF001 and AIF002 transparency information due for Q2-2022 (facing the standard 1 August 2022 deadline) can now be submitted up until 31 October 2022. However, we understand that AIF firms can also file their supervisory reporting (via RegData) within the original timeframe.
b) EU-AIFMD: ESMA update NCA leverage risk assessment status
Last week, ESMA re-issued their Compliance Table showing the status of EEA national competent authorities (NCAs) intending to comply with their Guidance on AIFMs managing leverage in their portfolio.
Ongoing, all NCAs now intend to perform a quarterly assessment of leverage-related systemic risk, primarily based on periodic AIFM data received per Annex IV reporting (including Value-at-risk, Net FX delta and Net commodity delta risk measures).
c) EU-AIFMD: EP issue draft AIFMD II, UCITS VI response
Last month, the European Parliament (EP) issued their initial 72-page response to the EC’s initial plans for directly amending the current AIFMD and UCITS legal regimes. This follows the draft directive and annex published by the EC last November, as part of their Capital Markets Union (CMU) strategy.
This draft EP opinion comes at an “early stage” of the EU legal due process, with any change to either AIFMD or UCITS level 1 directives unlikely before late 2024-2025.
In the meantime, the EP has made 117 proposed amendments, including:
- Delegation: the EP propose that detailed information on delegation arrangements should be added to the AIFM’s annual Annex IV reporting They also “acknowledge the diversity of distribution arrangements”, and state that independent third parties (not acting as the delegate of the AIFM) should be exempt from AIFMD II delegation requirements, ongoing.
- ‘Professional client’ definition: for revised AIFMD purposes, this would be either:
- the current MiFID II legal definition (incl. retail clients requesting to be treated as professional),
- investors committed to investing at least EUR 100 000 (formally stating their risk awareness), or
- Senior staff personnel or affiliates of the AIF manger, with “sufficient knowledge”.
- Liquidity management tools (LMTs): the AIFM and UCITS firm bear primary responsibility for LMT selection process, with any NCA intervention kept as a last The lists of LMTs available to both open-ended AIF and UCITS fund firms remain intact (EC draft annex II and IV).
- Disclosures and reporting: the EC’s draft AIFMD 24 reporting revisions should be extended to include “any other relevant economic and accounting information”. Furthermore, another eight supervisory reporting information criteria have been added, including the total amount of NAV leverage employed by the AIF.
Elsewhere, the EP cite the need for ESMA to cover “methods and arrangements for submitting” the new UCITS supervisory reporting, including “improved data standardisation, efficient sharing and use of data already reported within any Union reporting framework by any relevant competent authority, at Union or national level.”
3. Latest ESMA (non-ESG) publications
Aside from their essential sustainable finance guidance (summarised recently elsewhere), here are more recent ESMA publications of interest:
a) ESMA: Eastern Europe public statement
ESMA issued a public statement to “promote convergence” of actions now being taken by firms managing the impact on fund portfolios with exposure to Russian, Belarusian and Ukrainian assets.
This included a reminder that UCITS and AIF firms should “manage investment funds in the best interest of investors, have adequate liquidity management systems in place and ensure fair valuation of assets.”
ESMA’s guidance covering use of LMTs (including ‘permissibility’ of side pockets) attracted media attention.
b) ESMA: recent Costs and Fees updates
ESMA published a report on the Common Supervisory Action (CSA) covering UCITS costs & fees, that was carried out with National Competent Authorities (NCAs) during 2021. Key findings included:
- Room for improvement: “particularly for smaller management companies”
- Compliance of delegation rules: “questions arise… where portfolio managers e. delegates exercise significant influence or even decide the level of costs”
- “Divergent” market practices: including varying reportage of “due” or “undue” costs
- “Conflicts of interest”: flagged by some NCAs
While “work will continue” on this topic, ESMA invite their NCAs to “use this opportunity to also consider enforcement actions” wherever “significant” regulatory breaches are identified, “due to the high relevance for investor protection” for this specific area.
Separately, ESMA also recently updated the performance fees guidance sections in their UCITS (p.57-59) and AIFMD (p.53-56) Q&A documents. Both now clarify the performance reference period for the benchmark model, with additional examples to clarify the mechanism of underperformance compensation.
c) ESMA: kick-off CBDF notification consultation
ESMA also recently issued a 69-page consultation paper (CP) on cross-border marketing and management notifications of UCITS and AIFs. This seeks to consolidate the current Cross-border distribution of funds (CBDF) notification regime, where each NCA maintains their local processing (i.e. recently compiled by ESMA).
ESMA’s latest CP contains standardised notification templates for supply by fund firm to their respective NCAs (home and host). The document includes two draft sections:
- UCITS / AIFMD RTS: information to be notified by firms to the relevant NCAs when notifying their intention to carry out their activities in other Member States.
- UCITS / AIFMD ITS: form and content of the notification letters to be submitted by:
- UCITS: to their home NCA to propose to market their units in a host Member State;
- AIFMs: to their home NCA to notify intention to market the units or shares of the AIFs they manage in the home and/or another Member State;
- ManCos, AIFMs: to their home NCA to manage funds established in other Member
The consultation closes on 9 September 2022, with ESMA set to publish a final report early in 2023.
4. Round-up: UK, EU
a) UK: FTAs, FRF and FCA latest
The UK Government appear to be progressing with bilateral, comprehensive free trade deals (FTAs) including financial services, with both Switzerland and Japan.
However, there is still no sign of the UK Government’s confirmed future regulatory framework (FRF).
Last Friday, the Parliamentary Treasury Committee published a 68-page report ‘Future of financial services regulation’ which contained many referrals to the UK-FRF. The cross-party group also highlighted current “opportunities to tailor inherited EU regulations to the UK market, and to seek simplification”. However, they also issued a clear warning to the UK Government before the long-term regulatory strategy is confirmed:
“The Treasury should respect the principle of regulatory independence and must not pressure the regulators to weaken or water down regulatory standards, or to accept changes to the regulatory framework which could impede the regulators’ ability to achieve their primary objectives. If regulatory standards were to be changed or substantially weakened so as to increase the risks to financial stability, UK consumers and taxpayers could be harmed. Simplifying financial regulation and tailoring it appropriately to the UK market must be approached with care, and without compromising regulatory independence.”
Elsewhere, the FCA recently unveiled their co-owned online Regulatory Initiatives Grid, setting out the UK legislative pipeline for the next 24 months.
- The Regulatory Initiatives Grid overview: provides a summarised graphical timeline
- The Initiative details: provides more information about each piece of
The FCA also make the Grid available as an interactive dashboard and an Excel spreadsheet (to help users interact with the underlying data).
b) LU-CSSF: issue CBDF circular
Within the past month, the Commission de Surveillance du Secteur Financier (CSSF) has issued many new circulars, including one directly linked to the CBDF notification regime currently being reviewed by ESMA.
Circular 22/810 relates to UCITS / AIF manager notifications & de-notifications, namely:
- Marketing (and discontinuation of the marketing) of units of UCITS
- Pre-marketing in Luxembourg or another EEA member by Luxembourg-based AIFMs
NB: this has already entered into force and will now “ultimately” repeal the previous circular 11/509 (which established current UCITS notifications, back in April 2011). Ongoing, it will only be possible to complete certain cross-border marketing notifications via their eDesk online tool (launched in May 2018).
The CSSF will maintain a list of “relevant procedures” to be made available “progressively” on their website. This list is to be updated “regularly” and “should be consulted by the entities concerned”.
In due course, the CSSF will “continue to inform entities that fall within the scope of this new circular on the evolution of the eDesk procedures” using “separate press releases.”
*STOP PRESS*: this evening, the CSSF has announced that from 1 July 2022, Luxembourg-based AIFMs must administer their marketing notification and de-notification procedures exclusively via the eDesk Portal.
c) FR-AMF: transaction costs sanctions pending
In France, the Autorité des marchés financiers (AMF) has announced their local findings following the UCITS cost and charges CSA (conducted last year by ESMA). From 2026, the AMF say they will ban “overinflated” transaction costs (“commissions de mouvement”) levied by both UCITS and AIFs firms. They also intend to take measures to prevent “excessive fees” currently levied by passive fund managers.
d) IE-CBI: review fund authorisation process
Finally, the Central Bank of Ireland (CBI) recently confirmed they will complete their extensive review of current local fund authorisation processes by the end of 2022. Meanwhile, they also issued new guidance on how their review / approval processing of investment managers, investment advisers, and non-EU AIF managers will be conducted in the future.