Latest regulatory watch (EU, UK)

A) PRIIPs latest

1. FinDatEx: launch EPT 2.1 consultation

Earlier this month, after much speculation, FinDatEx began a consultation on proposed changes to their European PRIIPS template (EPT), to reflect the diverging UK regime.

After considering different options, the PRIIPs technical working group considered opted for a single template (EPT v2.1) in the effort to integrate both EU and UK markets.  The latest draft version includes an additional UK section, based on local PRIIPs rules applied by the Financial Conduct Authority (FCA) in March 2022.

In the medium term, it is proposed the EPT v2.1 should be used by either:

• UK-based firmsdistributing products to UK investors only, or
• UK and EEA based firms, with investors in both regimes

EEA firms that do not market funds in the UK may continue to deploy the current EPT v2.0 until further notice.

The public consultation is open for feedback until Friday 2 September (this deadline was recently extended).

The finalised EPTv2.1 is expected to be made available before the end of next month.

NB: in the longer term, European trade associations presume a longer-term convergence of both EPT templates will take place.  Meanwhile, another reminder that all European firms intending to market UCITS funds to UK investors must continue producing a UCITS KIID, until 2027.

2. PRIIPS latest: EEA member states

Amid many PRIIPs-related “quick-fixes” over the past few months, you may recall all EEA member states were meant to transpose specific UCITS legal amendments before 30 June 2022.

This is to avert two different pre-contractual disclosure documents (in respect of the same UCITS fund) being presented to investors, when the revised PRIIPS RTS is legally applied on 1 January 2023.

Luxembourg, Ireland,  France and Germany were among those ratifying UCITS updates within the deadline.

The European Commission (EC) recently issued notice letters to member states failing to locally update their UCITS law in time, including Italy, Denmark, Spain, the Netherlands, Austria, Finland and Sweden.

Belgium also received a letter, but published an update in their legal gazette in early-July.

Presumably, all remaining EEA countries will amend their local UCITS laws within the time remaining.

Meanwhile, a reminder of the European Supervisory Authorities’ “unclear reading” of the latest UCITS regime regarding supply of key investor information to national competent authorities (NCAs) after 1 Jan 2023.

Back in May, the ESAs were unable to determine whether:

• PRIIPS-KIDs must be filed with local NCAs (instead of the UCITS KIID), or
• Mandatory NCA filing of UCITS pre-contractual documents will no longer apply

The separate ex-ante notification of PRIIPs KIDs currently remains optional.

Until now, only NCAs in Belgium, Finland, Italy, Portugal and Croatia have chosen to enact this requirement.

Despite their request for “urgent” clarification, the ESAs still await a receive a formal response from the EC.

3. Swiss alignment with EEA-PRIIPs

In Switzerland, the latest Financial Services Act (FinSA) remains directly aligned with the EU PRIIPs regime.

From 1 January 2023, any domestic or foreign fund authorised for sale to Swiss non-qualified investors must produce either a local basic information sheet (BIB), or the EU-PRIIPS KID (i.e. still the only investor disclosure document listed as legally ‘equivalent’ in the local Ordinance, Annex 10).

B) UK regulatory update

1. GovUK: to revoke UCITS, AIFMD, MiFID, PRIIPs (eventually)

Last month, the UK Government presented their revised Financial Services and Markets Act (FSMA).

This was publicized in advance as the ‘bonfire of EU rules’, required to deliver the UK’s post-Brexit Future Regulatory Framework (FRF) following previous consultations in 2020 and 2021.

The latest draft FSMA 2022-23 is 335 pages long (i.e. the largest piece of UK legislation introduced since the original FSMA was enacted back in 2000).  Notable content includes: ​

• General revocation of EU law:hundreds of EEA financial services regimes, including UCITS, AIFMD, PRIIPs and MiFID II​†
• FCAregulation of ‘digital settlement assets’: including stablecoins
• Wholesale Markets changesincluding MiFID II / MiFIR updates (i.e. not directly linked to Kneip products or services).  ​
• Designated Activities Regime (DAR): UK regulators able to create rules legally applied to entities not within the scope of FSMA

NB: at this stage, the UK government is not positioned to instantly annul any EU legislation, until corresponding replacement UK laws are made available by the Treasury. ​ In due course, EU laws removed from the UK statute book will be effectively transferred to the UK regulatory authorities (e.g. FCA), who would assume responsibility for incorporating the necessary rules in their regime handbooks.

Legal sources had earlier quoted insiders admitting the UK legal revocations process will take “a number of years to complete”. ​

2. PM rivals to ‘accelerate’ EU divergence

On 5 September, the UK Conservative Party leadership election winner will become the next Prime Minister.

Both remaining contenders have pledged to accelerate the ‘EU red tape bonfire’, with latest estimates ranging from 100 days to 15 months.

Other ambitious proposals include creating a UK ‘mega-regulator’, after merging the FCA with the Prudential Regulation Authority (PRA).

3. LTAF: FCA propose “mass market distribution”

The FCA have proposed to “broaden the distribution scope” of their Long‑Term Asset Fund (LTAF) structure.

The LTAF was officially launched last November, to facilitate UK investment in long‑term, illiquid assets such as venture capital, private equity, private debt, real estate and Infrastructure.  While gaining much media attention, it is reported that until now, no LTAF launch applications have been submitted by UK fund firms.

Ongoing, the FCA suggest ‘restricted retail investors’ will be able to invest up to 10% of their investable assets into an LTAF, provided they “understand the risks involved and can absorb potential losses”.

The latest consultation is open until 10 October 2022, with a final LTAF policy statement set for early 2023.

4. UK high-risk investment promotion rules updated

The FCA have also published their latest financial promotions rules for ‘high-risk investments’.

These are aligned with their new Consumer Duty regime;  LTAFs are now legally classed as a type of ‘high-risk investment’, alongside Peer-to-Peer (P2P) lending agreements and qualifying cryptoassets.

From 1 December 2022, the FCA expect risk warnings and summaries from firms promoting the relevant high-risk investments, to be included in their respective marketing communications.

C) ESMA recent FinTech updates

1. ESMA: present initial RRI analysis results

ESMA have proposed to adopt a key retail risk indicators (RRIs) framework within the EU single market.

RRIs are now required given recent market developments, especially “the rise of online- or mobile-based retail trading”.  Specific RRIs areas highlighted by ESMA concern:

• Inexperienced investors
• Use of digital tools by younger investors
• Trading “spikes” during periods of market stress.

ESMA say they will continue analysis to refine and develop their RRIs and intend to “broaden the coverage in terms of the products and markets covered” in due course.

EIOPA are separately developing their RRI methodology covering Solvency II (S2).

2. ESMA consult on DLTR guidelines

Back in June, the EC published a new Regulation to initiate a pilot regime for market infrastructures based on distributed ledger technology (DLTR).  The DLTR is scheduled to begin on 23 March 2023.

ESMA have now issued draft guidelines outlining the forms, formats and templates, for those entities applying for permission to operate a DLT market infrastructure during the pilot regime.

This includes MiFID II firms and / or Centralised Security Depositories.

The consultation is open until 9 September 2022.

3. ESMA: “to arm itself with crypto data”

ESMA also recently published a public procurement request to suppliers of trading data on crypto transactions, including spot trades and derivatives.

This relates specifically to crypto off-chain data, with ESMA excluding transactions from blockchain or DLT (which underpins cryptocurrencies, e.g. bitcoin).  Their notice requests coverage to “…encompass all major exchanges and crypto assets so that it provides a fair representation of the crypto market landscape.”

D) Recent market trends

Experts fear “uncompliant” PRIIPs KIDs in 2023

We fast approach the grand UCITS/PRIIPs disclosure changeover on 31 December.

Meanwhile, industry experts observe many fund firms insufficiently prepared in key areas, such as summary risk indicators.  One advisory firm predicts “uncompliant PRIIPs KIDs” will be produced by medium-sized asset managers and “would not underestimate the reputational damage” pending.

Big name crypto ventures continue

Despite the recent global downturn, Abrdn, Schroders, Blackrock and Charles Schwab are the latest big names to announce digital asset ventures. On the other side of the fence, PGIM continue to express scepticism.

Kneip helps clients stay ahead of regulatory changes:

• Kneip plan to make EPT v2.1 available before 30 Sep 2022 (assuming a prompt conclusion to the consultation).
• We will support all revised disclosure regimes linked to UCITS / PRIIPs (per EU, UK, CH law) from 1 Jan 2023.
• We already accommodate evolving long-term investment structures (UK-LTAF, ELTIF), including Annex IV reporting and PRIIPs KIDs where necessary.