Brexit is the elephant in the room (and you can read my latest update on it here), but another major challenge of the moment is the Capital Markets Union. The CMU is an epic initiative designed to align and integrate the entire EU financial system, including asset management, banking, pensions and insurance industries. The accomplishments of the CMU may well determine the future of the entire European Project (now evolving for 70 years) including the ability of its institutions to serve all citizens, young and old alike. Containing no less than 16 initiatives, it is now expected to pick up acceleration (following post-EU election hiatus). Specific areas of continued Kneip focus include:
- Cross-Border Distribution of Funds: an updated passport regime applied across UCITS, AIF, including additional obligations covering marketing communications, ex-ante NCA notifications, cost & charges information (plus ESMA central database), starting H1 2021. How will the UK firms and funds be impacted in the wake of the Brexit outcome?
- Pan-European Personal Pensions: a new product offering savers a fixed low-cost flexible, transferable means of retirement, likely available from H1 2022. Can enough prospective PEPP-providers be able to manage these products within the available margin (1 % fees per annum)? How will EU member states align their pension industries and tax regimes to enable portability?
- Sustainable Finance Action Plan: perhaps the most ambitious part of the CMU is driven by legislation to classify sustainable activities (Taxonomy), enhance non-financial information made available to investors and regulators (Disclosure) and improve transparency on investment portfolio carbon footprints (Benchmarks). During a phased period (currently H2 2020 – H1 2023), there will be additional Delegated Acts for MiFID II, UCITS and AIFMD, including obligations for manufacturers & distributor Target Markets and extended Due Diligence (addressing conflicts of interest and principal adverse impact). Will fund managers be able to reconcile set Environmental, Social & Governance (ESG) obligations with their investment objectives and investor returns? Can non-prescriptive measures be made universally practicable and readily enforceable by regulators? Meanwhile, with mass-organised pressure movements (e.g. Extinction Rebellion) now emerging, activism will no longer be restricted to investors at shareholder general meetings.
Otherwise, practically everything else we know is currently under re-examination.
- UCITS: fund managers are already obliged to complete their review of Active, Passive funds “as soon as practicable or by the next update to the KIID.” The KIID must be revised and aligned (to Prospectus and marketing materials) wherever Investment Objective, Past Performance and Benchmark content is ambivalent.
- AIFMD: the European Commission (following on from KPMG’s contribution earlier this year) are expected to publish their definitive AIFMD Review report in Q1, 2020, which may include re-aligned revisions not only to the Annex IV template, but also UCITS reporting).
- PRIIPS: the European Supervisory Authorities currently consult (until January 2020) on their targeted proposals to amend the Key Investor Document (KID) delegated regulation, including revised Performance / Risk scenarios and Costs / Charges. It has been reported recently that the European Commission may defer a generic PRIIPS Review report (including consumer test results) until the end of next year. If confirmed, this means the current PRIIPS KID will most probably continue until end-2021, alongside its simpler UCITS predecessor (KIID). Meanwhile, additional KID variations will emerge during the interim, to be prepared by manufacturers of EU Personal Pension products and financial instruments sold to retail clients in Switzerland.
Finally, the longer-term picture continues to provoke lively debate. Are EU fund liquidity stress testing rules sufficient to mitigate systemic risks? How likely is a 3rd class of investment product (e.g. “complex” absolute return) alongside UCITS, AIFMD? How will blockchain impact the funds industry? Could asset managers become obsolete (as opined by the Bank of England governor in-waiting)?