6 November 2024

EU Regulatory catch-up

A) Retail Investment Strategy latest

1. EU-RIS overall status

The aim of the EC’s adopted retail investment strategy (RIS) is to “empower consumer investors to make investment decisions that are aligned with their needs and preferences, ensuring they are treated fairly and duly protected.”

A reminder that all three EU legal bodies had previously formed their respective positions on the ambitious RIS legal package, ahead of lengthy negotiations to finalise the revised Level 1 rules:

May 2023: EU Commission (EC) unveil proposed ‘Omnibus’ Directive[including UCITS, AIFMD, MiFID regime updates] and revised PRIIPs Regulation;
April 2024: EU Parliament (EP) finalise their amended ‘Omnibus’ Directive and PRIIPs legal texts;
June 2024: Council of EU (CoEU) reach consensus on their ‘Omnibus’ Directive, PRIIPs

Since our last update, there remains no indication when the EU ‘trilogue’ negotiations will begin.

Some now assume these may be delayed until 2025 (i.e. when Poland assume the 6-month rotating CoEU presidency).

Given the complexity of the proposed legal amendments, EU talks are expected to be prolonged (at least 12 months). As before, the application dates of each RIS legal text remains a crucial discussion item.

2. Recap: major EU-RIS components

a) ‘Value for Money’ framework

One of the main RIS objectives is to “ensure investment products bring real value for money to retail investors”; this is achieved by “developing benchmarks against which the value of financial products need to assessed”. The epic draft ‘Omnibus’ Directive contains proposed product disclosure measures, “…to ensure that undue costs are not charged, and products deliver value for money to retail investors”.

At this stage, the EU bodies hold differing opinions on how the ‘Value for Money’ [VfM] concept can be delivered.

Since 2020, the European Insurance and Occupational Pensions Authority (EIOPA) have been seeking to mitigate ‘Value for Money risks’ as a key priority. Last December, they consulted on a proposed method to create ‘VfM benchmarks’ for unit-linked and hybrid insurance products.

On 7 October, EIOPA unveiled their finalised, ‘three-step’ VfM benchmark methodology; this is said to “balance the need for comparability between similar products and limitations on data collection”:

Step 1 – Product ‘clusters’: products with similar features are ‘clustered’ into groups, based on policyholders’ needs. This is based on a list of criteria for categorising products. EIOPA say this step is “fundamental… to bring much-needed comparability to products distributed across Europe”.
Step 2 – VfM indicators:EIOPA’s method defines indicators for costs and returns, around which value for money benchmarks are calculated. Specific indicators allow for a more transparent, efficient and reliable comparison of products. This will help identify products “that offer poor or no value to consumers and lead to more supervisory scrutiny”.
Step 3 – Setting benchmarks:to calculate benchmarks, EIOPA will use the data already collected to prepare their annual Costs and Past Performance [CPP] report (e.g. PRIIPs KIDs). No additional reporting is required.

NB: the entire document is essential reading for those seeking to visualise how the EU’s VfM idea could be achieved.

b) ‘Simplified’ digital PRIIPs-KID

The EC also proposed a “modernised and simplified” EU-PRIIPs KID, with ‘targeted changes’ including:

New ‘Product at a glance’ summary and ‘How environmentally sustainable is this product? sections;
‘Electronic format’: legally defined as the default PRIIPs-KID medium (unless a paper version is requested;
KIDs provided by means of an ‘interactive tool’, enabling investors to generate personalised key Information.

NB: The EC also said it “was relevant to make the document more user-friendly …in parallel to making the information available on the European Single Access Point [ESAP]” (i.e. effective from 10 January 2028).

B) Other EU updates

1. Pending PRIIPs TC update

The current EU-PRIIPs Level 2 RTS enables UCITS to utilise the ‘new PRIIPs’ method to calculate implicit transaction costs. That option ends on 31 December 2024; ongoing, EU fund firms must instead align their cost calculations using the ‘Arrival Price’ method, based on the average of transactions executed over the previous 3 years.

The charges must be calculated each time a KID is revised (per RTS art. 16), following a general review process that must take place at least every 12 months (or any interim event likely to “significantly affect” the information previously disclosed).

NB: As always, firms should be mindful of their duty to ensure all information contained in the PRIIPs KID “remains accurate, fair, clear, and non-misleading”. They should also recall respective NCA preferences (e.g. the CSSF, who now “encourage” local UCITS firms to annually update and submit their PRIIPs KID to them, within 35 business days of each calendar year-end.

2. ESAP rules finalised

You may recall ESAP is the strategic ‘single point of access’ platform for EU public financial, non-financial and sustainability-related information about companies and financial products. The European Securities and Markets Authority (ESMA) are now mandated to ‘establish and operate’ an ESAP before 10 July 2027.

Last week, the joint European Supervisory Authorities (including EIOPA and ESMA) published a final report with draft technical standards to facilitate access to ESAP information. This responds to a previous consultation covering:

• ‘Collection Body tasks: covering automated information validation, Qualified Electronic Seal attributes, open standard licenses, data collection API characteristics, plus an “indicative list’ of ‘acceptable’ formats:

- ‘Data-extractable’: HTML, PDF and txt formats will be accepted
- ‘Machine-readable’: XML, XBRL, XBRL-csv, XBRL-xml and inline XBRL formats will be accepted.

• ESAP functionalities: such as data publication API characteristics, legal entity identifiers, information type classifications and industry sector categories.

The draft RTS is declared to be the “first milestone for the successful establishment of a fully operational ESAP”.

The EC now has until 29 January 2025 (extendible by one month) to decide whether to adopt these standards.

3. AIFMD II / UCITS VI latest

ESMA’s dual consultation on Liquidity Management Tools (LMTs) for AIF and UCITS firms ended on 8 October.

They now have until 16 April 2025 to deliver finalised LMT technical standards and guidelines to the EC.

Other items on ESMA’s extensive ‘AIFMD II / UCITS VI’ to-do list (per stated EC deadlines) include:

• 16 April 2025: Draft technical standards on open-ended Loan Origination AIFs (LOFs).

• 16 Oct 2025: Report on Costs charged by UCITS and AIFMs: this depends on EU regulators providing ESMA “on a one-time basis with data on costs including all fees, charges and expenses which are directly or indirectly borne by the investors” per fund firm operations. An ESMA spokesperson has confirmed they “need to run a data collection” exercise through national regulators, who in turn “might ask the industry if they don’t have the relevant data“.

• 16 April 2026: Report on how to develop the integrated collection of supervisory data: in their recently published 2025 work programme, ESMA pledge to “continue the work on integrated supervisory data collecting”; their “development of an integrated reporting system, preceded by studies and subsequent report on AIFMD/UCITS integrated supervisory data collection” is also listed as a ‘key objective’. It is widely expected ESMA will proceed with a public consultation on this subject, mid-2025.

• 16 April 2027: Draft technical standards on AIF, UCITS supervisory reporting: ESMA are currently not expected to publicly consult on revised ‘Annex IV’-type reporting, until 2026.

Separately, ESMA continue to work on their UCITS eligible assets technical advice; originally required before 31 October 2024, ESMA’s new work programme confirms this is now pushed back to 2025.

4. ELTIF II RTS now applies

The ELTIF II Level 2 RTS was finally published in the EU Official Journal on 25 October and now applies directly.

Revised EU long-term investment fund rules include the use of financial derivative instruments solely for hedging purposes, redemption policy, permitted LMTs and certain elements of the costs disclosure.

NB: there are now almost 140 authorised ELTIF products, according to ESMA’s latest EU register.

5. ESMA favour ‘step-by-step’ shift to centralised supervision

The head of ESMA recently told the Financial Times there should be “a gradual shift to more centralised supervision in the bloc, starting with oversight of large “cross-border players… such as Deutsche Börse and Euronext”.

A recent EU report by ex-ECB president Mario Draghi also called for ESMA to “transition from a body that coordinates national regulators into the single common regulator for all EU securities markets, similar to the US Securities and Exchange Commission”.

NB: this idea is directly opposed by EU member states, such as Luxembourg and Ireland, said to “fear it could undermine their thriving financial sectors”.

C) Local NCA updates

1. Luxembourg: CSSF

a) PRIIPs KID transmission user guide published

In Luxembourg, the CSSF have published their long-awaited PRIIPs KID submission procedures; from 15 November 2024, only the eDesk application or S3 [API] channel can be used for submitting KIDs.

NB: Kneip have been tracking the CSSF’s PRIIPs user guide since 2023 and remain on-track to re-align our local PRIIPs KID processing (i.e. in co-ordination with those clients impacted), within the time available.

b) CBDF notifications updated

The CSSF also recently informed their supervised UCITS and AIF firms of new information required in relation to the cross-border marketing notifications. This will be collected through marketing notification and de-notification requests, starting from 11 November 2024.

These are now listed in CSSF’s revised CBDF user guide (V2.4), covering respective eDesk / S3 [API] processing.

c) Fund charges data collection ‘pending’

It is reported this week the CSSF is planning “to launch a data collection exercise examining the expenses funds charge investors in the near future”. As mentioned above, this will provide ESMA with the information necessary to prepare their UCITS / AIF charges report before the October 2025 deadline.

A CSSF questionnaire is expected to be sent to local firms “later this year…outside the normal cycle” of reporting.

2. Ireland: CBI

a) Overseas Fund Regime prospectus updates flagged

The Central Bank of Ireland (CBI) has reminded local UCITS planning their transition to the UK Overseas Fund Regime [OFR] they “may be required to make changes to fund offering documents”, to comply with the FCA rules.

Any prospectus amendments must be submitted to the CBI as a ‘post-authorisation update’, via two options:

Specific changes, filed via CBI Portal, using the “UCITS/AIF Country Supplement” Request Change; or
The entire amended prospects submitted to the Funds Post-Authorisation team via the CBI Portal, using the “UCITS/RIAIF: Prospectus/Supplement review – No new sub-funds” Request Change.

NB: CBI submissions per option ii) will be “subject to a lengthier and more detailed review process. This should be factored into timelines for the submission of the OFR application to the Financial Conduct Authority”.

b) ETF share class naming rules changed

As widely reported in the financial media, the CBI have now signalled their intent to amend the share class naming rules for local exchange-traded funds [ETFs].

The CBI stated total AUM of Irish-based ETFs has grown from EUR162bn in 2014 to EUR1.45tn this year.

Ahead of the CBI’s revised ‘UCITS Regulations’ law and ‘Q&A’ guidance, they also confirmed ETF share classes can be launched within local mutual funds, without the ‘UCITS ETF’ moniker currently required at the sub-fund level.

This follows extensive industry requests for the CBI to re-align with the CSSF, whose rules require only the listed share class to include ‘UCITS ETF’ in its name (i.e. without having to change the sub-fund name).

c) CBDF notification process clarified

The CBI also recently confirmed their amended process for the submission of UCITS and AIF cross-border passport notifications and de-notifications.

The ‘UCITS Outward Marketing Requirements’section now refers to submission of the notification letter via Central Bank portal;
A new document is now available: ‘Portal – A Guide to Submitting CBDIF Passporting Applications‘:

3. Germany: BaFin amend CBDF processing

During the summer, the French AMF and Belgian FSMA were among the first NCAs to confirm respective cross-border notification forms for use by local UCITS/AIF firms, seeking to carry out activities within another EU member state.

More recently in Germany, BaFin have now published revised versions of their ‘cross-border’ guidance notices.

They have updated their guidance note pertaining to local marketing of units of EU-UCITS, per section 310 of the local Investment Code; their cross-border fund notifications fee process is also amended.

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D) EU Market trends, opinions

1. EU firms ‘underestimate’ UK overseas fund requirements

“The CBI has been working closely with both the FCA and EU peer regulators to ensure that the commencement of the OFR is successful, and that investment funds and their managers are aware of their obligations.”
Central Bank of Ireland spokesperson (Sep 2024)

As highlighted by the CBI, experts are warning EU fund firms not to underestimate the work necessary to transition their UCITS products (i.e. currently permitted to market on a “temporary” basis) across to the new UK Overseas Fund Regime.

One legal firm said that managers expecting a simple, UCITS EU-passporting-type FCA notification have “…now realised this is an application process.” They point to some Irish firms not realising “the need to engage with both the FCA and the CBI”, to identify new UK supplement disclosures required within their EU fund prospectus.

Another counsel said “many in the European fund industry” still expect a ‘light-touch’ OFR transition process, despite the possibility of revised prospectus disclosures, ahead of likely additional ESG product disclosures per UK-SDR.

Additional challenges facing EU-UCITS firms include information gathering for OFR online application forms, obtaining regulatory permission to issue financial promotions in the UK, alongside interim distributor engagement.