22 March 2024

EU, UK regulatory catch-up

A) EU latest: retail investment strategy (RIS)

1.RIS: where we are now

This week, the “most ambitious legislative proposal since the inception of EU financial regulation” edged forward.

Within the European Parliament (EP), a pivotal committee vote on Wednesday evening approved the latest amended legal texts, enabling formal scrutiny at next month’s plenary session.

However, with the Council of EU (CoEU) preoccupied with other priorities, it seems unlikely the incumbent European Commission (EC) will see their Retail Investment Strategy (RIS) legal package progress to the next ‘trilogue’ stage before the EU elections in June.


 2.Reminder: how we got here

A very quick recap of the main RIS events, so far:

24 Sep 2020: Capital Markets Union (CMU): action added to ‘build retail investors’ trust in capital markets’
24 May 2023:  EC unveil landmark RIS package of legal measures [previously summarised by Kneip]:
  ○  Omnibus’ Directive: to extend EU retail investor protection, including updates to AIFMD, UCITS, MiFID II regimes;
  ○  PRIIPs Regulation: to modernise the key information document.
■ 28 Aug 2023: RIS public feedback period ends [comments submitted available here]
05 Oct 2023: EP-ECON publish RIS initial counter-proposals [per  marked-up Omnibus Directive and PRIIPs Regulation]
■ 27 Nov 2023: EFAMA highlight industry RIS priority areas [per leaflet here]
■ 31 Dec 2023: Spain pass CoEU presidency to Belgium: main RIS topics unresolved [per report here]
■ Mar 2024: EP-ECON ‘shadow’ discussions end; committee vote to adopt legal RIS texts.



3. RIS latest: EP-ECON

The Committee on Economic & Monetary Affairs [ECON] is responsible for managing financial services law on behalf of the European Parliament; they play a key role within the standard EU legal procedure (i.e. amending draft EC legislation, ahead of negotiations with the CoEU) as part of the finalisation / approval process.

Last October, the lead EP-ECON rapporteur published marked-up versions of draft RIS legal texts; key counter-proposals included removing initial ‘Value for Money’ benchmark rules and extending RIS legal application timelines. Until recently, discussions were underway with other EP-ECON ‘shadow’ members, to agree compromises on the legal texts, to enable finalised drafts to be formally reviewed by the EU Parliament.

However, continued dissent over the proposed exclusion of inducement bans (i.e. supported by asset managers, but rejected by consumer groups) caused interim talks to end without agreement; this prompted the lead ECON rapporteur to publicly criticise the Social & Democrats and Greens/EFA parliamentary groups for their withdrawal.

On Wednesday 20 March, the EP-ECON committee voted to approve both revised RIS legal texts. These should now be considered during the EP plenary session, provisionally scheduled for 22 April 2024.



 4. RIS latest: CoEU

As EU co-legislator, the actions of the CoEU also remain of critical importance. According to reliable sources, member states within the CoEU have yet to form a majority position on the RIS package.

 While the current Belgian presidency pledge “to continue the work complete the Capital Markets Union” within their current CoEU programme, “retail investment strategy” is mentioned only once in the entire 49-page document.

Although the CoEU Financial Services Working Party also met this week to continue scrutiny of the legal package, most in the industry do not expect the CoEU to reach a consensus before June 2024.


5. RIS: what next?

Based on the above, at this stage: the EU ‘trilogue’ discussions to decide the final RIS legal texts are unlikely to begin until Q4-2024 (i.e. once the outcome of the EU elections becomes clear). In the meantime, we will summarise the latest marked-up versions of the RIS legal texts, once these are made formally available.


B) EU latest: other long-term changes

 1. ‘AIFMD II’/UCITS VI’: finally adopted by EP, CoEU

In contrast to the EU-RIS package, the established Alternative Investment Fund Management Directive (AIFMD) has almost reached the end of a separate legal review process, lasting almost 7 years.

On 26 February, the CoEU formally adopted the finalised ‘AIFMD II’ legal text (including specific UCITS Directive changes, to align both EU regimes). This followed earlier EP approval during a recent plenary session.

The 156-page AIFMD II / UCITS VI Directive will be published in the EU Official Journal (EUOJ) within a few weeks.

  • The ‘Level 1’ text will enter into force 20 days after EUOJ publication; thereafter:
  • EU Member States have 24 months to transpose most rules into national legislation, except:
  • NCA supervisory reporting frameworks: reliant on draft technical standards, required within 36 months.


Following EUOJ publication, the European Securities and Markets Authority (ESMA) will have to deliver many pieces of work within the stated timeframes, including:

  • Guidelines: liquidity management tools for selection by AIFMs, UCITS firms (within 12 months);
  • Draft RTS: liquidity management tool characteristics available to AIFMs, UCITS firms: (within 12 months);
  • Guidelines*: UCITS, AIF product names deemed to be “unfair, unclear or misleading” (within 24 months);
  • Report: how to develop the integrated collection of supervisory data (within 24 months);
  • Draft RTS: revised AIFMD supervisory reporting framework (within 36 months);
  • Draft RTS: new UCITS supervisory reporting framework (within 36 months).


*NB: a reminder that ESMA intend to use their new AIFMD/UCITS legal mandate to quickly finalise their long-disputed ESG fund-naming guidance. This will likely apply from Q3-2024 for all new EU fund launches, with a six-month transition period made available for pre-existing products to align.

2. EP approve EU AI Act

Last Wednesday, the EP adopted the EU Artificial Intelligence Regulation (‘AI Act’).

This epic 459-page legal text (spread across thirteen chapters, 113 legal articles, with 13 separate Annexes) defines EU-wide rules on data quality, integrity, transparency, human oversight and accountability in relation to the development, marketing, implementation and use of ‘artificial intelligence (AI) systems’.

Generally recognised as the world’s first comprehensive legal AI framework,  the AI Act will apply not only to those ‘providers’, ‘importers’, ‘distributors’ and/or ‘manufacturers’ of ‘AI systems’, but also to ‘deployers’ (i.e. those using AI systems for non-personal, professional purposes).

The AI Act will operate on risk-based approach, with varying obligations applicable, depending on the level of risk identified [i.e. ‘unacceptable’, ‘high’, ‘limited’, ‘minimal’].

Failure to conform with the AI Act can lead to financial penalties exceeding €35 million [up to 7% of global annual revenue] for non-compliance with ‘prohibited AI Practices’ (linked to listed criminal offenses); other breach instances may result in fines of up to €15 million [up to 3% of global annual revenue].

The AI Act now awaits formal endorsement by the CoEU. Once approved, it will enter into force 20 days after EUOJ publication.  Although most of the AI Act will apply within 36 months, specific provisions take effect much earlier (e.g. ‘prohibited AI practices’ rules apply within 6 months, while penalties may be incurred after 1 year).


3. ESAs: consult on ESAP

The European Supervisory Authorities (ESAs) recently consulted on the new European Single Access Point (ESAP).

Interested parties were asked to provide views on the ESA’s draft technical standards relating to:

  • Tasks of ‘Collection Bodies’: e.g. automated validations, open standard licenses, data collection API, ‘acceptable’ data-extractable & machine-readable formats;
  • ESAP functionalities: e.g. data publication API, legal entity identifiers, classification of information types and industry sectors.

The ESAs will now consider feedback ahead of publishing a Final Report (incl. draft ‘Level 2’ specifications) required before 10 September 2024.


C) other EU updates

 1. ESAs update PRIIPs Q&A

On Friday 15 March, the European Supervisory Authorities (ESAs) updated their EU-PRIIPs KID Q&A.

Latest available ESA guidance refers to:

  • General topics: meaning of the term “PRIIPs open to subscription” (p.9);
  • ‘What is this product?’: incl. difference between “benchmark” vs. “proxy” (p.15-17);
  • Market Risk Assessment [Annex II]: incl. 5 YR of daily NAV data unavailable, “synthetic proxy” (p.25-26);
  • Summary Risk Indicator [Annex III]: ‘Currency Risk’ per Element C (p.36);
  • Performance Scenarios [Annexes IV,V]: no exit until end-RHP interim disclosure (p.44);
  • Past performance [Annex VIII]: duly revised, 35 BD post-Y/E deadline (p.47-48);
  • Presentation of Costs [Annex VII]: year 1 alignment of table 1, 2 (p.81).


  2. EC complete review of ELTIF II draft RTS

You may recall that although the revamped EU long-term investment funds (ELTIF) regime began to legally apply on 10 January 2024, ESMA were late in delivering their draft RTS within the required schedule.

 Last week, it was announced that the EC had written to ESMA to notify they will only adopt their proposed Level 2 legal text if significant amendments are made.  Most relate to “necessarycalibration of the requirements relating to redemptions and liquidity management tools”.

The EC also cite key issues with the proposed ELTIF II costs disclosure methodology; this is said to diverge from PRIIPs, MiFID II and AIFMD regime rules and would “cause uncertainty and additional operational burdensPart of the necessary changes will require ESMA to remove their ‘ELTIF overall cost ratio’ (previously specified in an Annex).

 ESMA now has until mid-April 2024 to resubmit an amended draft ELTIF II RTS (i.e. based on EC comments).

D) UK latest

 1. OFR: HTM finally confirm EEA-UCITS ‘equivalence’

Nearly two years after launching their Overseas Fund Regime (OFR), the UK Government finally confirmed they will treat EU-UCITS products as legally ‘equivalent’ to local funds.

Following their detailed assessment by the UK Treasury, it has been decided:

  • EEA/EU member states will be considered ‘equivalent’ within the new OFR;
  • At this time: EU-products will not be required to comply with any additional UK requirements (e.g. annual Value for Money assessment);
  • GovUK will consult on whether EU-UCITS (within the OFR) should be within scope of the local Sustainability Disclosure Requirements (SDR) and fund labelling regime (pending from 31 July 2024).

To enable a “smooth transition”, the temporary marketing permissions regime (TMPR) is extended until end-2026.

The Financial Conduct Authority (FCA) previous OFR consultation has now ended, with final rules expected to appear during Q2-2024. These will confirm how EU-UCITS should apply for FCA recognition and what OFR rules need to be followed, ongoing.


2. EMT consultation now in progress

Also on 15 March, FinDatEx published a new version of their European MiFID Template (EMT) for consultation.

As proposed by the Investment Association (IA), the latest EMT V4.2 includes additional UK-specific fields itemising ‘synthetic’ and ‘real asset components’ of the total ongoing charges; this is part of a response to a FCA ‘cost forbearance’ statement made last year in relation to PRIIPs / UCITSThere is also a new indicator of funds that will produce SDR consumer-facing disclosures in due course.

The FinDatEx consultation is open until 5 April.

Meanwhile, the IA will hold an education session on the latest EMT changes on Monday 25 March, 9am (UK).


E) Latest market trends, opinion

 1. Eurogroup call for more EU retail investor legislation

Last week, the Eurogroup of EU ministers published a statement on the future of the Capital Markets Union (CMU).

The group conclude the current CMU action plans (including the retail investment strategy), are “far from reaching their full potential”.

They also look ahead to the next EU legislative term (2024-2029), following the June EP elections.

Proposed measures include the need to ‘create an attractive, easy-to-use and consumer-centric investment environment’; this will require the EC to deal with the unresolved RIS legal package, while “coming forward with [more] legislative proposals to facilitate retail access to an easy-to use digital investment environment.


2. Investment trust campaigners step up protests

Also last week, 114 co-signatories wrote a letter to The Times newspaper, calling for UK investment trusts to be removed from the UK-AIFMD regime.

It is claimed this UK sector has been “spiralling into a deepening crisis”, having been “shunned by investors and investment platforms because of EU regulation which, although it does not apply to any listed investment companies in Europe, remains on the UK statute book”.

This follows a recent bad-tempered session at the House of Lords, as Peers discussed a Private Members Bill that would exempt listed investment companies from the locally transposed AIFMD legislation.

A reminder that last November, the FCA made another interim ‘cost forbearance’ statement, covering investment company cost disclosure.

The UK campaigners have since launched their own website.


3. Firms consider ‘bolting’ LTAFs onto EU funds

It is rumoured that firms are seeking to use the UK Long-Term Asset Fund (LTAF) as part of a post-Brexit remedy.

One legal firm cites “several asset managers have advanced plans” to set up LTAFs as feeder funds for EU-master products, such as AIFs.  Another expert reckons the arch-rival ELTIF “could be an attractive master fund for LTAF managers”; depending on the outcome of the draft RTS now being finalised by the EC/ESMA.


4. SMSG advise ESMA on Digitalisation, Retail Investor Protection

ESMA’s discussion on MiFID II Digitalisation and Retail Investor protection ended on 14 March 2024.

In their response paper, the Securities and Markets Stakeholder Group (SMSG) support data-layering but are concerned this may “hide dark patterns which may lead to conflicts of interest and manipulation”.

The SMSG also point to “digital asymmetry in power, control and knowledge” and “potential market stability consequences”, which need to be addressed by “regulatory actions” across other EU legal regimes.


5. Eire closes AUM gap with Luxembourg

Finally, today EFAMA published their latest International Statistics quarterly report, covering investment fund assets.

Five European countries are currently ranked in the top 10 largest global fund domiciles, with Luxembourg [7.9%] comfortably ahead of Ireland [6.1%], Germany [3.9%], France [3.4%], and the UK [2.8%].

However, research highlighted by Ignites Europe indicates that Ireland-domiciled fund AUM may overtake those in Luxembourg within 5 years, if recent market growth rates are upheld.

Main drivers are said to include the rapid growth of Eire-based exchange-traded funds (ETFs) – requiring specialised knowledge and experience – alongside local tax incentives. 

During this week’s ALFI Global conference, the Luxembourg finance minister stated his intention to “reduce” the subscription tax for actively-managed local ETFs; those tracking indices have been exempt since 2010.



Article written by Mark Kilbride
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