It’s time for another summary of key regulatory attention areas over the next 12 months.
1. EU–PRIIPs: a UCITS hangover
As the new year begins, the Cross-Channel divergence of ‘packaged’ retail investment and insurance products (PRIIPs) is set to further accelerate.
In the EU, the PRIIPs key information document (KID) “level 2” RTS was revised back in December 2021 to rectify some of the widely recognised flaws. Unfortunately, guidance expected from the European Supervisory Authorities (ESAs) did not appear until a few weeks ago.
Moreover, EU regulators and UCITS firms did not receive any EC advice relating to expected NCA notifications ahead of the 1 January 2023 transition, despite the ESA’s request for “urgent clarity”.
At the time of writing, details of the varying UCITS / PRIIPs approaches applied by EEA national regulators continue to emerge (i.e. mostly without formal announcements); for instance, compare and contrast the interim regimes recently enacted in Luxembourg, Ireland, France, Austria and Finland.
Meanwhile, EEA-UCITS firms opting to retain the Key investor information documents (KIID) for non-retail share classes must ensure these are updated and filed before the 20 February 2023 deadline.
2. EC to launch Retail Investment Strategy
The European Commission (EC) are expected to formally unveil their EU Retail Investment Strategy (RIS) in April 2023. The original RIS roadmap was published almost two years ago, however, this key plank of the EC’s Capital Markets Union action plan was postponed last spring.
The final RIS package may contain overdue PRIIPs “level 1” legal changes, such as those currently proposed by the ESAs:
- revised EU-KID disclosure of future and past performance information
- adapting the KID to digital media (e.g. machine readability and use of “layered information”)
- enabling consumers to use the KID as an interactive tool (to better compare products)
- obligatory ex-ante PRIIPs KID notification to source the EU Single Access Point (ESAP).
Rumours persist of an annual “value for money assessment” to be prepared by EEA asset managers (similar to the current UK ‘AoV’ regime). At present, it is unclear if a proposed ban on inducements paid to financial advisors will be endorsed.
The RIS may also feature elements of ESMA’s technical advice on MiFID II retail investor protection (including formal re-alignment of MIFID II costs and charges with the PRIIPs framework).
3. UK to confirm post-PRIIPs landscape
In stark contrast with the EU, the PRIIPs era is now poised to end (fairly soon) in the UK.
Last month, the UK Government decided to “commence the repeal of the EU-inherited PRIIPs Regulation as a matter of priority”; they cited “unnecessarily prescriptive measures that led to information being presented to investors in unhelpful, or worse, misleading ways”, together with “burdensome requirements that caused firms to restrict retail access to their products”.
The HM Treasury ‘PRIIPs and UK Retail Disclosure’ consultation will seek views on a suitable replacement framework until 3 March 2023. HMT propose that the Financial Conduct Authority (FCA) will be “empowered to integrate UCITS and PRIIPs disclosure into a coherent UK retail disclosure framework”, before 1 January 2027.
At the same time, the FCA’s recently published ‘Future Disclosure Framework’ discussion paper is said to “complement” the HMT consultation. The UK regulator presents PRIIPs, UCITS, on-shored EU legislation and ESG as the context to stimulate opinion on the delivery, presentation and content of future UK retail disclosure; this will also enable the FCA to assess “additional powers” required to govern the new Overseas Funds Regime (OFR) that came into force last year.
The FCA discussion is open until 7 March 2023, with a separate consultation paper to follow this year.
4. SFDR/TR RTS: climate goalposts shift imminent
On 1 January 2023, the Taxonomy Complementary Climate Delegated Act entered into force.
The industry currently awaits the European Parliament (EP) and Council to complete their scrutiny of the ESA’s latest draft Sustainable Finance Disclosure Regulation (SFDR) RTS, amended to reveal financial products exposed to investment in nuclear and gas activities. This includes revised editions of ‘sustainable’ product website disclosure and pre-contractual & periodic reporting templates.
These interim SFDR changes are likely to be legally published before 1 February 2023. This will enable FinDatEx to formally release an updated EET V1.1 template, containing the necessary supplementary data fields.
5. Other key EU ‘sustainable’ 2023 milestones
There are many other important EU-ESG events to track this year, including:
- EC SFDR Q&A – “to bring some clarity on specific points”: “early 2023”
- EC Taxonomy FAQs (including 200 query responses): “early 2023”
- EC ‘comprehensive assessment’ of SFDR implementation: “early 2023”
- SFDR Art.8 / Art.9 product periodic reporting templates: April 2023
- SFDR Entity Principal Adverse Impact statements: 30 June 2023
- ESMA – guidance on ESG / sustainability in fund names to apply: Q2-Q3 2023
- ESAs SFDR/TR RTS changes – PAI sustainability indicators, re-scheduled: Oct 2023
- EC guidance for remaining TR environmental objectives (i.e. circular economy, biodiversity, pollution, and water): TBC, 2023
6. EU to unveil finalised AIFMD II and UCITS VI
During 2023, the EP and Council will also continue to discuss long-term changes to both AIFM and UCITS Directives. As proposed back in October 2021, both regimes are to be re-aligned in key areas such as delegation arrangements and liquidity risk management.
In due course, ESMA will announce details of their revised supervisory reporting regime: the current AIFMD “Annex IV” framework will be extended, while NCA reporting templates drafted for UCITS firms.
Although the first EP vote on “AIFMD II / UCITS VI” is scheduled to take place in 24 January 2023, the due process will likely continue until Q4-2023. Once finalised and adopted, the amending directive is likely to require another two years (Q4-2025) to be applied in each EU member state.
7. EU: Digital Operational Resilience Act (DORA) + Digital Finance Strategy
Key elements of the EU Digital Finance Strategy will continue to unfold in 2023.
The Digital Operational Resilience Act (DORA) will come into force on 16 January. This will impose prescriptive IT risk management rules on all EU financial entities. At the same time, many IT service providers deemed to be “critical” will be subject to EU regulatory oversight for the first time.
The Distributed Ledger Technology Market Infrastructures regulation (DLTR) apply from 23 March, while the Markets in Crypto-Assets Regulation (MICA) is expected to be ratified in the same quarter.
Following global crypto losses of USD 2 trillion last year, it will be interesting to gauge investor demand.
8. Scope of “Edinburgh reforms” clarified
The UK Finance Minister’s recent presentation in Edinburgh of proposed legal reforms to financial services attracted widespread media attention.
Before the end of 2023, the UK Government intend to pass their Retained EU Law (Revocation and Reform) Bill so they can annul the previous European Union (Withdrawal) Act enacted to minimise the impact of Brexit. The latest HMT policy statement reaffirms EU legislation that was previously earmarked last summer for local replacement or revocation; alongside PRIIPs, the list includes UCITS, AIFMD, MIFID II, ELTIF, IDD and Solvency II. By following this path, it seems very unlikely the UK can pursue any long-term financial services trade agreement with the EU.
The FCA’s Temporary Permission Regime (TPR) for authorised EEA firms will also end on 31 December.
9. UK: SDR (incl. Greenwashing rules), plus UK Green Taxonomy
The FCA’s consultation on UK Sustainability Disclosure Requirements (SDR) regime closes on 25 January.
The UK Investment Association have flagged “areas for improvement” and will submit their response within the next few days. Anti-greenwashing rules will be applied to all local marketing and communications before 30 June this year.
Contrary to EU-SFDR, the FCA propose a formal product labelling system; this will be implemented before June 2024, alongside pre-contractual disclosure, product naming / marketing rules and consumer-facing digital disclosure required from both asset managers and distributors.
10. UK: Customer Duty
Finally, the FCA described the new UK Consumer Duty unveiled last July as “a paradigm shift in our expectations of firms in retail markets”.
The Duty applies to all UK firms with a key role in delivering retail customer outcomes, requiring:
- A new ‘Consumer Principle’: firms to act to deliver good outcomes for retail customers.
- ‘Cross-cutting’ rules: firms to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
- ‘Four Outcomes’ rules: firms to ensure consumers receive understandable communications, products & services that meet their needs, offered at a fair price, with the required support.
The Duty will apply on 31 July 2023 for all UK products or services open to sale or renewal.
The FCA’s finalised Policy Statement (161 pages) and Consumer Duty Guidance (121 pages) contain specific obligations for firms classed as the manufacturer or distributor of a financial product or service.
The FCA have confirmed that firms who comply with their revised Assessment of Value (AoV) obligations will satisfy the products & services and fair price elements of their ‘Four Outcomes’ rules.
In the meantime, one key gap identified relates to the exchange of aggregated data between manufacturers, distributors and investment platforms, covering UK consumer outcomes. One solution may be a standardised data schema and template, similar to the EU-EMT administered by FinDatEx.
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As 2023 progresses, Kneip will continue to share regular updates on these topics (and more) in our Insights area. As always, feel free to get in touch with any queries.