Ten things to watch in 2021

1. Sustainable Finance: all hands on deck

“The timeline for the application of the new sustainable finance requirements is very challenging for companies …as long as the different sets of legislation are in different stages of development and not yet fully aligned with one another, full compliance across the investment chain will be very difficult”.

ESMA Securities and Markets Stakeholders Group (SMSG), 23 December 2020

The Sustainable Finance Disclosure Regulation (SFDR) legal application is approaching, with anticipation that the European Securities and Markets Authority (ESMA) will shortly issue general (level 1) expectations as of 10 March 2021.  This follows previous varying updates from European regulators, including “fast-track” means to administer prospectus updates recently announced by the Luxembourg CSSF and the Central Bank of Ireland.

Later this year, ESMA will complete their delayed SFDR (level 2) technical standards to legally apply from January 2022. These will include a finalised Principal Adverse Impact statement and pre-contractual disclosure templates for products that either promote environmental / social characteristics or pursue sustainability objectives.

Separately, ESMA will also finalise proposals for additional Taxonomy Regulation (TR) disclosure, including Key Performance Indicators to highlight sustainable proportions of Turnover, Capital Expenditure and Operating Expenditure.

In the meantime, firms need to be notified when exactly delegated acts to the UCITS, AIFM and MiFID II directives will require the integration of sustainability risk factors into general corporate practice.

FinDatEx (including Kneip as a member) are currently consulting on a proposed interim version of their European MiFID Template (EMT) to “answer the demand of distributors and producers to cope with the basic implementation of MiFID ESG/SFDR principles”.

2. PRIIPS: New Years’ resolution?

The fate of the European Supervisory Authorities (ESAs) delayed PRIIPs Regulatory Technical Standards (RTS) remains unresolved.

The EU funds industry awaits instruction from the European Commission (EC) in order to proceed.

Will the EC stick to their previous roadmap, where all investment funds (UCITS, AIFs) marketed to EEA retail investors will require a modified PRIIPS Key Investment Document (KID) – including additional Past Performance data, revised Transaction Cost calculations) – starting January 2022?

At the same time, we also need to see how the European PRIIPS Template (EPT) may evolve to accommodate diverging EU and UK fund regimes (see 10. below).

3. AIFMD II: what’s in, out?

The EC’s consultation on proposed amendments to the current Alternative Investment Fund Directive continues until end-January, with resulting draft level 1 (AIFMD II) legislation expected around summertime. This may include not only revised Annex IV reporting (i.e. to mitigate widespread regional variations), but also controversial changes to current Investment Manager Delegation rules (as recommended by ESMA in anticipation of the UK’s departure from the EU).

Starting in February, National Competent Authorities (NCAs) will have to implement a new framework to mitigate AIF leverage-systemic risk (as set out in ESMA’s recent guidelines).

4. UCITS: KIID outcome, new performance fee rules

In 2021, EU-UCITS firms will learn of the future of the current Key Investment Information Document (KIID – obligatory for both retail and professional investors) and if they will be required to produce additional AIFMD II reporting (i.e. also proposed by ESMA last year).

In the shorter-term, they will have to ensure that the prospectus, KIID and marketing materials of new UCITS funds comply with ESMA’s performance fee guidelines (also applicable for certain types of AIFs).  These will apply to all existing funds within the next 6 months.

5. MiFID II: quick fixes on timeline, harder stuff to follow

As part of the Coronavirus Capital Markets Recovery Package, the EC decided to proceed with some “quick fixes” to MiFID II, including Investor protection and Investment Regime measures. Likely to apply from Q4 2021, there remains uncertainty concerning a proposed move to Digital Communication by phasing-out of paper documents (given EU regime dependencies elsewhere, e.g. UCITS KIID and PRIIPS KID pre-contractual disclosures).

6. ELTIF: reboot pending

The Capital Markets Union (CMU) was formally adopted by the European Council last month.

With a market potential of EUR 2 trillion, the EU Long-term Investment Fund are a key CMU component.  ELTIFs are a type of Alternative Investment Fund (AIF) and will require a PRIIPS KID where marketed to retail investors.  The EC’s revised regulatory proposal is anticipated Q3, 2021.

7. EU-PEPP: concept verified

The pan-European Personal Pension product is another important part of the CMU (with a previously estimated market size of EUR 1-2 trillion).  The funds industry has already received significant details of the required disclosures (including additional Key Information Documents and Regulatory Reporting); this year, they may see if long-standing challenges (including a strict fee cap and local tax divergences) can be resolved to enable sufficient PEPP providers to emerge.

8. FinTech: TURN up the speed

The digital transformation of asset management will continue to accelerate this year.

As a founding partner of TISA’s Universal Reporting Network (TURN), Kneip is well positioned to assist with the increasing challenges of FinTech.

9. ESMA multi-tasking

There are many other ESMA work-in-progress requiring EU asset manager attention this year, including:

• Cloud Service Providers guidelines (applicable from July 2021)
• Fund Marketing Communications guidelines (finalised by August 2021)
• UCITS costs & charges common supervisory action (throughout the year).

10. Brexit: bilateral focus required

Last (but not least) are the prospects of the new UK fund regime (following recent EU departure).

The EU–UK Trade and Cooperation Agreement (TCA) does not contain any equivalence decisions relating to financial services, meaning that UK firms are no longer able to benefit from the ‘passporting’ that previously enabled automatic access to the European funds single market.

The UK Government previously on-shored most EU funds legislation into local statute.

Ongoing, they may seek an additional EU financial services co-operation agreement (‘memorandum of understanding’, with provisional target date set for March 2021).

Otherwise, they may opt for UK funds to diverge further from the EU in areas such as Sustainable Finance, MiFID II and Long-Term investment.

The parallel UK-PRIIPS regime has already lined up a further five year exemption for UK-UCITS products, while the Financial Conduct Authority decides the best means to present “appropriate” performance information to local retail investors.

Keep an eye on our Insights area where Kneip will share regular updates on these topics (and more) as 2021 progresses.   If you ever have a query, get in touch with us.

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