Welcome to the Funds-Axis Regulatory Round Up!
The past month has brought a number of important developments on topics including ESG, UCITS, AIFMD II and Money Market Funds.
The month also saw:
- The Central Bank of Ireland approve the process for UCITS side-pocketing arrangements,
- The ESAs publish recommended changes to make the PRIIPS Key Information Document more consumer friendly, and
- The UK Takeover Panel publish a consultation on presumptions of the definition of “Acting in Concert”.
Continue reading below to find out more about these and many other recent regulatory developments.
On 31st May 2022, ESMA published a report on the Common Supervisory Action (CSA) on costs and fees for investment funds, that was carried out with National Competent Authorities (NCAs) during 2021. ESMA highlights, in the Report, the importance of supervision in ensuring investors are not charged with undue costs, considering its high impact on investors’ returns.
The CSA Report presents the main results of this exercise, namely:
- There is room for improvement on the application of the ESMA supervisory briefing on the supervision of costs in UCITS and AIFs, particularly for smaller management companies;
- Some questions arise concerning compliance with delegation rules where portfolio managers i.e. delegates, exercise significant influence or even decide the level of costs;
- Divergent market practices exist as to what industry reported as “due” or “undue” costs;
- Some NCAs discovered conflicts of interest at UCITS managers, in particular in case of related-party transactions;
- In some instances there is a lack of policies and procedures on efficient portfolio management (EPMs) and lack of clear disclosures as required under the ESMA Guidelines on ETFs and other UCITS issues; and
- Widespread use of fixed fee splits arrangements for securities lending continues, with unfavourable results for retail investors.
Read more here.
The FSMA has published Circular FSMA_2022_16 (available in French – Dutch only) explaining the provisions of the Regulation by the Financial Services and Markets Authority of 16 May 2017 on the statistical information to be submitted by certain undertakings for collective investment.
Read more here.
The Securities and Exchange Commission (SEC) has proposed amendments to rules and disclosure forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (“ESG”) factors.
The proposed changes would apply to registered investment companies, business development companies (together with registered investment companies, “funds”), registered investment advisers, and certain unregistered advisers (together with registered investment advisers, “advisers”). The rules and form amendments would enhance disclosure by:
- Requiring additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures;
- Implementing a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance; and
- Generally requiring certain environmentally focused funds to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments.
Read more here.
The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has updated the following Questions and Answers:
- on the application of the AIFMD
- on the application of the UCITS Directive
- on the Central Securities Depositories Regulation
- on the European crowdfunding service providers for business Regulation
- on MiFID II and MiFIR transparency topics
Read more here.
The FCA, jointly with the Bank of England, and with the endorsement of the Treasury, has published a Discussion Paper on Money Market Fund (MMFs) reform. The Discussions Paper seeks views to inform the development of MMF reform proposals. The FCA has also published guidance on the UK MMF Regulation.
The guidance relates primarily to two issues – the requirements in UK MMFR article 34(1)(a) for public debt Constant Net Asset Value (CNAV) MMFs and Low Volatility Net Asset Value (LVNAV) MMFs, and the portfolio requirements in UK MMFR articles 24 and 25 which, together, apply to all UK MMFs. Article 24 applies to short term MMFs (public debt CNAV MMFs, LVNAV MMFs and short term Variable NAV (VNAV) MMFs), and Article 25 applies to standard VNAV MMFs.
Read more here.
The European Supervisory Authorities (ESAs) have submitted to the European Commission further queries relating to the interpretation of Union law with reference to the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation (TR).
Queries related to interpretation of SFDR and TR in the following areas:
- Principal adverse impact (PAI) disclosures
- Financial advisers
- Transparency of the integration of sustainability risks and rules for products no longer made available
- Good governance practices
- Scope of Article 5-6 TR
Read more here.
On 16 May, the Central Bank of Ireland published the Approval Process for UCITS Side-pocketing arrangement in relation to Russian, Belarusian and Ukrainian assets that are impacted by the Russian invasion into Ukraine and/or impacted by sanctions that have been imposed as a result of Russia’s invasion of Ukraine.
The Central Bank will permit, subject to conditions, a UCITS to implement a sidepocket arrangement only for Russian, Belarusian and Ukrainian assets that are directly and/or indirectly impacted by the Russian invasion into Ukraine and/or impacted by sanctions that have been imposed as a result of Russia’s invasion of Ukraine.
Read more here.
The European Parliament has issued its draft report on the European Commission’s proposals to amend the existing Alternative Investment Fund Managers Directive (AIFMD II). The Report forms part of the legislative process and includes the European Parliament’s suggested amendments to the draft directive issued by the European Commission in November 2021. The draft directive proposed a number of changes to the Alternative Investment Fund Managers Directive, largely in respect of:
- delegation,
- loan origination,
- liquidity risk management,
- data reporting and
- depositaries
Read more here.
The European Securities and Markets Authority (ESMA) issued a Public Statement to promote convergence in relation to actions taken to manage the impact of the Russian invasion of Ukraine on investment fund portfolios exposed to Russian, Belarusian and Ukrainian assets.
It concerns in particular the obligations of the following fund managers:
- Authorised external Alternative Investment Fund Managers (AIFMs) and internallymanaged Alternative Investment Funds (AIFs) subject to the AIFMD
- EuVECA managers subject to the EuVECA Regulation
- EuSEF managers subject to the EuSEF Regulation
- UCITS management companies and self-managed UCITS investment companies (together ‘UCITS managers’) subject to the UCITS Directive.
To manage investment funds in the best interest of investors, have adequate liquidity management systems in place and ensure fair valuation of assets.
Read more here.
ESMA have published updated guidelines on stress test scenarios under the MMF Regulation. The guidelines apply to competent authorities, money market funds and managers of money market funds as defined in the MMF Regulation.
The Guidelines stablish common reference parameters of the stress test scenarios to be included in the stress tests taking into account the following factors specified in Article 28(1) of the MMF Regulation:
- hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF;
- hypothetical changes in the level of credit risk of the assets held in the portfolio of the MMF, including credit events and rating events;
- hypothetical movements of the interest rates and exchange rates;
- hypothetical levels of redemption;
- hypothetical widening or narrowing of spreads among indexes to which interest rates of portfolio securities are tied;
- hypothetical macro systemic shocks affecting the economy as a whole.
Read more here.
The FCA have issued a reminder regarding cryptoassets and that they have not been given regulatory oversight over direct investments in cryptoassets and NFTs. There are no consumer protections for those who buy any cryptoassets and NFTs, and they are not FSCS protected. As a result, if you buy cryptoassets you should be prepared to lose all the money you invest.
Those marketing cryptoassets must stick to the guidelines set out by the Advertising Standards Authority (ASA) and state that cryptoassets are not regulated by the FCA.
Read more here.
The European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) issued a joint supervisory statement regarding the ‘What is this product?’ section of the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs). The expectations put forward in the supervisory statement aim at improving the quality of descriptions provided by PRIIPs manufacturers and thereby contribute to better protection of retail investors.
The ESAs have identified a range of poor practices in how PRIIP manufacturers describe products under this section. Most issues relate to a general lack of clarity in the text, which makes it difficult for retail investors to understand the key features of products.
Some of the main issues identified include:
- the use of overly broad, general categories when specifying the type of product;
- poor practices regarding the overall clarity of the language and layout of the text, including as a result of automation in creating such texts;
- insufficient information regarding capital protection levels and potential losses for the investor;
- imprecise description of early termination features;
- lack of clarity concerning the nature and timing of the coupon payments;
- limited information about the specific nature of the underlying assets to which investors are exposed;
- inadequate description of any leverage factors and the risks related to them;
- undifferentiated and abstract descriptions for the ‘intended retail investor’.
Read more here.
The FCA has published a letter addressed to credit brokers and firms providing high-cost lending products.
The letter states that it is unlawful for a person in the course of business to communicate a financial promotion unless (i) that person is an authorised person, (ii) the content of the communication is approved by an authorised person, or (iii) a relevant exemption applies (section 21 of the Financial Services and Markets Act 2000 (FSMA)).
The FCA expect authorised firms issuing and/or approving financial promotions in relation to consumer credit to ensure that all communications of financial promotions are clear, fair and not misleading and otherwise comply with the rules set out at CONC 3. This includes ensuring that those to whom a financial promotion is addressed, or at whom it is directed, understand the nature of the firm’s regulated activities.
Read more here.
The European Securities and Markets Authority (ESMA) has advised the European Commission on certain aspects relating to retail investor protection. In the advice ESMA puts forward proposals that will make it easier for investors to get the key information they need to take well-informed investment decisions, whilst also protecting them from aggressive marketing techniques and detrimental practices.
The proposals put forward aim at maintaining a high level of investor protection, while ensuring that retail investors can benefit from digitalisation opportunities. The recommendations relate to, among others:
- requiring machine readability of disclosure documents to facilitate the development of searchable databases available to the public;
- addressing information overload by proposing to define what is vital information and by using digital techniques such as layering of information;
- development of a standard EU format of information on costs and charges and aligning the disclosures under MiFID and the PRIIPs KID;
- possibility for NCAs and ESMA to impose on firms the use of risk warnings for specific financial instruments;
- addressing aggressive marketing communications; and
- addressing issues related to misleading marketing campaigns on social media and the use of online engagement practices, such as the use of gamification techniques by firms or third parties.
Read more here.
The European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) have published their technical advice to the European Commission on the review of the PRIIPs Regulation.
The ESAs have recommended:
- requiring machine readability of disclosure documents to facilitate the development of searchable databases available to the public;
- harnessing the opportunities of digital disclosure, such as by allowing information to be presented in a “layered” format;
- not extending the scope to additional financial products at this stage, but further specifying the existing scope;
- allowing different approaches for different types of products where this is necessary to ensure the appropriate understanding of retail investors;
- allowing more flexibility on the information provided in the performance section of the KID including the indication of past performance;
- changing the rules for multi-option insurance products to better facilitate comparison between different investments; and
- introducing a new section in the KID to give prominence to sustainable objectives.
Read more here.
The European Supervisory Authorities (EBA, EIOPA and ESMA) has published a Consultation Paper seeking input on draft Regulatory Technical Standards (RTS) on the content, methodologies and presentation of information in respect of the sustainability indicators for Simple, Transparent and Standardised (STS) securitisations.
The proposed draft RTS aim to:
- facilitate disclosure by the originators of the principal adverse impacts of assets financed by STS securitisations on environmental, social and governance-related factors;
- supplement the single rulebook under the Securitisation Regulation as amended by the Capital Markets Recovery Package (CMRP);
- draw upon the ESAs’ work in respect of sustainability-related disclosures in the financial services under the Sustainable Finance Disclosure Regulation (SFRD).
Read more here.
The Central Bank of Ireland has published Guidance Notes on Reporting requirements of Irish Authorised Investment Funds. The purpose of this Guidance is to provide information and direction on the completion of the Fund Profile V2 return. Fund Profile V2 was introduced in Q2 2022 to replace the previous iteration of the Fund Profile return first introduced in 2018. The Fund Profile V2 return now replaces both the Fund Profile return and the Annual Investment Fund Sub-Fund Profile return.
Read more here.
On 18 May 2022, the Federal Council initiated the consultation on legislation to screen foreign direct investment in Switzerland. New legislation to screen foreign direct investment seeks to prevent threats to public order and security posed by foreign investors acquiring Swiss companies.
Read more here.
The Code Committee of the Takeover Panel has published a public consultation paper, PCP 2022/2, which sets out proposed amendments to the Takeover Code with regard to the presumptions of the definition of “acting in concert” and related matters.
The consultation proposes to raise the threshold in what is currently presumption (1) of the definition of “acting in concert” (which relates to companies) from 20% to 30%, so as to align it with the threshold in the Code’s definition of “control”;
Additionally, it proposes to make explicit that the presumption of acting in concert applies to interests in:
- shares carrying voting rights (whether or not the shares are also equity share capital); and/or
- equity share capital (whether or not the shares also carry voting rights);
It also explains that the (new) 30% threshold applies differently to interests in voting share capital and (voting or non-voting) equity share capital in that:
- voting control does not “dilute” through a chain of ownership (i.e., if A owns or controls shares carrying 30% or more of the voting rights in B, which in turn owns or controls shares carrying 30% or more of the voting rights in C, then A is presumed to control C); and
- equity investment does (normally) “dilute” through a chain of ownership (i.e., if A owns or controls 30% or more of the equity share capital in B, which in turn owns or controls 30% or more of the equity share capital in C, A is treated as, in effect, having an equity interest of 9% in C). However, equity ownership of 50% or more is not treated as “diluting” through the chain of ownership as an owner of more than 50% of the equity share capital in a company is deemed to control that company (as referenced in the Note on Definitions at the end of the Definitions Section of the Code);
Read more here.
