Asset Management & Investment Funds: EU & International Developments - March 2018

EU Commission proposals on cross-border distribution of UCITS and AIFs

On 12 March 2018, the European Commission published proposals intended to boost the cross-border market for investment funds, as part of the Capital Markets Union (CMU). The proposal is open for feedback until 10 May 2018.The press release notes that the EU investment funds market amounts to a total of EUR 14.3 trillion and that just over a third (37%) of UCITS funds and around 3% of AIFs are registered for sale in more than three Member States. The proposal states that it aims to make cross-border distribution simpler, quicker and cheaper. The proposal will need further work before it is fit for purpose. The shift in decision making from national regulators to ESMA continues inexorably.

The proposed directive on cross-border distribution of funds contains amendments to the UCITS IV Directive and the AIFMD relating to, among other things, pre-marketing of AIFs and the discontinuation of marketing.

  • UCITS provisions on content requirements for UCITS marketing communications (Article 77) and the publication of national rules on marketing (Article 91(3)) are deleted from the UCITS Directive and replaced with provisions in the proposed Regulation (which will have direct effect and so will allow less scope for differences in implementation).
  • UCITS provisions on the provision of local facilities (Article 92) will be replaced so that the facilities may be provided on-line and Member States may not require the UCITS ManCo to provide the facilities through a physical presence. Similar provisions are introduced for AIFMs marketing AIFs to retail investors.
  • UCITS provisions requiring that document updates be furnished to host regulators are changed to require notification to the home regulator. The home regulator must then notify the UCITS within 10 working days that it is not to implement the change (if it believes the UCITS would no longer comply with the UCITS Directive) or, if not, inform the host regulator of the changes. Similar changes are made to the AIFMD with different time limits.
  • New UCITS procedures (Article 93(a)) are introduced which will permit a UCITS ManCo to discontinue marketing in a Member State (other than the UCITS home Member State) if there are less than 10 investors in that Member state holding less than 1% AUM, in which event the ManCo will be obliged to
    • make a blanket public offer to repurchase, free of charges and deductions, all shares or units held by investors in that Member State, which offer must remain open for at least 30 working days and
    • publicise its intention to stop marketing in that Member State, by a medium customary for marketing a UCITS and suitable for a typical UCITS investor.
  • The ManCo will notify its home regulator and, within 20 days, the home regulator will transmit the request to the host regulator and to ESMA and inform the ManCo. The UCITS may not be marketed thereafter although the obligations to provide information to investors who remain will continue. Similar provisions are introduced for AIFMs.
  • A new harmonised regime for pre-marketing of AIFs in the EU will be introduced. Currently, Member States adopt differing approaches to pre-marketing. The directive provides for an authorised EU AIFM to engage in pre-marketing in the EU, without any notification obligations. "Pre-marketing' is defined  as "a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established". The right falls away where the information presented to investors in the pre marketing:
    • relates to "an established AIF"
    • contains a reference to "an established AIF"
    • enables investors to commit to acquiring units/shares of a particular AIF or amounts to a prospectus, constitutional documents of a not-yet-established AIF, offering documents, subscription forms or similar documents whether in a draft form or a final form allowing investors to take an investment decision.

This definition and the carve-outs will need further refinement if the provision is to achieve the intended purpose. Moreover the right to pre-market is not extended to non-EU AIFMs.

The proposed regulation on facilitating cross-border distribution of funds and amending the EuVECA Regulation and the EuSEF Regulation will impact AIFs and UCITS.

  • National regulators will be permitted to charge fees which must be proportionate and subject to a transparent process.
  • National regulators will be required to publish online all applicable national laws, regulations and administrative provisions concerning their marketing requirements for UCITS and AIFs and their fees and charges and must notify these to ESMA.
  • Where national law requires that marketing materials be submitted to the national regulator for review, the national regulator must itself comply with provisions which aim to improve transparency and equal treatment.
  • UCITS and AIFs will be required to comply with harmonised requirements for their marketing materials with ESMA required to issue guidelines on the requirements.
  • National regulators will be required to transmit notifications, notification letters, written notices and information relating to notifications to ESMA.
  • ESMA will be required to establish central databases of:
    • the national marketing requirements
    • the national fees and charges
    • a list of EU authorised AIFMs and UCITS ManCos, AIFs and UCITS which those AIFMs and UCITS ManCos manage and market and the Member States in which those AIFs and UCITS are marketed.
  • The EuVECA Regulation and the EuSEF Regulation will be amended to provide for a pre-marketing regime similar to that set out for AIFMs in the draft directive.
  • ESMA is to publish a myriad of templates, forms and procedures, central databases of information, regulatory technical standards, implementing technical standards, guidelines and reviews (every 2 years) after the regulation enters into force.

ESMA Speech on CMU, Brexit and ESA review

ESMA chair, Steven Maijoor delivered a speech on CMU, Brexit and the ESA review making a number of points, some of which are highlighted below.

Brexit and the issue around ESMA's work on delegation 

"The decision of the UK to leave not only the EU but, also the Single Market, has led to a situation in which there is the potential for a significant shift of entities and activities from the UK to the EU27." "This triggered concerns about the risk of regulatory arbitrage between the EU27 Member States seeking to attract this business." "We are not looking to question, undermine or put in doubt the delegation model. We know that this is a key feature of the investment funds industry and that the flexibility to organise centres of excellence in different jurisdictions has contributed to the industry's success"..."What our opinions are seeking to address is the risk of letterbox entities. I hope you would all agree that it is in no-one's interest to allow the creation of such entities. Both the UCITS Directive and the AIFMD explicitly require there to be enough substance in the entity established in the home Member State."

"In other words, financial centres in the EU27 should be free to compete based on the particular strengths they can offer relocating firms, like speed and efficiency, but in all cases the EU rulebook should be consistently applied. Otherwise, there could be insufficient substance in the EU27, which may pose risks to ESMA achieving its stability and investor protection mandates."


"On the methodology for calculation, ….we are ready and willing to look at this issue but that we need to see concrete evidence to assess whether these flaws are real. In the absence of any such evidence, we maintain our view that the methodology is sound and that negative transaction cost figures should be extremely rare."

CMU/ESAs Review

" those who see only additional complications and burdens from a strengthened role for ESMA on delegation, I would point out that the Supervisory Coordination Network (SCN) has been doing similar work over the past six months without creating any of the disruption that has been warned about. In addition, I would like to highlight that the tools we would be empowered to use under the Commission's proposal – namely opinions – are a very standard convergence tool that we have used hundreds of times already on a range of different topics, including under MIFID I and MiFID II."

"Another point some Member States and parts of the industry have been critical about is the new funding model. I and my colleagues at ESMA looked at these numbers, and the shift to the industry-funded budget for indirect supervision, as proposed by the Commission, would inter alia impact about 2,500 investment management companies across the EU. Their yearly contribution, however, based on ESMA's 2018 budget and the proposed distribution key would mean an average of €650 per entity annually. I cannot imagine that this level of burden could significantly impact the profitability of the BVI's membership" [the BVI represents the interests of the German investment fund and asset management industry].

"At the same time I predict that with a more independent funding base, ESMA would be able to expand its supervisory convergence activities, which ultimately benefits the CMU project, and both consumers and the financial industry. Finally, I think it is important to keep in mind that ESMA's Board of Supervisors would retain the budget approval powers, and the Member States would continue to co-decide the general EU Multi-Annual Financial Framework which also applies to ESMA."

Money Market Funds - stress tests

ESMA published the official translations of its Guidelines on stress test scenarios under Article 28 of the MMF Regulation

The Central Bank must notify ESMA whether it complies or intends to comply with the Guidelines.

Brexit legal text for transition period

On 19 March 2018, the UK government and the European Commission published a draft withdrawal agreement which includes text agreed by the negotiators on the post-Brexit transition period. The UK government has agreed that the transition period will end on 31 December 2020. The agreed text provides that the UK "may negotiate, sign and ratify international agreements" entered into in its own capacity in areas of exclusive EU competence during the transition period "provided those agreements do not enter into force or apply during the transition period" unless authorised by the EU. The transition period is described in Article 121 as "a transition or implementation period".

ELTIF Regulation

On 23 March 2018, Commission Delegated Regulation (EU) 2018/480 supplementing the Regulation on European Long-Term Investment Funds (ELTIF Regulation) with regard to regulatory technical standards (RTS) on financial derivative instruments solely serving hedging purposes, sufficient length of the life of the ELTIF, assessment criteria for the market for potential buyers and valuation of the assets to be divested, and the types and characteristics of the facilities available to retail investors was published in the Official Journal of the EU. The Delegated Regulation will enter into force on 12 April 2018.

ESMA MiFID II Q&As on investor protection

On 23 March 2018, ESMA published updated Q&As on investor protection topics under the MiFID II Directive and MiFIR. ESMA has added new Q&As or updated existing Q&As relating to the following topics:

  • Inducements
  • Information on costs and charges
  • Post-sale reporting
  • The meaning of the term "ongoing relationship", which is used in various Articles of the MiFID II Directive and MiFIR.

ESMA Q&As on the Benchmarks Regulation

On 22 March 2018, ESMA published updated Q&As on the implementation of the Regulation on indices used in financial instruments and financial contracts or to measure the performance of investment funds (Benchmarks Regulation) with a new Q&A on how supervised contributors should apply Article 16 of the Benchmarks Regulation (covering governance and control requirements for supervised contributors) during the transitional period.


On 23 March 2018, ESMA published updated Q&As on the implementation of the Regulation on improving securities settlement and regulating central securities depositories (CSDR) with two new Q&As, relating to:

  • The assessment of CSD links to be made by the competent authorities in the context of the authorisation procedure
  • Whether links between CSDs participating in TARGET2-Securities (T2S) are interoperable links as defined in the CSDR.

ESMA also updated an existing Q&A on the implementation of Article 35 of the CSDR, to specify the extent of the flexibility that can be granted to CSDs in their use of international standards to communicate with their participants or with other market infrastructures.

ESMA Q&As on Market Abuse Regulation

On 23 March 2018, ESMA published updated Q&As on the Market Abuse Regulation with an updated Q&A 5.1 on the disclosure of inside information on compliance with Pillar II requirements.

EU Commission proposal on Crowdfunding

On 8 March 2018, the European Commission published proposals on crowdfunding (both lending and investment based) which include a Commission proposal for a regulation on European Crowdfunding Service Providers (ECSP) for Business. The Commission proposes enabling crowdfunding platforms to obtain an EU authorisation from ESMA, to be supervised by ESMA and to be permitted to engage in cross-border activities. The proposals are part of the CMU agenda and will be discussed by the European Parliament and the Council of the EU with a view to adoption by mid-2019 and application by mid-2020.


ESMA speech on FINTECH

On 27 February 2018, ESMA published a speech delivered by Steven Maijoor, ESMA Chair, on taking a measured approach to FinTech which involves two strands. The first strand involves monitoring innovations diligently and intelligently. The second strand is to take action in a measured way (that is, to carefully consider how best to act, weighing risks and benefits in an objective fashion). ESMA identifies three key areas of FinTech:

  • Structural features of FinTech
  • Monitoring FinTech by looking at economic function
  • Challenges and opportunities for regulators

Mr Maijoor refers to the European Commission's proposals which envisage work for the European Supervisory Authorities in four areas

  • pursuing convergence on licensing requirements for FinTech companies
  • clarifying and updating the supervisory outsourcing frameworks
  • co-ordinating national technological innovation hubs
  • cybersecurity.

European Commission 2018 FinTech Action Plan

In March, 2018, the European Commission published its 2018 FinTech Action Plan. The Action Plan sets out a number of initiatives aimed at creating a "more future-oriented regulatory framework" within the EU where "innovative fintech products and solutions can be rapidly rolled out… without compromising financial stability or consumer and investor protection". Some notable initiatives proposed by the Commission include:

  • A proposed assessment of the suitability of the current EU regulatory framework for initial coin offerings (ICOs) and cryptoassets.
  • The Commission will present a report on best practices for regulatory sandboxes by Q1 2019.
  • The Commission will set up an expert group to assess by Q2 2019 whether there are unjustified regulatory obstacles to financial innovation in the EU financial services regulatory framework.
  • The Commission will host an EU FinTech Laboratory where European and national authorities will engage with tech providers in a neutral, non-commercial space with a view to building capability and knowledge.
  • The Commission has already created an EU Blockchain Observatory and Forum. This agency will report on the challenges and opportunities of cryptoassets later in 2018 and is working on a comprehensive strategy on distributed ledger technology and blockchain.

Read here for more information.

ESAs report on the impact of Big Data on consumers and financial firms

The Joint Committee of the European Supervisory Authorities (ESAs) published its final report on Big Data analysing its impact on consumers and financial firms. It also issued a factsheet for consumers. The ESAs found that while the development of Big Data poses some potential risks to financial services consumers, the benefits of this innovation currently outweigh these. Many of the risks identified by the ESAs are mitigated by existing legislation and any legislative intervention at this point would be premature.

Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders

ESMA and EBA issued joint Guidelines on the assessment of the suitability of members of the management body and key function holders. These Guidelines specify the requirements regarding the suitability of members of the management body of credit institutions, investment firms, financial holding companies and mixed financial holding companies. The Guidelines do not apply to UCITS and AIFs but may inform the regulatory approach.. The Guidelines specify, in particular, the notions of sufficient time commitment; honesty, integrity and independence of mind of a member of the management body; adequate collective knowledge, skills and experience of the management body; and adequate human and financial resources devoted to the induction and training of such members. The issue of diversity in the selection of members of the management body is also addressed. The annex sets out a template for assessments to take account of the business model, governance, risk management, compliance, audit, management and decision making and experience.


On 21 March 2018, the G20 issued an update, following a meeting of finance ministers and central bank governors.

  • G20 remains committed to the full, timely and consistent implementation and finalisation of the Basel III reforms and their evaluation.
  • G20 will continue to address the decline in correspondent banking relationships.
  • G20 commits to implement the Financial Action Task Force (FATF) standards as they apply to crypto-assets, and looks forward to the FATF review of those standards.
  • G20 commits to step up its fight against terrorist financing, money laundering and proliferation financing. The G20 calls on the FATF to enhance its efforts to counter proliferation financing.
  • The G20 calls on the Global Partnership for Financial Inclusion (GPFI) to produce, by July 2018, a policy guide for G20 and non-G20 countries to use digitisation to provide financial services to unserved and underserved individuals and businesses currently operating in the informal economy.

Anti-Money Laundering/ Combating the Financing of Terror/ Corruption


The Financial Action Task Force (FATF) held a plenary meeting in Paris in February 2018. Key developments included:

  • the adoption of a new counter-terrorist financing operational plan
  • the adoption of updated FATF Guidance on Counter Proliferation Financing
  • an update on recent developments on de-risking
  • improving the understanding of virtual currencies risks.

Wolfsberg Group FAQs on assessments for financial crime country risk

On 19 March 2018, the Wolfsberg Group published FAQs on assessments for country risk in relation to financial crime. The FAQs relate broadly to financial crime risk, which includes money laundering, sanctions, bribery and corruption risks, financial secrecy and tax transparency. The FAQs are based on current best practices.

The Wolfsberg Group correspondent banking due diligence questionnaire

The Wolfsberg Group published an updated version of its correspondent banking due diligence questionnaire, together with accompanying documents, which has been expanded to cover anti-bribery and corruption, counter terrorism financing and sanctions exposure controls.

European Parliament adopts recommendation on cutting sources of terrorist income

On 1 March 2018, the European Parliament announced that it has voted to adopt a recommendation on cutting the sources of terrorist income.

For more information please contact a member of the Asset Management & Investment Funds Team.

Date Published: 06 April 2018