Asset Management & Investment Funds: EU & International Developments - Nov 2021

AIFMD proposal and the Capital Markets Union legislative Package

Proposals for revisions to AIFMD were published as part of the EU Capital Markets Union package. The proposals include provisions on:

  • delegation
  • National Private Placement Regimes: Articles 36 and 42
  • liquidity
  • data reporting
  • loan funds
  • fees and charges
  • depositary
  • SSPEs
  • AIFMD and UCITS harmonisation
  • ELTIFs, MIFIR, ESAP

You can read a summary here.

ESMA speech on CMU and climate transition

Natasha Cazenave, executive director of the European Securities and Markets Authority (ESMA), spoke on How the asset management industry can contribute to the Capital Markets Union and the climate transition  

  • CSA on valuation issues in investment funds planned for 2022 ESMA
  • AIFMD review should include a specific framework for loan origination and loan participation (as part of AIFMD). Such a framework should contain common criteria for loan originating and loan participating funds, while also protecting investors by limiting such funds to closed-ended structures and ensuring they can only be sold to professional or semi-professional investors.
  • Strengthening of the existing framework is in the area of financial stability. The following priorities, aimed at reducing the liquidity and valuation risks at the level of the investment fund, should reduce the risk of the fund industry amplifying a shock on the financial system.
    • ESMA will finalise suggestions to the European Commission on how to address vulnerabilities faced by MMFs in the EU, in the context of the review of the MMF Regulation later this year or early next year
    • increase the availability of Liquidity Management Tools (LMTs) across EU jurisdictions so as to have the right tools available in the event of renewed liquidity crisis episodes (see AIFMD proposals)
    • management companies valuation procedures should cover all market situations including valuation approaches for stressed market conditions, particularly in case of less liquid assets
    • enhanced reporting by UCITS and AIFs to NCAs, especially on liquidity and leverage, is essential to improve capacity to monitor risks
    • the AIFMD review provides the right opportunity to explore appropriate measures in both AIFMD and the UCITS Directive to enhance liquidity risk and leverage reporting
  • From an investor protection perspective, costs and performance, including costs and fees charged by fund managers, is a Union Strategic Supervisory Priority and disclosure to the end investor is crucial
  • Credible sustainability disclosures:
    • The EU taxonomy, SFDR/ CSDR disclosures are important to both support the shift to sustainable investment and to combat the risk of greenwashing.
    • The data required for the product disclosures on taxonomy-alignment will not be available for fund managers from underlying investee companies until 2023, while the product disclosures on taxonomy-alignment becomes applicable for the first two taxonomy objectives start applying already on 1 January 2022.
    • ESMA expect the provisions of the Level 1 texts to be complied with, both for the core SFDR disclosures since 10 March 2021 and the additional taxonomy-related product disclosures starting from 1 January 2022.
    • The ESAs are preparing Level 3 guidance in the form of Q&A on key issues related to the practical application of the rules. More questions on the interpretation of the legal texts will also be forwarded to the European Commission.

Supervisory convergence is crucial, 2022 will see a focus on sustainability disclosures, exploring all the tools available to ESMA, including Q&As, guidelines, thematic reviews. This will be crucial in combating greenwashing

ESMA's contribution to sustainable finance

ESMA chair, Verena Ross, spoke on greenwashing at a conference on environmental, social and governance issues: next level reporting, risk management, strategy and responsibility. Ross said ambitious and targeted measures to address greenwashing will play an important role in forthcoming ESMA activities in the sustainable finance area as it intends to work closely with national securities regulators to promote a co-ordinated approach across the EU.

ESMA announced that it is committed to contributing to a more sustainable financial system, as part of the European Green Deal and global efforts to deliver on the United Nations’ COP26 objectives on combatting climate change. ESMA released a summary​ of its contributions to a sus​tainable financial system across the following sectors:

  • investment managers
  • issuers
  • benchmarks
  • credit rating agencies
  • investment firms and investment funds
  • ESG risk assessment and market monitoring activities
  • EU Green Bond standard

There is a visual summary of ESMA publications and timelines in ESMA's LinkedIn post​.

IOSCO - Sustainability in Asset Management, ESG ratings, data products providers, greenwashing

The International Organization of Securities Commissions (IOSCO) published its report on sustainability-related practices, policies, procedures and disclosure in asset management. The report aims to improve sustainability-related practices, policies, procedures and disclosures in the asset management industry through five recommendations for securities regulators and policymakers. These cover:

  • asset manager practices, policies, procedures and disclosure 
  • product disclosure - looking at sustainability-related products and material sustainability-related risks for all products
  • supervision and enforcement 
  • terminology 
  • financial and investor education 

IOSCO issued a report on ESG ratings and data products providers. The report sets out ten recommendations concerning the use of ESG ratings, data products and data products providers. These include public disclosure of data sources, defined methodologies, management of conflicts of interest, high levels of transparency and handling confidential information and due diligence. The recommendations are underpinned by more specific guidance.

IOSCO also published a speech delivered by the chair of its Sustainable Finance Task Force, Erik Thedéen, at COP26, in which he discussed IOSCO´s recent work on sustainable finance, including ensuring that investors receive ‘timely, comprehensive and comparable information, as a means to mitigate greenwashing’.

FATF Recommendations updated to clarify environmental crime offences and obligations of DNFBPs

The Financial Action Task Force (FATF) published October 2021 updates to its Recommendations. The updates clarify the types of offences which fall within the definition of ‘environmental crime’ and revise Recommendation 23 to clarify obligations on designated non-financial businesses and professions (DNFBPs) to apply group-wide programmes.

Quick fix amendments to PRIIPS Regulation and UCITS Directive extending transition to 31 December 2022

The European Parliament adopted texts amending the PRIIPs Regulation and the UCITS Directive. The PRIIPs Article 32 transitional arrangement will extend until 31 December 2022. The revisions to the UCITS Directive will apply from 1 January 2023. The EU Commission is required to produce a report as a matter of urgency addressing problems in the PRIIPs Regulation including the need for a clearer definition of retail investors and the product scope.

The next step is for the Council of the EU to adopt the legislative proposals. The Regulation and Directive will then enter into force on the day following their publication in the Official Journal of the European Union.

The ESAs call for evidence regarding the PRIIPs Regulation, closes 16 December 2021.

IOSCO updates its outsourcing principles to ensure operational resilience

IOSCO updated its Principles on Outsourcing, which are intended for specified regulated entities that outsource tasks to service providers. The seven principles set out expectations for those regulated entities that outsource tasks, along with guidance for implementation. While not directly aimed at funds and funds service providers, these principles inform the thinking of regulators and policymakers. The update looks at the impact of COVID-19 on outsourcing and operational resilience in the context of each principle.  

FATF publishes summary of report on digital transformation of AML/CTF

The FATF released a summary of its joint report with Egmont Group of Financial Intelligence Units on digital transformation of anti-money laundering and counter-terrorist financing (AML/CTF) for operational agencies. The report focuses on how to find and use the right tools for AML/CTF and how to overcome practical and operational challenges. The report itself is available to public authorities. The summary, which highlights key findings of the report, can be freely accessed.

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

Date published: 26 November 2021