Asset Management & Investment Funds: EU & International Developments – November 2022
Asset Management & Investment Funds: EU & International Developments – November 2022
The ESAs issued updated Q&As on PRIIPs with over 40 new Q&As, many of which concern the new rules applicable on 1 January 2023. The Q&As include background, analysis of legislative provisions and helpful examples. Points of interest include:
signposting to a glossary is permitted
it is possible to show the complete name of the PRIIP when first mentioned in the KID and then simply refer to it as “the product” or “the fund” thereafter
Prior to 1 January 2023 is it not possible to "prepare" a KID based on the new requirements in the PRIIPs RTS, for example for a product launched between September and December 2022 or a product with a subscription period that runs from 2022 into 2023
a UCITS or AIF must provide a clear indication of whether it is actively or passively managed
a series of Q&As on benchmarks (with examples given in many instances)
Q&As on ETFs and actively-managed UCITS ETF
Q&As on whether the redemption prices of open-ended real estate AIFs are "prices"
Q&A concerning absolute return funds
Q&As on performance scenarios
The Q&As include a specific section on investment funds. Again, points of interest include:
A fund with multiple share classes may use the price history of an existing share class when a new share class is created rather than use the price history of a benchmark.
The recalculation of the performance scenarios does not automatically mean that it will be necessary to revise and republish the KID. For certain types of PRIIPs (open-ended funds, or other PRIIPs open to subscription), previous performance scenario calculations must be published on a monthly basis. This monthly publication also does not , as such, require an update to the KID itself.
A UCITS or AIF which does not yet have past performance data for one complete calendar year (and is not a UCITS or AIF which may provide simulated data for past performance) must include a specified statement.
Rules concerning the UCITS key investor information document (KIID) still apply in certain situations post 1 January 2023. In particular, where a UCITS is not made available to retail investors in the EU in accordance with Article 5(1) of the PRIIPs Regulation.
Existing retail investors within a UCITS umbrella fund, who switch or exchange units in one sub-fund for units in another, must be provided with the KID for the sub-fund in which they are going into from 1 January 2023.
Some clarifications on the use of a representative share class.
Please speak with your usual contact on the Asset Management & Investment Funds team for more detail as the above is a summary only.
Proposed updates to the SFDR RTS and product disclosure templates
The European Commission has proposed amendments to the SFDR Level 2 RTS as a result of the Complementary Climate Delegated Act (made under the Taxonomy Regulation). The Complementary Climate Delegated Act allows certain fossil gas and nuclear investments to be treated as ‘environmentally sustainable’ under the Taxonomy Regulation, in limited circumstances and provided that certain conditions are met. The amendments to the SFDR Level 2 RTS will provide for financial market participants to disclose, by way of a graph, the extent to which their portfolios are exposed to gas and nuclear-related activities that comply with the Taxonomy Regulation as set out in the Complementary Climate Delegated Act.
The amendments are aligned with a report issued by the European Supervisory Authorities (ESAs) setting out draft amendments to the SFDR Level 2 RTS. The ESAs noted that the disclosures:
Add a yes/no question in the financial product templates of the SFDR Delegated Regulation to identify whether the financial product intends to invest in such activities; if the answer was yes, a graphical representation (pie chart) of the proportion of investments in such activities is required.
Implement minor technical revisions to the Delegated Regulation to correct inconsistencies identified after its publication.
The ESAs consider the existing disclosures in the SFDR Delegated Regulation sufficient for fossil gas or nuclear energy investments by financial products that are not covered by the EU Taxonomy.
This update to the RTS follows a mandate issued to the ESAs by the Commission in order to align with the Complementary Climate Delegated Act (published 15 July 2022 and effective 1 January 2023). The ESAs issued their report with draft amendments to the SFDR Level 2 RTS on 30 September 2022. The EU Commission proposed the amendments on 1 November 2022. The amendments are now subject to scrutiny by the European Parliament and the Council. If neither object, the Delegated Regulation will be published in the OJ within three months and will take effect three days after being published. The intention is for the amendments to take effect from 1 January 2023, in line with the SFDR RTS. The amendments involve updates to the SFDR product disclosure templates (the Annexes).
The FAQs are categorised under general (such as What is a taxonomy eligible economic activity?), non-financial undertakings (such as How far should undertakings assess and report taxonomy-eligible activities in their value chain, both upstream and downstream?), financial undertakings (such as What should financial undertakings report if underlying entities' information is not publicly available?) and asset managers (such as How may asset managers weight their holdings in a portfolio to report taxonomy-eligible assets?) as well as FAQs for insurers, credit institutions and the debt market.
These FAQs complement the 22 FAQs published by the Commission on 20 December 2021, on how financial and non-financial undertakings should report taxonomy-eligible economic activities and assets in accordance with the Disclosures Delegated Act.
SFDR – PAI indicators and financial product disclosures in SFDR Level 2- review delay
The ESAs were invited to review the indicators for principal adverse impact (PAI) and the financial product disclosures in SFDR Level 2 by 28 April 2023.The ESAs have flagged that there will be a delay of up to six months in delivering the review. The ESAs identified challenges because of the substantial number of technical components and the need to consult with expert bodies and agencies (as stated in the mandate). The revision and extension of PAI indicators is a substantial and technically demanding exercise involving, among other things, their respective definitions, applicable methodologies, metrics and presentation. As part of this, the ESAs aim to develop a more objective basis to the 'do not significantly harm' (DNSH) framework and to significantly expand on the social indicators. Further technical developments are also relevant, for instance to specify the treatment of derivatives and to develop formulae for all PAI indicators. The ESAs reference analysis shows that substantial issues were not fully or adequately addressed in the original RTS. This includes, for example, the treatment of “equivalent information”.
ESMA strategy, work programme and union strategic supervisory priorities
ESMA published its Strategy for 2023-2028. In the strategy, ESMA details its long-term priorities and how it will use its competencies and toolbox to respond to future challenges and developments.
ESMA will focus on strengthening supervision, enhancing the protection of retail investors, fostering effective markets and financial stability, enabling sustainable finance, as well as facilitating technological innovation and effective use of data.
Verena Ross, ESMA Chair, said:
“The 2023-2028 ESMA Strategy is centred around three priorities and two thematic drivers. Fostering effectiveness and stability of the EU markets and enhancing the protection of retail investors, and doing both through strengthened supervision, are at the core of what ESMA is all about. The key twin drivers of sustainability and technological and data innovation are also now embedded across all areas of the organisation.”
ESMA also published its 2023 Annual Work Programme (AWP). It sets out ESMA’s priority work areas for the next year to deliver on its mission to enhance investor protection and promote stable and orderly financial markets.
Verena Ross, Chair, said:
“The 2023 AWP is the first work programme developed under the ESMA Strategy for 2023-2028 and will see ESMA delivering amongst others on the priorities we set out in our sustainable finance roadmap, adapting to digitalisation in financial markets and enhancing the access to and quality of supervisory data. A core part of our mission is to further improve the protection of retail investors and we will do this by promoting the convergence of supervisory and regulatory practices across the EU."
Notably, ESMA is changing its union strategic supervisory priorities (USSPs) to include ESG disclosures alongside market data quality. The new priority of ESG disclosures replaces costs and performance for retail investment products and represents an important step in the implementation of the ESMA strategy, which gives a prominent role to sustainable finance. ESMA and the national competent authorities (NCAs) will work together to foster transparency and comprehensibility of ESG disclosures across key segments of the sustainable finance value chain including issuers, investment managers and investment firms, and in doing so, tackle greenwashing. Not surprisingly, ESMA aims to gradually promote an increased scrutiny on ESG disclosures through effective and consistent supervision.
European Commission report on the functionality of the Securitisation Regulation
The European Commission published its long-awaited report on the functioning of the Securitisation Regulation. Read analysis by our ALG colleagues here.
AML/ CFT/ Sanctions
Commissioner McGuinness spoke recently on the new EU AML-CTF supervision model. Commissioner McGuinness gave an overview of the new EU AML-CTF supervision model. The model includes four different elements:
the new AML Regulation - directly applicable rules (the single rulebook) so that industry implement the same rules, no matter where in the European Union they are based
a new AML Directive - with scope for Member States to decide how they wish to structure their own systems, including the functioning of national supervision and cooperation
extension of the Transfer of Funds Regulation to the virtual and crypto space
a new EU Anti-Money Laundering Authority (AMLA) which will:
directly supervise certain entities
foster high standards, convergence and a common culture among national supervisors, encouraging cooperation and interaction between AMLA and national supervisors
support cooperation among Financial Intelligence Units and enable joint analyses of suspicious activities at EU level
get off the ground in 2024, to reach full staffing in 2025, and to start carrying out direct supervision in 2026 (as currently planned)
The Wolfsberg Group issued a comment letter on the EU AML/CFT legislative package to establish the new EU AML-CTF supervision model 2022
The IMF issued a report on Ireland and AML / CFT as part of its Financial Sector Assessment Program
FATF is holding a public consultation on Beneficial Ownership (Recommendation 24) which closes on 6 December