The Front Page, Asset Management & Investment Funds: EU & International Developments

ESMA opinion and advice on passporting under AIFMD

ESMA published its advice (to the European Parliament, Council of the EU and European Commission) on the application of the AIFMD passport to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) and its opinion on the functioning of the passport for EU AIFMs and the national private placement regimes (NPPRs).

The advice relates to the possible extension of the passport, currently only available to EU entities, to non-EU AIFMs and AIFs which are currently subject to EU NPPRs. As anticipated, ESMA conducted a country-by-country assessment (section 2), so as to take into account the different circumstances of each non-EU jurisdiction as regards the regulatory issues to be considered i.e. investor protection, competition, potential market disruption and the monitoring of systemic risk. ESMA assessed six jurisdictions – Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the USA – who were selected based on a number of factors including the amount of activity already being carried out by entities from these countries under the NPPRs, EU national authorities’ knowledge and experience of dealing with their counterparts and the efforts by stakeholders from these countries to engage with ESMA’s process.

The Advice concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles with the enactment of pending legislation. No definitive view has been reached on the other three jurisdictions due to concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria.

ESMA will continue to work on its assessment of other non-EU countries not covered in this advice with a view to delivering further submissions to the European Parliament, the Council and the Commission. For those non-EU jurisdictions with which there are currently no supervisory cooperation arrangements in place for the purposes of the AIFMD, ESMA will continue its efforts to agree a MoU with the authorities concerned.

The Advice and Opinion, required under AIFMD, will now be considered by the European Commission, Parliament and Council. In particular, the Commission will decide whether to activate the 3rd country passport or, as suggested by ESMA, to wait until sufficient evidence is available that they can conclude their analysis of a wider list of 3rd countries.

For more information see our In Focus paper here.

ESMA consultation on new UCITS V remuneration guidelines and revised AIFMD remuneration guidelines

As noted in our recent Front Page newsalert, ESMA published a consultation paper on guidelines on sound remuneration policies under the UCITS V Directive and the Alternative Investment Fund Managers Directive .The proposed guidelines are set out in section 8.4 (Annex IV) of the consultation paper  and a draft of the revised AIFMD guidelines is set out in section 14.5 (Annex V) of the consultation paper (the amendments relate to the guidelines for AIFMs being part of a group). Comments can be made on the proposals until 23 October 2015. ESMA aims to publish the final version of the UCITS remuneration guidelines together with a final report by the first quarter of 2016, ahead of the UCITS V transposition deadline of 18 March 2016. The final report is expe cted to include the final revised AIFMD remuneration guidelines. The draft revised AIFMD guidelines state that they will apply two months after they are published by ESMA.

ESMA updates Q&A on application of AIFMD

ESMA published an updated Q&A paper on the application of the Alternative Investment Fund Managers Directive. The Q&A has been amended (highlighted in yellow) to reflect updated answers about reporting information to national competent authorities and calculating the total value of assets under management.

IOSCO Consultation on International Standards on Fees and Expenses of Investment Funds

IOSCO published a consultation report on Elements of International Regulatory Standards on Fees and Expenses of Investment Funds, which proposes an updated set of common international standards of best practice for the operators of Collective Investment Schemes (CIS) and regulators to consider.

This consultation report builds on the recommendations made in the 2004 paper on International Regulatory Standards on Fees and Expenses of Investment Funds. It looks at whether these standards are still valid or might be updated or supplemented in light of market and regulatory changes. The report examines and consults on issues identified as being key across jurisdictions. Such issues concern, inter alia:

  • types of permitted fees and expenses,
  • performance-related fees,
  • disclosure of fees and expenses,
  • transaction costs, and
  • hard and soft commissions on transactions.

For the current report, IOSCO conducted a second review of existing regulatory practices with respect to fund fees and expenses in order to gather information about how these practices have evolved in recent years. Since the 2004 report, the natural evolution of the industry has resulted in new CIS product structures, new investment strategies and changing distribution models, amongst other developments. At the same time, regulatory developments in some jurisdictions or at the regional level (e.g. MiFID revision) have changed the way fees and expenses are disclosed, and the effectiveness of certain disclosure models has been tested with investors. Comments are invited by Wednesday 23 September 2015.

Key Information Document for PRIIPS

The European Banking Authority, the European Insurance and Occupational Pensions Authority and ESMA issued a Discussion Paper on Risk, Performance Scenarios and Cost Disclosures in Key Information Documents (KIDs) for Packaged Retail and Insurance-based Investment Products (PRIIPs). UCITS will not be obliged to move to producing a PRIIPs KID (which is based on the UCITS KIID) until 2019 at the earliest. Comments are invited using the response form, via the ESMA website, under the heading ‘Your input/Consultations’ by 17 August 2015.

AML and CTF risks associated with investment-based crowdfunding

ESMA issued a Q&A document to promote the sound, effective and consistent application of EU rules on anti-money laundering (AML) and counter-terrorist financing (CTF) for investment-based crowdfunding. The Q&A are aimed at NCAs to support them in delivering common supervisory approaches and practices in this area, taking into account the characteristics of, and risks associated with, different aspects of investment-based crowdfunding. ESMA also believes that the Q&A also help market participants by providing clarity on the issues involved.

FATF report on money laundering and terrorist financing risks and vulnerabilities associated with gold

The Financial Action Task Force (FATF) published a report on money laundering and terrorist financing risks and vulnerabilities associated with gold. The report was approved at FATF's June 2015 meeting and aims to promote effective risk mitigation and preventative measures.

  • Chapter 2 identifies the features of gold that make it attractive to criminal organisations as a mechanism to move value.
  • Chapter 3 maps the nature, source and scope of gold production, markets and trade, to assist practitioners to recognise the common predicate offences.
  • Chapter 4 sets out red flag indicators that could assist financial institutions, among others, to identify and report suspicious activities associated with money laundering and terrorist financing in the gold sector.

FATF objectives for July 2015 to June 2016

FATF published a paper in which the incoming FATF President outlines the objectives of the Korean Presidency of the FATF for the year July 2015 to June 2016. The seven priorities are:

  • Enhancing the efforts of  FATF and the FATF-style regional bodies (FSRBs) in CTF. The FATF and FSRBs will carry out a fact-finding survey on the current state of implementation of the FATF recommendations on CTF. The survey results will be reported to the G20 in October 2015.
  • Addressing the challenges faced by the fourth round of mutual evaluations.
  • Addressing capacity constraints. FATF intends to provide a capacity building programme at FATF level to help developing and under-resourced countries in implementing the FATF international standards and preparing for a mutual evaluation. For these purposes, the Korean Presidency proposes to establish a global AML and CTF training and research institute.
  • Work prioritisation and strategic allocation of resources. In light of the international community's and FATF members' demands on FATF, a strategic review of FATF's work priorities is required so as to seek to realign and match limited resources with priorities.
  • Mid-term review of the FATF mandate.
  • Reinforcing the global AML and CTF network. FATF will explore ways to deepen the relationship with the FSRBs and consider further how to reinforce its relationship with the Egmont Group of Financial Intelligence Units. It will also continue to work with the G20 and the UN on anti-corruption and enhance communication and co-operation with international bodies, including the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, IOSCO and the OECD, to promote consistent implementation of the FATF international standards.
  • Encouraging closer engagement with the private sector and civil society. As private institutions are in the frontline of AML and CTF compliance, there must be constant dialogue and feedback between them and the FATF, including in emerging economies and low income countries.

On 26 June 2015, FATF published a press release reporting on the outcomes of its 2015 plenary meeting.

FSB ninth progress report on implementation of OTC derivatives market reforms

The Financial Stability Board  issued a press release together with its ninth progress report on the progress of standard-setting bodies, national and regional authorities and market participants towards meeting the G20 commitments for reforms to global OTC derivatives markets. Implementation of OTC derivatives market reforms is well underway, with the foundational authority needed to give effect to the full range of these reforms in most FSB member jurisdictions.

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

Date published: 30 July 2015