At a time when asset managers are grappling with a number of significant issues including market challenges arising from geopolitical change and the macroeconomic environment, the dangers and opportunities presented by artificial intelligence and climate change, and hiring and retention challenges in the flexible working environment, a pause in legal and regulatory change would no doubt be most welcome. However, there has been little deceleration in the pace of developments in this dynamic area of financial services, as legislators and regulators strive to keep step and address evolving issues.
A number of consultations impacting the industry are currently open or just recently closed, with the next steps to be confirmed. These include the European Securities and Markets Authority ("ESMA") consultation on funds' names using ESG or sustainability-related terms, the ESMA consultation on changes to Level 2 measures under the Sustainable Finance Disclosure Regulation ("SFDR"), the European Commission consultation on technical screening criteria under the EU Taxonomy Regulation, the Commission's consultation on greenwashing and the Central Bank's consultation on regulations and guidance implementing the Individual Accountability Framework. The European Commission will review SFDR Level 1 later this year, while the Irish Department of Finance will issue a public consultation to develop a "Funds Sector 2030" report on a framework to ensure that Ireland maintains its leading position in asset management and funds servicing and that we continue to see support for our national and regional economies. In relation to more advanced proposals, AIFMD II is expected to be finalised this summer, while the Commission has published its Retail Investment Strategy intended to create the necessary conditions to grow retail investor participation in capital markets.
It is clear that these consultations and proposals will bring more change in this ever-evolving legal and regulatory environment. We have set out below our expectations relating to some of those changes.
KEY THEMES IN ASSET MANAGEMENT AND INVESTMENT FUNDS
CENTRAL BANK GUIDANCE
Central Bank Cross-Sectoral Guidance on Operational Resilience
Irish fund management companies must be in a position to demonstrate that they have revised relevant frameworks in order to meet the requirements of this guidance by December 2023 at the latest.
The guidelines are described in the Spring 2022 Horizon Tracker.
Central Bank Macroprudential Measures and Guidance for Property Funds
The Central Bank has introduced macroprudential measures for property funds (the "Framework"), which include limits on leverage and guidance on liquidity timeframes ("Guidance"). This follows a consultation issued at the end of 2021 ("CP145").
A five year implementation period starting on 24 November 2022 will allow for the gradual and orderly adjustment of leverage in existing property funds. Existing funds will have 18 months to take appropriate actions in response to the Guidance. The Central Bank will now only authorise new funds if they meet the 60% leverage limit and it expects that property funds authorised after 24 November 2022 (the date of publication of the Guidance) will comply with the Guidance immediately.
For more information, see our briefing note Central Bank of Ireland Introduces Macroprudential Measures for Property Funds November 2022.
Central Bank Guidance on Performance of UCITS and Certain Types of Retail AIFs
On 1 April 2021, the Central Bank published guidance on Performance Fees of UCITS and Certain Types of Retail Investor AIFs (the “Central Bank Guidance”), which followed an initial consultation and partially implements the European Securities and Markets Authority ("ESMA") guidelines on performance fees published 5 November 2020.
The Central Bank is implementing the ESMA guidelines on a phased basis due to the need to: (a) consult on amending the domestic framework; (b) reflect the transitional periods provided under the ESMA guidelines; and (c) maintain a consistent approach for retail investor funds. There will be a further consultation on amending legislation to incorporate the ESMA guidelines into the CBI UCITS Regulations and the Alternative Investment Fun ("AIF") Rulebook, as the Central Bank considered that it was not possible to implement certain features of the ESMA guidelines with immediate effect from their date of application. The second Central Bank consultation had been expected to be published in 2022, but it is not now clear when the consultation will be published.
CENTRAL BANK THEMATIC REVIEWS
Thematic Review of SFDR Level 1 Compliance
The Central Bank advised in 2022 that it was conducting a thematic review of Sustainable Finance Disclosure Regulation ("SFDR") Level 1 compliance, which it expected to conclude in Q1 2023. The thematic review relied on in-house data that the Central Bank had already collected. It is expected that the Central Bank's findings on the SFDR Level 2 filings made in advance of the 1 December 2022 deadline will be informed by the thematic review.
Thematic Review of Exchange Traded Funds
The Central Bank has commenced a thematic review of exchange traded funds ("ETFs") during H1 2023. It issued a qualitative questionnaire in April 2023, followed by a quantitative questionnaire in May 2023, with a number of questions focused on authorised participants ("APs") and market makers. Phase 3 of the review, which will involve meeting with selected fund management companies, has yet to be scheduled.
IRISH CONSULTATIONS
Funds Sector 2030: A Framework for Open, Resilient and Developing Markets
On 6 April 2023, the Irish Department of Finance published the terms of reference for a review of Ireland's funds sector. The review will seek to ensure that Ireland maintains its leading position in asset management and funds servicing and that we continue to support our national and regional economies. It will also seek to ensure that Ireland's funds sector framework is resilient, future-proofed, supportive of financial stability and a continued example of international best practice. Work is expected to be concluded in summer 2024. The review team will seek external views, including by means of a public consultation, the opening date of which has yet to be confirmed.
EU LEGISLATION
European Long Terms Investment Funds Regulation ("ELTIF")
Date published: 20 March 2023
This ELTIF Amending Regulation (Regulation (EU) 2023/606) contains targeted amendments to the ELTIF Regulation (Regulation (EU) 2015/760) reflecting the outcome of the Commission's review of the legislation. The aim of the regulation is to improve the attractiveness of the ELTIF framework for investment managers and investors and to increase the uptake of ELTIFs across the EU. To date, it has not been possible to establish ELTIFs in Ireland, but the Central Bank has indicated that it will consider how to accommodate ELTIFs within the Irish regulatory framework and Irish Funds is preparing a submission in this regard.
Applies from: The ELTIF Amending Regulation entered into force on 9 April 2023 and applies from 10 January 2024. There are transitional provisions so that authorised ELTIFs benefit from a transitional period of five years and must comply with the ELTIF Amending Regulation by 11 January 2029. Subject to certain conditions, managers of existing ELTIFs may opt to apply the new ELTIF regime, providing that the ELTIF's competent authority is notified and approves the opt-in. ELTIFs authorised before 10 January 2024 which do not raise additional capital will be deemed to be compliant with the ELTIF Amending Regulation.
Sustainable Finance: Commission Delegated Regulation amending the Sustainable Finance Disclosure Regulation Technical Standards
See Sustainable Finance section.
Sustainable Finance: Regulation on the Establishment of a Framework to Facilitate Sustainable Investment – The Taxonomy Regulation
See Sustainable Finance section.
EU DRAFT LEGISLATION
Retail Investment Strategy – Proposed Omnibus Directive on Retail Investor Protection Rules
Procedure reference: COM(2023)279
Date published: 24 May 2023
On 24 May 2023, the Commission adopted a Retail Investment Package that aims to empower retail investors to make investment decisions that are aligned with their needs and preferences, ensuring that they are treated fairly and duly protected. As part of the EU Capital Markets Union Action Plan, the package aims to encourage retail participation in EU capital markets, which is essential in order to fund the green and digital transitions. The amending directive included in the package amends the Undertakings for Collective Investment in Transferable Securities Directive ("UCITS") and the Alternative Investment Fund Managers Directive ("AIFMD") and includes provisions relating to the transparency of costs, value for money assessments and a requirement for management companies to ensure that investors are not charged undue costs. The other measures proposed in the omnibus directive include:
- new rules aimed at protecting retail investors from misleading marketing communications and practices which emphasise benefits but downplay the potential risks;
- rules prohibiting inducements in execution-only cases and tackling bias in the advice process by strengthening the best interest principle and introducing new criteria for “acting in the best interest of the client” as well as improving transparency; and
- further measures on financial literacy, investor categorisation, enhanced suitability and appropriateness assessments, measures to increase professional qualifications of financial advisors and measures to enhance supervisory enforcement.
Latest stage: The Commission's adopted act is open for feedback for a period of eight weeks (ie, until 20 July 2023). The Commission will summarise the feedback and present it to the European Parliament and Council with the aim of feeding into the legislative debate.
Retail Investment Strategy – Proposed Regulation Amending the PRIIPs Regulation
Procedure reference: COM(2023)278
Date published: 24 May 2023
On 24 May 2023, the Commission published a proposal to amend the regulation on packaged retail and insurance based investment products ("PRIIPS" Regulation) as part of the Retail Investment Package. The proposal makes targeted amendments to the PRIIPS Regulation aiming to improve information for investors and their ability to make well-informed investment decisions. The proposal aims to adapt disclosures to the digital environment. It will introduce a new section in the PRIIPs key information document titled "Product at a glance" to summarise and highlight information on product type, costs, level of risk, recommended holding period and presence of insurance benefit, as well as a dedicated section focused on sustainability.
Latest stage: The Commission's adopted act is open for feedback for a period of eight weeks (ie, until 20 July 2023). The Commission will summarise the feedback and present it to the European Parliament and Council with the aim of feeding into the legislative debate.
Proposal for a Directive amending the AIFMD and the UCITS Directive
Procedure reference: COM(2021)721
Date published: 25 November 2021
On 25 November 2021, the Commission published a legislative proposal to amend the AIFMD as part of the Capital Markets Union Legislative Package. The Commission has set out targeted proposals, which would amend both the UCITS and AIFMD frameworks, including the introduction of minimum substance requirements where an EU fund management company delegates functions to a third country entity and an enhanced regulatory supervision framework for third country delegation arrangements. New rules addressing the use of liquidity management tools to ensure supervisory convergence across EU Member States are also proposed. The Commission has also suggested increased reporting requirements for both UCITS and AIFs to facilitate monitoring systemic risk.
Latest stage: Trilogue negotiations are ongoing and the Swedish Presidency of the Council of the EU is confident that the negotiations will be concluded before the end of its term on 30 June 2023. Member States will have 24 months after entry into force of the amending directive to transpose the requirements into national law.
ESMA Final Report on Notifications for Cross-Border Marketing and Management of Funds
On 17 May 2022, ESMA published a consultation on the information and templates to be provided and used by firms when they inform regulators of their cross-border marketing and management activities under the UCITS Directive and the AIFMD. The closing date for responses to the consultation was 9 September 2022. On 21 December 2022, ESMA published a final report specifying the information to be provided, and the templates to be used, to inform competent authorities of cross-border marketing and management of investment funds and the cross-border provision of services by fund managers. ESMA has submitted the RTS and ITS to the Commission for adoption within three months. The final RTS and ITS have not yet been published in the Official Journal of the EU.
EU CONSULTATIONS
ESMA Consultation Paper on Draft Regulatory Technical Standards under the Amending ELTIF Regulation
On 23 May 2023, ESMA published a consultation paper on regulatory technical standards ("RTS") under the Amending ELTIF Regulation. The RTS address the following:
- criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purpose;
- the circumstances in which the life of an ELTIF is considered compatible with the life-cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF;
- the circumstances for the use of the matching mechanism, ie, the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors;
- the criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets; and
- the costs disclosure.
ESMA will consider the feedback it receives to the consultation in Q3 / Q4 2023 and expects to publish a final report and submit technical standards to the European Commission for endorsement by 10 January 2024.
European Commission Targeted Consultation on the Money Market Fund Regulation
The Money Market Fund Regulation (EU Regulation 2017/1131 – "MMFR") requires the Commission to submit a report to the co-legislators assessing the adequacy of the MMFR from a prudential and economic point of view. On 12 April 2022, the Commission published its targeted consultation on the functioning of the MMFR. The deadline to respond to the questionnaire was 13 May 2022.
Irish Funds met with a senior Commission official in May 2023 who confirmed that the Commission's MMFR report is expected to be published imminently and that no legislative proposal will be proposed during the term of the current Commission. The report is expected to be factual in nature and it is understood that it will avoid strong recommendations.
Consultation on Fund Names' using ESG or Sustainability-Related Terms
This initiative was discussed in our Spring Tracker. For further commentary see here.
ESAs' Consultation on Amendments to RTS on Content and Presentation of PAI and Financial Product Disclosures under the SFDR
On 12 April 2023, the European Supervisory Authorities ("ESAs") published a consultation paper proposing amendments to the RTS on principal adverse impacts ("PAI") and financial product disclosures under the SFDR. The deadline for responses to this consultation is 4 July 2023.
The consultation is based on a mandate given to the ESAs by the Commission on 28 April 2022 to review and revise the SFDR RTS, but the ESAs' proposals go beyond the terms of that mandate. (The review of the SFDR RTS is to be distinguished from the broader review of SFDR Level 1 announced by the Commission early in 2023.) The main proposals include:
- expanding the list of universal social indicators for disclosing the adverse impacts of investment decisions on the environment and society and refining the content and definitions of existing PAI indicators and calculation formulae (to better align with the European Sustainability Reporting Standards and the Taxonomy Regulation);
- proposed changes to the do no significant harm ("DNSH") test;
- changes to product level disclosures, including changes to the language, layout and structure of the disclosure templates as the current templates are considered overly complicated and lengthy; and
- adding product disclosures concerning decarbonisation targets.
The ESAs are expected to issue their final report to the Commission in October 2023.
European Commission Consultation on Technical Screening Criteria under the Taxonomy Regulation
On 5 April 2023, the Commission published a consultation paper seeking input regarding the new set of EU Taxonomy technical screening criteria ("TSC") for economic activities contributing towards one or more of the four remaining environmental objectives set out in the Taxonomy Regulation (in addition to climate change mitigation and climate change adaptation, in relation to which TSC have already been published):
- sustainable use and protection or water and marine resources;
- move towards a circular economy;
- pollution control and prevention; and
- protection and restoration of ecosystems and biodiversity.
These four environmental objectives were due to apply from 1 January 2023. The first two environmental objectives - climate change mitigation and climate change adaptation - have applied since 1 January 2022. The deadline for responses was 3 May 2023.
EU REGULATORY INITIATIVES
ESMA Common Supervisory Action on Valuation
During 2022, ESMA conducted a common supervisory action ("CSA") focusing on the compliance of authorised managers of UCITS and open-ended AIFs with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets, is ongoing. The Central Bank issued a qualitative questionnaire requesting information and relevant supporting documents, together with an FAQ, to a sample of managers. On 24 May 2023, ESMA published its report on the CSA presenting its analysis and conclusions. ESMA has identified the following areas for improvement:
- the appropriateness of valuation policies and procedures;
- valuation under stressed market conditions;
- independence of the valuation function and use of third-party valuers;
- early detection mechanisms for valuation errors and compensation to investors.
ESMA Common Supervisory Action on Costs and Fees
On 31 May 2022, ESMA reported on its CSA on costs and fees for investment funds, which was carried out during 2021. On 24 March 2023, the Central Bank issued an industry letter on the CSA on Costs and fees. In advance of the publication of the Commission's Retail Investment Strategy, ESMA published an opinion on undue costs of UCITS and AIFs recommending legislative change to the UCITS and AIF frameworks relating to the notion of "undue costs". ESMA's recommendations have been actioned in the proposed directive published under the Retail Investment Strategy on 24 May 2023.