1. Sustainable Finance developments
a) EU expert group: Nuclear energy, natural gas “…not sustainable activities”
“Existing nuclear is zero emissions – tick – but draft CDA criteria do not require no significant harm to [any other] EU environmental objectives as needed under the TR: water & marine; circular economy; pollution prevention & control; biodiversity & ecosystems.”
Nathan Fabian (Chairperson at EU Platform on Sustainable Finance), 24 January 2022
“I fully accept that gas is a fossil fuel — we’re not blind to this — but it’s much better than the continuing use of dirty coal. Equally, nuclear is carbon free.”
Mairead McGuinness (EU Financial Services Commissioner), 31 January 2022
On 1 January 2022, the Taxonomy regulation (TR) came into force for climate change mitigation and adaptation environmental objectives. However, as mentioned last time, economic activities in relation to both natural gas and nuclear energy sectors have been excluded from the underlying TR framework, given the continuing disagreement within key member states.
The interim European Commission (EC) plan was to adopt an extended Taxonomy before the end of January. However, in an interim setback, their in-house ESG expert group has responded negatively to the proposed legal amendments to incorporate both contentious sectors within existing TR technical screening criteria and key performance indicators.
The EU Platform for Sustainable Finance (PSF) group conclude in their recent response that the proposed inclusion of nuclear and gas activities “are not in line” with the Taxonomy regulation itself.
The PSF also pledged to assist the EC efforts to accelerate the transition to a low-carbon economy; they will publish “within weeks” further details of an extended Taxonomy framework “beyond green”. This will contain a new intermediate “amber” performance category (to cover certain greenhouse gas emissions on a “life-cycle basis”) and an “unsustainable” category (i.e. activities requiring “an urgent and just transition”).
However, as quoted above, the EU Financial Services Commissioner has retorted that the EC “won’t be rewriting their text”; the College of Commissioners are poised to sign-off the controversial TR amendment this week, ahead of a 4-6 month scrutiny period by the EU Parliament and Council.
b) Recent notable market analysis
Morningstar have unveiled their latest list of European mutual fund sales by firms during 2021.
This is said to underline the continuing trend of increasing sustainable product demand; ongoing, active products (including thematic and ESG funds) are set to “dominate“, with investor appetite for passive funds likely to decrease if global uncertainty persists.
Separately, Refinitiv points to sustainable investment exposures driving large differences in the 2021 share price returns of prominent, globally listed asset managers.
Elsewhere, a recent ESG survey of professional investors across Europe and South East Asia concludes a clear majority “will now avoid – or even divest from – asset managers that are not meeting their responsible investment expectations… by way of product offering, investment approach or client reporting.” 85% of respondents now consider responsible investment as a crucial “deal-breaking” part of manager selection, with only 33% intending to retain investments in funds classified as SFDR art. 6 (i.e. non-sustainable) this year.
2. PRIIPS latest: UK, EU
a) FCA: updates key UK-PRIIPS grandfathering update (UCITS / NURS)
The UK Financial Services Authority (FCA) has revised their initial communication for firms within scope of their extended local PRIIPS exemption period. The latest version includes a key clarification that:
- UCITS schemes can only provide the UCITS KIID until 31 December 2026
- non-UCITS retail schedules (NURS) will meet their revised FCA sourcebook (COLL) obligations by producing either a UCITS KIID or a PRIIPS KID.
The FCA’s deferred UK-PRIIPS regime policy statement (including their finalised UK-KID and transition period) remains scheduled to appear before the end of Q1-2022.
b) EU: PRIIPS RTS application alignment still “pending”
A reminder the application date of the amended PRIIPS RTS published recently in the Official Journal of the EU is 1 July 2022 (i.e. 6 months ahead of extended UCITS transition period which ends 31 December 2022).
While experts anticipate an imminent EC proposition to re-align the RTS application date, the required formal due process (including verification from the EU Parliament and Council) may run until Q2-2022.
Meanwhile, the Luxembourg Council of State have now reviewed the recent EU PRIIPS / UCITS legislation (with formal approval by the Chamber of Deputies now expected later in February).
c) PRIIPS L1 call for evidence: responses now available
Contributors to the recent PRIIPS call for evidence organised by the European Supervisory Authorities (ESA) have attracted prominent media attention.
ESMA’s Securities and Markets Stakeholders Group (SMSG) observed a “substantial degree of consistency” within the retail investment product regime. However, they also cite a “clear need to rapidly reform level-1 regulation with respect to specific areas”, including:
- Future performance scenarios: current results “confusing and incomprehensible to retail investors”
- Past performance disclosure: to be promoted to the main contents section of the EU-PRIIPS KID
The SMSG also present interesting findings in a PRIIPS KID study by the German Banking Industry Committee, alongside analysis from the Consob in Italy. It is also recommended that the optional ex-ante KID notification “should be re-thought” to achieve the “goal of a more integrated European capital market.”
Elsewhere, the UK Investment Association (IA) recommend the PRIIP regulation “should become a data standard” and the EC’s pending level 1 review should now instead “focus on providing standardised performance, risk, and cost data that intermediaries can use to make investor-focused, digitally-adapted disclosures about their services and the products they offer.”
NB: it is still possible to register for the ESA’s Public Hearing on the Review of the PRIIPs Regulation that will take place on Friday 11 February 2022.
3. Other recent UK developments
a) GovUK: financial services regulation “bonfire” pending
Officials across government are currently reviewing all EU retained laws to determine if they are beneficial to the UK.
It is right that people know how much EU-derived law there is and how much progress government is making to reform it, so the government will make this catalogue public in due course.
Gov.UK press release, 31 January 2022
To mark the second anniversary of Brexit, the UK government has published a new Benefits Policy document, while announcing a new ‘Brexit Freedoms legal Bill’ in order to “end the special status of EU law and ensure that it can be more easily amended or removed”.
Meanwhile, there is renewed media anticipation of an imminent regulatory “bonfire” in the UK.
The chief finance minister has reportedly informed colleagues of his interim plans to “shed EU rules for financial services”. It is understood that the UK government are currently considering 19 possible areas in total: one item mentioned is an easing of EU Solvency II directive capital requirements, currently in place for the insurance industry.
On 9 February 2022, the UK Treasury is scheduled to conclude its Future Regulatory Framework (FRF) Review consultation (previously heralded as “Big Bang 2.0”). More to follow.
b) FCA: “fires warning shot” to European firms using TPR
‘The UK is open for business, but not to firms who do not meet our regulatory expectations. We expect firms operating under the regime to be responsive to our requests for information, and that are coherent in their business planning. We will continue to act against firms that fail to meet our standards.’
Financial Conduct Authority, 21 January 2022
The FCA recently issued a reminder to EEA firms wishing to remain in the temporary permissions regime (TPR) of the need to comply with their required conditions, in order to continue operating in the UK marketplace. Those failing to respond within their formal ‘landing slot’ invitation could either be prevented from undertaking new business or removed altogether from the TPR. To emphasise their point, the FCA publicly names four firms summarily removed from the UK-TPR, after failing to respond to recent information requests.
The TPR is scheduled to run until December 2023, to be replaced by the Overseas Fund Regime (i.e. still to be formally activated). In the meantime, another interim reminder of the imminent cessation of the FCA Temporary Transitional Powers (TTPs) on 31 March 2022. Ongoing, pre-authorised EEA firms must ensure their full compliance with the UK versions of all “onshored” EU legislation.
4. Other EU regulatory updates
a) Additional CBDF/R milestones
Further parts of the cross-border distribution of funds regime became applicable on 2 February 2022.
One key component of the CBDF regulation are ESMA’s marketing communication guidelines, including specific content rules for marketing materials (including factsheets), which have now been accepted by all local NCAs.
Also expected this week was ESMA’s delivery of two central databases on their website:
- One DB containing NCA summaries of local marketing rules
- Another DB listing all AIFs and UCITS currently marketed across the EEA.
However, neither database has yet appeared (with no interim press announcement to date).
ESMA did publish this week (in PDF format) a document compiling local CBDF regime information, including hyperlinks and summaries of EEA-NCA rules governing UCITS and AIF marketing requirements.
NB: a reminder that Kneip remain positioned to assist with interim difficulties faced by our clients (e.g. diverging NCA rules) as the CBDF regime dust continues to settle.
b) CSSF: issue DLT white paper
In Luxembourg, the CSSF recently published their white paper covering Distributed Ledger Technology (DLT) and blockchain: this aims to advise local firms embarking on their risk assessment, ahead of future FinTech project planning.