Latest regulatory update

1. AIFMD: EU, UK divergences

a) FCA announce UK Annex IV reporting divergence

As mentioned last week, the Financial Conduct Authority (FCA) have directly contacted regulated firms to notify them of changes to their AIFMD Annex IV AIF001 and AIF002 reporting templates “…following the UK’s withdrawal from the EU”. These now apply to the current Q2 reporting period, with an initial RegData filing deadline set for 1 August 2022.

While the FCA have revised their SUP 16.18 AIFMD reporting handbook (post-dated 29 July 2022), there has been no formal press announcement or revised UK Annex IV reporting guidance made available at this stage.

Kneip presume this will impact both local UK AIFMs and those EEA firms operating within the FCA’s national private placement regime (NPPR) since 1 April. We have already have begun the process of updating of our Annex IV reporting service to readily accommodate both EEA and UK AIFMD regimes in good time.

As always, clients with queries can directly contact their Kneip account manager, or get in touch on our website.

NB: a reminder that European Supervisory and Markets Authority (ESMA) have yet to issue an update of their original AIFMD reporting framework (in place since 2014, when the UK was a member of the EEA).

b) EU level 1 latest

We continue to track the EC’s proposed long-term updates to the EU-AIFMD regime itself.

The latest proposals remain at an early stage of EU negotiation, with initial EU trilogue agreement only likely in the second half of 2022.  At some stage, this will include proposals to replace the EU Annex IV reporting templates, alongside similar supervisory reporting for UCITS firms and funds.

c) EU-AIFMD leverage risk assessment (art.25)

Over in Paris, L’Autorité des marchés financiers (AMF) are currently proceeding with a localised data quality initiative in relation to AIFMD reporting.

This follows on from ESMA’s guidelines in relation to quarterly risk assessment of firms managing leveraged AIFs (per AIFMD art. 25).  Set to begin this month, these are assumed (by most) to be a matter directly for EEA regulatory authorities, alone.  However, unlike most other NCAs, the AMF has decided to make specific refinements to their Annex IV reporting process, impacting local AIF market participants. They have requested a series of Data Quality Checks (DQCs) to be performed by local AIF managers, with results to be disclosed in two stages:

• batch no.1: identification of AIFs at risk, based on their Q1-2022 AIF reporting (deadline: 30 April 2022)
• batch no. 2: relating to a systemic risk assessment information, based on Q2-2022 AIFM reporting (deadline: 31 July 2022)

NB: Kneip has access to all necessary information (finalised recently on 12 April 2022) and is now prepared for the respective quarterly AMF implementation dates.

2. PRIIPS developments

a) EU-PRIIPS level 1 update

ESMA and EIOPA are members of the European Supervisory Authorities (ESAs) joint committee, tasked with delivering sector-specific advice to the European Commission (EC).  One key component of the EC’s pending Retail Investor Strategy is their review of the current EU-PRIIPS legal regime (level 1).

Last week, the ESAs presented 150 pages of technical advice to the EC, ahead of the PRIIPS legal review.

This includes specific proposals “to make the PRIIPS KID more consumer-friendly”, including:

• Digital KID adaptation: allowing “vital information” to be presented in a “layered” format, to avert “information overload” for retail investors
• A machine-readable KID, with ex-ante disclosure aligned with the European Single Access Point (ESAP) in due course
• A new KID section for sustainable objectives (linked to SFDR / TR)
• Introduce a “more tailored KID” per product type: “to ensure appropriate understanding of retail investors” (e.g. short vs. long-term duration, insurance-linked, linear, structured and derivatives)
• Past performance: included in the KID where “relevant” i.e. all UCITS and AIFs except structured products
• Modified rules for multi-option insurance products: “to better facilitate comparison between different investments”

It is now for the EC to decide which of these are to be adopted in their PRIIPS consultation, expected within a matter of weeks.  Given the EU legal due process, a reminder the application of any L1 regime amendments is unlikely before 2025.

b) Product descriptions: changes, divergence ahead

The ‘What is this product?’ section is a key part of the PRIIPS KID.  This was intended to enable retail investors easily understand the key features of each product.  Until now, it is a “free text” section within the KID template – with each product manufacturer able to decide the narrative.

Yesterday, the ESAs published a joint Supervisory Statement to call for improvements in product descriptions facing retail investors.  These are currently “too technical and difficult to understand”, including “very long and complex legal descriptions”.    Ongoing, the ESAs provide interim guidance about firms can “improve the clarity and comparability of KIDs”, including the use of “clear and understandable language” in product descriptions to “contribute to better protection of retail investors”.

NB: The ‘What is this product?’ section has been extensively revised in the EU-PRIIPS KID RTS.

From 1 January 2023, many additional retail disclosure rules will begin to apply, covering “essential features of a UCITS or AIF”, including investment objectives and policy information not disclosed in the prospectus.

To complicate matters, this section has not been changed in the UK-PRIIPS KID RTS.

c) Latest: European retail disclosure legal arrangements

EU lawmakers continue scrutiny of the “quick-fix” to align the level 2 PRIIPS RTS application date with the 31 December 2022 deadline scheduled for retail UCITS firms.  With no objections likely at this stage, legal closure seems set to follow before end-Q2 2022.

In their recent PRIIPS level 1 technical advice, the ESAs highlighted the “unclear” status of UCITS ex-ante notifications to national competent authorities (NCAs) across the EEA and requested the EC provide “urgent clarity”.   Presumably, the new Cross-Border Distribution of Funds (CBDF) regime (where most EEA NCAs currently refer only to UCITS KIIDs) will be updated, also.

Over in the UK, there has been no clarification about FCA acceptance of the revised EU-PRIIPS KID as legal pre-contractual disclosure for UK retail investors, from next year.

Similarly, there has been no update from the Swiss Financial Market Supervisory Authority (FINMA) in relation to the recently confirmed UK-PRIIPS regime. Their local Financial Services Act (FinSA) is already aligned with the EU-PRIIPS/UCITS regimes, including supply of an EU-PRIIPS KID or a local basic information sheet (BIB) to non-qualified Swiss clients, from 1 January 2023.

3. Sustainability updates

a) EU SFDR / TR latest

This week, it became clear the EC intend to plough ahead with further extending the EU Sustainable Finance Disclosure and Taxonomy regulations (SFDR / TR) framework.

The ESAs were recently given two EC mandates to amend their SFDR / TR disclosure rules.

• The first mandate relates to information about financial products exposed to investment in fossil gas and nuclear energy activities for disclosure in pre-contractual documents, periodic reports and websites. These SFDR/TR amendments are needed by 30 September 2022 (at the latest).
• The second mandate requires “broadening” of the SFDR framework to address “the main technical issues” in relation to Principal adverse impacts (PAI) at entity and product level. The EC now need an extended list of PAI universal indicators, together with amended definitions, methodologies, metrics and presentation rules.  The EC also request more rules for decarbonisation targets and milestones, also for disclosure in product pre-contractual documents, periodic reports and websites.  The ESAs have until 8 April 2023 to deliver this SFDR/TR package.

Meanwhile, a reminder the EU Parliament and Council will have at least until the end this month to accept (or reject) the EC’s adoption of gas, nuclear inclusion in the EU taxonomy itself.  They also continue to scrutinise the previous set of SFDR / TR technical standards – adopted by the EC last month – ahead of their application in January 2023.

b) UK TCFD / SDR latest

In their recently published business plan for the next 12 months, the FCA state that they will “build on” their ESG regulatory framework (rules, standards) by “being transparent in our approach to managing our own climate-related risks and opportunities. In 2022, we’ll publish a report covering the recommended disclosures of the Task Force on Climate-related Financial Disclosures (TCFD).”

Elsewhere, there is still no sign of either:

• FCA policy statement: covering the new UK Sustainability Disclosure Requirements (SDR) regime
• UK Green Taxonomy update: including draft technical screening criteria for climate change objectives

A reminder these were expected to appear before end-Q1-2022.

Meanwhile, the FCA are reportedly in dialogue with leading European institutional real estate associations, covering their proposed ESG metrics and SDR product labels.

4. Miscellaneous round-up

a) MiFID II: ESMA activities

You may have noticed the MiFID II regime attracting much industry attention, considering:

• EC long-term level 1 proposals: updating market trading infrastructure, transparency
• EC targeted consultation: enhancing key suitability and appropriateness assessments
• ESMA continuing consultation: guidelines to apply sustainability factors, risk and preferences to MiFID II suitability requirements (ahead of 2 August 2022)
• ESMA pending consultation: required guidelines to apply sustainability factors to MiFID II product governance obligations (ahead of 22 November 2022)

Alongside PRIIPS, MiFID II is also at the core of the EU retail investor strategy. In their key role, ESMA recently provided the EC with further technical advice to improve retail investor protection. Proposals include:

• Formal alignment of EU-MiFID II disclosure regime with EU-PRIIPS: using the same means outlined by the ESAs last week (e.g. machine readable documents, ways to avoid “information overload”).
• Standardised EU format of costs and charge information: aligned to MiFID II ex-ante disclosure, once the PRIIPS Level 1 review has been completed
• A new ‘vital information document’: based on PRIIPS KID information, to supplement the marketing materials of UCITS, AIF and MiFID II firms. This has attracted a mixed response from industry insiders.

ESMA’s recent letter to the head of the EC financial policy department also supported a longer-term simplification of the primary MiFID II investor assessments, including a ‘standardised’ retail investor assessment regime and a ‘personalised’ asset allocation strategy (applicable to funds and insurance products).

b) EIOPA: issue Final report on retail investor protection

EIOPA have also been very busy with their EU retail investor strategy advice for insurance and pensions industries.  Last week they delivered almost 700 pages of technical advice, annexes and resolution tables to the EC.  They proposed to address existing Solvency II and PRIIPs KID disclosure duplications; they also endorse a transfer of “missing generic and personalised elements” from Solvency II into the Insurance Distribution Directive (IDD) regime, “…without creating a separate document for the personalised disclosures”.

c) ESMA: re-affirm ESAP delivery timeframe

ESMA recently reaffirmed their European Single Access Point (ESAP) is still on-track for a 2024 delivery.

They reminded a webinar audience of the ESAP objective to create “a common source of public and freely available financial and sustainability-related information of EU companies and investment products”.

This enables “a better use and reuse of this information” in order for EU companies “to save time and resources”, while enabling investors “to make sound and well-informed investment decisions.”

ESMA’s re-stated their aim to include “…over time …all relevant information relating to issuers as well as financial products”. The ESAP implementation will remain phased; it may start “as soon as 1 January 2024”,  with “potential gradual expansion… beyond 2026.”

d) EC: launch EU Digital Finance Platform

Finally, for now: the EU Digital Finance Platform has been launched.

The EC describe this as a “collaborative space bringing together industry and public authorities to support innovation in the EU’s financial system and help work towards a true Single Market in digital finance.”

The EC website currently has two components:

• Observatory: offering interactive features such as a Fintech Map, events and a section where users will be able to share relevant research material
• Gateway for innovation facilitators: a single access point to supervisors, “with information about national innovation hubs, regulatory sandboxes and licensing requirements”. This will also enable cross-border testing, enabling firms to involve multiple NCAs in the testing of new products or applications.

ESMA will now assist the EC “to make the Digital Platform a tool that will be recognised and used by FinTech in Europe”.  Next year, there will be added features, including a Data Hub “to be used by the industry and supervisory authorities to enhance their toolkit and their capacities in testing innovations”.