Latest regulatory update (PRIIPs, AIFMD II and more)

1. EU-PRIIPS / UCITS: EC update imminent

There remains no formal European Commission (EC) announcement of exactly how (and when) they intend to legally apply the draft RTS for a revised PRIIPS Key Information Document (KID), including the extended regime covering UCITS funds marketed to retail clients (i.e. currently exempt until end-Dec 2021).

The European Fund and Asset Management Association (EFAMA) currently expect these details to be clarified within a matter of days. Meanwhile, EFAMA also feature prominently in this morning’s Ignites headline article, continuing to highlight the vast logistical challenge facing UCITS firms in 2022, including double-disclosures for the same products (UCITS KIIDs and PRIIPS KIDs) within 6 months, with forecast volumes of PRIIPS KID linguistic translations poised to “easily rise into five digits”.

The same feature draws attention to last Friday’s warning from the Belgian Financial Services and Markets Authority (FSMA) over the poor quality of local PRIIPS disclosures since the regime began in 2018 (notably incorrect performance calculations and ambiguous investment objectives), with more prescriptive local rules and further action now a possibility.

2. UK-PRIIPS / UCITS: dust continues to settle

Same subject, different side of the channel: there has been mixed marketplace reactions to the UK government’s decision to extend the UCITS exemption from their PRIIPS framework for a further 5 years.

• BBH’s global head of regulatory intelligence comments that the extension “sounds like good news, yet actually complicates matters” and creates “more work, not less” for cross-border fund firms.
• FE FundInfo question whether EEA funds temporarily passporting into the UK are able to continue using their EU-PRIIPS KID or have to produce a UCITS KIID for retail investor pre-disclosure
• The UK Investment Association (IA) welcomed reform of the PRIIPS regulation to enable this to be “fit for purpose”, providing “clear and meaningful information to customers”.
• The Association of Investment Companies (AIC) representing UK closed-ended funds strongly object to the PRIIPS KID being retained as the mandatory AIF pre-contractual disclosure means for UK retail investors.

While the latest reportage highlights rumours of “only minor adjustments” to the UK-PRIIPS rules, a reminder that the Financial Conduct Authority are now legally positioned to specify the localised “appropriate performance information” deemed necessary for the UK-PRIIPS KID in due course.

3. AIFMD II: legal updates expected Nov 2021

The European Commission’s AIFMD II legislative proposals are now expected in November 2021. 

As of now, it remains unclear how many of the subject matters raised in the EC’s 2020 consultation will face significant rule changes in the revised level 1 directive.

It seems likely that those areas with changes pending include the alignment of lliquidity management tools (LMTs) across the EU, a framework for loan origination funds and an AIFMD reporting common supervisory reporting database.    However, there is no sign whether ESMA’s notable suggestions supplied last year (e.g. significant changes to Investment Manager delegation arrangements for non-EEA firms, the application of a “harmonised” Annex IV reporting regime to UCITS managers) will be incorporated, alongside any inclusion of a new semi-professional client category (to align with MiFID II).

4. Cross-border fund rules pending: 02 Aug 2021

The Cross-Border Distribution of Funds (CBDF) directive and regulation were aligned in 2019.

A key part of the EC’s Capital Markets Union (CMU) action plan, the CBDF package introduces new rules relating to cross-border marketing and distribution of EU-collective investment undertakings.

The CBDF regime amends AIFMD and UCITS directives in the attempt to synchronize certain operational aspects of the cross-border marketing regimes currently applicable.

Most legislation articles apply from 02 August 2021.  Kneip are will organise another client-only webinar, covering the highlights of the Cross-Border Distribution of Funds legislation (ETA: mid-July 2021).  More details again to follow.

Recent notable CBDF coverage has focused on ESMA’s new marketing communications guidelines (i.e. deferred until Q1 2022), together with the new protocol to de-notify UCITS / AIF units or shares marketed in certain EU member states and revised investor marketing facilities.

One factor of the CBDF directive that seems to have attracted less attention (until now) is the amendment of UCITS IV art. 93, i.e. requiring UCITS fund firms to give at least one month’s written notice to both home and host regulators “in the event of a change to the information in the notification letter” (previously submitted) or “a change regarding share classes to be marketed”.

Although not specifically referred to in the legislation, several legal experts have recently deduced this may necessitate UCITS entities to file translated KIIDs at least 30 days in advance with both home and host NCAs.  One firm now contemplates a likelihood of “significant and unwelcome impact on UCITS managers’ plans for passporting share classes”, i.e. “in stark contrast” to the current market standard practice (i.e. a 10-day turnaround of fund passport notifications).

The legal application of this adjustment rests upon localised laws (currently variable) and level 3 guidance issued by the respective NCAs (in scarce supply).   Kneip continue to seek information from reliable sources and will present an update to their clients during the July CBDF webinar.

While this instance does not appear to have generated many queries (yet) within the industry, we do recommend that firms verify their general preparedness for the CDBF regime in August (where necessary) with their legal and compliance teams.

5. EC: launch retail investor strategy consultation

“This initiative aims to ensure that consumers who invest in capital markets can do so with confidence and trust, that market outcomes are improved and consumer participation is increased. If more consumers invest in capital markets – channelling capital to private sector firms – that could help the process of economic recovery after the economic fallout from the COVID-19 pandemic.”

Finally, the EC has accelerated past their initial roadmap onto a full public consultation covering a long-term strategy for retail investors.

As highlighted before, this is another part of the CMU and seeks to align the variety of retail investor protection regimes (UCITS, MiFID II, PRIIPS, etc) currently in operation.

Open until 03 August, areas covered include:

• the comparability of similar investment products regulated by different legislation (i.e. hence subject to multiple disclosure obligations)
• fair advice in light of current inducement practices
• how to address the financial literacy of EU citizens
• the impact of digitalisation on financial services
• sustainable investing

On completion of the consultation, the EC will proceed to prepare finalised (level 2) regulatory amendments (scheduled for adoption Q2, 2022).