EU/UK Regulatory roundup

On June 5, 2019, the International Organization of Securities Commissions (IOSCO) published a final report on sustainable finance in emerging markets and the role of securities regulators.

The final report puts forward 10 recommendations that IOSCO member jurisdictions should consider when issuing regulations or guidance regarding sustainable instruments and additional disclosure requirements of environmental, social and governance (ESG)-specific risks. When applying these recommendations, regulators and market participants are encouraged to maintain an open dialogue, taking into account local conditions, the level of market development in their jurisdiction and global/regional efforts in the area of sustainable finance.

On June 5,2019, the House of Commons’ Treasury Committee announced that it was launching an inquiry into the decarbonisation of the UK economy and green finance. The inquiry will scrutinise the role of HM Treasury, regulators and financial services firms in supporting the government’s climate change commitments. It will also examine the economic potential of decarbonisation for the UK economy in terms of job creation and growth. The deadline for written responses to the inquiry is July 26, 2019.

On June 4, 2019, the European Securities and Markets Authority (ESMA) published an updated version of its Q&As on the Alternative Investment Fund Managers Directive (AIFMD).

Five new Q&As have been inserted under Section VI regarding depositories, namely asking

• Under recital 42 of AIFMD, what are ‘supporting tasks that are linked to depositary tasks such as administrative or technical functions performed as part of the depositary tasks’ and under which conditions would it be possible to entrust third parties with such tasks?
• May depositaries entrust third parties with the performance of tasks that would give them the ability to transfer assets belonging to alternative investment funds (AIFs)?
• Where the depositary of an AIF is a branch and the head office is established in a Member State other than the home Member State of the AIF, to which extent may the branch allocate its depositary functions to its head office in compliance with the establishment requirement set out in Article 21(5) of AIFMD?
• Where depositary functions are performed by a branch established in the home Member State of the AIF other than the home Member State of the depositary’s head office, who is responsible for supervising the activities of the branch relating to depositary functions?
• Where a depositary delegates some of its functions to another legal entity which belongs to the same group, should this be considered a delegation for the purposes of the application of the depositary delegation rules under Article 21(11) of the AIFMD?

On May 31, 2019, the FSB published a report on crypto-assets, which considers work underway, regulatory approaches and potential gaps. The report is being delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on June 8-9, 2019. International organisations are working on a number of fronts, directly addressing issues arising from crypto-assets. As described in the report, they are mainly focused on investor protection, market integrity, anti-money laundering, bank exposures and financial stability monitoring.

On May 29, 2019, the FCA issued a call for input regarding a cross-sector sandbox. The call for input provides an overview of the FCA’s work on the concept of a cross-sector sandbox, highlights what the sandbox is and, using case studies, explains the opportunities and challenges a cross-sectoral sandbox could pose for firms and regulators. The FCA is inviting views on the concept until August 30, 2019.

On May 28, 2019 IOSCO published a consultation paper on issues, risks and regulatory considerations relating to crypto-asset trading platforms (CTPs). The consultation paper identifies eight key considerations for regulatory authorities to take into account when considering the regulation of CTPs. These are accompanied by a set of toolkits, listing examples of practical regulatory measures. The industry is invited to submit comments by July 29, 2019.

On May 24, 2019, the FCA published the following revised directions following the extension of the Article 50 Brexit negotiations to October 31, 2019

• Direction for EEA passports and Treaty firms
• Direction for EEA UCITS
• Direction for EEA alternative investment funds

The revised directions consequently details that firms and funds can notify the FCA of their intention to join the respective firm/fund temporary permission regime before October 30, 2019.

On May 24, 2019, the FCA confirmed the deadline for notifications for the temporary permissions regime (TPR) will be extended to the end of October 2019.

On November 7, 2018, the Cost Transparency Initiative (CTI) was launched. The CTI is an independent group working to improve cost transparency for institutional investors with the responsibility for progressing the work already undertaken by the Institutional Disclosure Working Group.

On May 22, 2019, the FCA published a statement welcoming the launch of the CTI finalised templates for the disclosure of costs and charges to institutional investors.

On May 22, 2019, there was published in the Official Journal of the EU (OJ) two Delegated Regulations concerning conflicts of interests in European funds

• Commission Delegated Regulation (EU) 2019/819 of 1 February 2019 supplementing Regulation (EU) No 346/2013 of the European Parliament and of the Council with regard to conflicts of interest, social impact measurement and information to investors in the area of European social entrepreneurship funds
• Commission Delegated Regulation (EU) 2019/820 of February 4, 2019 supplementing Regulation (EU) No 345/2013 of the European Parliament and of the Council with regard to conflicts of interest in the area of European venture capital funds.

Both Delegated Regulations came into force on June 11, 2019 and apply from December 11, 2018.

On May 20, 2019, the FCA published a webpage setting out the findings of its supervisory review of principal firms in the investment management sector. The review was carried out following a similar review in the insurance sector which identified shortcomings in the control and oversight of appointed representatives (ARs) by their principal firms. More recent supervisory work within the investment management sector identified similar concerns, prompting this review.

The FCA has published an accompanying Dear CEO letter setting out the findings of its review, and its expectations for firms.

On May 13, 2019, ESMA published the keynote speech that Evert van Walsum (Head of Investors and Issuers Department, ESMA) gave at the Swedish Fund Association’s Annual Conference.

In his speech Mr van Walsum covers sustainable finance, costs and fees borne by investors buying funds and investor protection more generally, with a focus on disclosure-related issues.

In relation to sustainable finance Mr van Walsum notes that

• The three European Supervisory Authorities (ESAs) are now starting work on the mandated technical standards on disclosure.
• ESMA is providing technical advice which will supplement the EU legislative proposals on sustainable finance by amending delegated acts under the UCITS Directive, the AIFMD and MiFID II. ESMA has recently submitted technical advice on integrating sustainability risks and factors in the above Directives.
• ESMA’s advice on changes to the UCITS Directive and AIFMD Level 2 legislation relates to organisational requirements, operating conditions and risk management. On organisational requirements, ESMA recommends that the Commission amends relevant requirements to ensure that all UCITS management companies and alternative investment fund managers (AIFMs) take into account sustainability risks in their processes, systems and controls, devote sufficient resources to the integration of sustainability risks and ensure that senior management is responsible for the integration of sustainability risks. In terms of operating conditions, ESMA’s advice recommends changes to the legislative texts to ensure that fund managers take into account sustainability risks in their due diligence processes and consider conflicts of interests that may arise in relation to the integration of sustainability risk. On risk management, ESMA has recommended to the Commission to include sustainability risks in the list of material risks to be managed by UCITS management companies and AIFMs.

In terms of the agreed legislative proposal on disclosures, Mr van Walsum states that the ESAs are empowered to draft a significant number of draft technical standards, most of which will be produced during or just after the summer. These include

• Public disclosure of so-called ‘principal adverse impacts’ of investment decisions on sustainability factors, such as environmental and social matters
• Pre-contractual disclosures showing how products meet environmental or social characteristics or sustainable investment objectives
• Periodic reporting requirements on how financial products meet their environmental or social characteristics and the overall sustainability-related impact of products with sustainable investment objectives
• The standard presentation of the promotion of environmental or social characteristics and sustainable investments in marketing communications

On May 3, 2019, ESMA published its technical advice on sustainable finance initiatives to support the European Commission’s Sustainability Action Plan in the areas of investment services and investment funds.

The final reports contain technical advice to the Commission on the integration of sustainability risks and factors, relating to ESG considerations with regards to investment firms and investment funds, into MiFID II, AIFMD and the UCITS Directive

On April 15, 2019, the PRA published Policy Statement 11/19: Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (PS11/19).

PS11/19 is relevant to all UK insurance and reinsurance firms and groups, banks, building societies, and PRA-designated investment firms (collectively referred to as firms).

In PS11/19 the PRA provides feedback to responses to Consultation Paper 23/18: Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. It also contains the final Supervisory Statement 3/19: Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (SS3/19).

In SS3/19 the PRA sets out expectations concerning how firms

• Embed the consideration of the financial risks from climate change in their governance arrangements
• Incorporate the financial risks from climate change into existing risk management practice
• Use (long-term) scenario analysis to inform strategy setting, and risk identification and assessment
• Develop an approach to disclosure on financial risks from climate change.

On March 28, 2019, ESMA published a consultation paper on draft regulatory technical standards (RTS) under Article 25 of the European Long-Term Investment Funds Regulation (ELTIF Regulation).

Article 25(3) of the ELTIF Regulation provides for ESMA to develop draft RTS to determine the costs disclosure requirements applicable to ELTIF managers. Sections 3 to 4 of the consultation give detailed explanations on the content of the proposed RTS and seek stakeholders’ input through specific questions. The full text of the RTS can be found in Annex V of the consultation paper.

The deadline for responses to the consultation paper is June 29, 2019. Responses will assist ESMA in finalising the draft RTS to be submitted to the European Commission for endorsement.

On February 20, 2019, the Investment Association (IA) published fund communication guidance.

The guidance is part of the industry response to the FCA Asset Management Market Study which highlighted, among other things, the difficulty for customers of knowing what to expect from their fund and how to assess whether or not it was performing against its stated objectives.

The purpose of the guidance is to help IA members implement clearer and more consistent customer communications, focusing on the objectives and investment policy of a fund. The material is intended to assist members in two ways

• provide practical guidance in implementing clearer communications
• provide a reference point with respect to evolving regulatory expectations in this area.

As with similar documents issued by the IA, the guidance is not mandatory but sets out ways in which members can address industry-wide issues on the basis of a common framework. The IA views the guidance as a starting point in helping firms deliver consistent language in fund documentation. The guidance will be kept under review and may evolve further following future consumer testing exercises.