Asset Management & Investment Funds: EU & International Developments – April 2022
UCITS directive and AIFM regulation – sustainable finance revisions
Following on from the implementation of the Sustainable Finance Disclosures Regulation (SFDR) and the Taxonomy Regulation, on 21 April 2021 the European Commission adopted a delegated UCITS directive and delegated AIFM regulation on the sustainability risks and sustainability factors to be taken into account for UCITS management companies and AIFMs.
The changes are effective from 1 August 2022. In our latest publication, we provide an overview of the practical impacts of these changes
SFDR delegated regulation.
On 6 April 2022, the European Commission adopted a Delegated Regulation outlining the technical standards to be used by financial market participants when disclosing sustainability-related information under SFDR. The Delegated Regulation specifies
- the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’
- the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts
- the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre- contractual documents, on websites and in periodic reports.
It is based on the draft regulatory technical standards submitted by the European Supervisory Authorities (ESAs) to the European Commission. The Delegated Regulation bundles the 13 standards into a single legal act but leaves the previous draft standards substantively unchanged. The European Parliament and the Council now have three months to scrutinise the Delegated Regulation. Both institutions may request an additional three months of scrutiny time.
The requirements of the Delegated Regulation are scheduled to apply from 1 January 2023.
Consultation on the functioning of MMF Regulation
The EU Commission published a targeted consultation on the functioning of the Money Market Fund (MMF) Regulation. This consultation is targeted at relevant stakeholders and users of MMFs, and in particular to investors and managers of MMFs, to understand the impact of existing rules. It asks questions on effectiveness, efficiency, relevance, coherence and value of the EU framework. These include questions relating to the removal of the LVNAV and Public Debt CNAV MMF product categories. The consultation closes on 13 May 2022.
Please speak with your usual contact on the A&L Goodbody Asset Management & Investment Funds team if you would like to contribute to the consultation.
IOSCO Consultation on ETFs
IOSCO is consulting on good practices in the operation and trading of exchange traded funds (ETFs) and to supplement IOSCO’s 2013 Principles for the Regulation of Exchange Traded Funds.
The proposed good practices respond to significant recent global ETF market growth, and the increasing number of new products with exposures to novel and less liquid asset classes and more complex investment strategies. The consultation also takes into account the developments in the market in March 2020.
Please speak with your usual contact on the A&L Goodbody Asset Management & Investment Funds team if you would like to contribute to the consultation.
Funds' liquidity stress testing
ESMA carried out a supervisory engagement with investment funds together with NCAs. The exercise focused on liquidity risk in corporate debt and real estate funds, with the results showing that the funds included in the scope of the analysis do not pose any substantial risk for financial stability. While the overall degree of compliance is satisfactory, it also highlights some room for improvement and continued monitoring, especially on the liquidity stress testing and valuation of less liquid assets.
ESMA, in 2022 will facilitate discussions on these topics among NCAs on the application of the liquidity stress testing guidelines in UCITS and AIFs and is currently conducting a 2022 CSA on the valuation of less liquid assets in UCITS and open-ended AIFs.
ESMA report on the cost and performance of EU retail investment products finds that ESG UCITS outperformed non-ESG UCITS
ESMA publishes its fourth annual statistical report on the cost and performance of EU retail investment products. A new finding this year is that UCITS with an environmental, social and governance strategy (including equity, bond and mixed funds) outperformed their non-ESG peers, and were also overall cheaper.
The report examines the market over the ten-year period ending in 2020 and finds that, while costs show signs of reducing in certain jurisdictions, in most Member States as well as in the EU as a whole there is limited progress in funds becoming more affordable. Retail investors also continue to pay higher fees than professional investors. The main findings in the report are:
- Gross performance: Gross performance in 2020 was low or negative and highly volatile due to the COVID-19 pandemic. Investing long-term significantly reduces the risks related to sudden and large changes in the valuation of financial products.
- Costs: Costs remained a critical component when evaluating the ultimate benefits of an investment, they reduced only marginally over time. Total costs were higher for retail investors than for institutional investors, on average. Costs for cross-border funds were higher than those for domestic funds.
- ESG UCITS: ESG equity, bond and mixed funds were overall cheaper than non-ESG peers, while their performance reflected the strong performance of specific sectors since the COVID-19 crisis. Within the ESG fund category, impact funds performed better than other ESG strategies and funds with sustainable investment as objective performed better in net terms, after having included costs, than those promoting environmental or social characteristics despite slightly higher costs.
- Structural market features: 15% of the managers of UCITS in our sample managed 90% of assets. Cross-border funds were, on average, larger than funds sold only in their home market and on average 60% of funds included in the sample were effectively sold cross-border. Heterogeneity across Member States persists.
- Performance and costs by management type: Costs were significantly higher for active UCITS than for passive funds and ETFs. ETF UCITS performance was in line with that of other passive UCITS investing in similar assets.
- Retail AIFs: In 2020, retail investors accounted for only 13% of the total Net Asset Value (NAV) in the EU AIF market. As for UCITS, the annualised monthly gross and net performance across the main retail AIFs fund types, significantly decreased compared with 2019. A full costs analysis could not be carried out due to the unavailability of data on cost composition.
- Structured retail products: Total costs were largely attributable to entry costs and varied substantially by country and by pay-off type, but they did not depend on issuance size or underlying type.
Speech by Commissioner Mairead McGuinness
EU Commissioner Mairead McGuinness delivered a speech covering:
- Russian aggression in Ukraine impacted global financial markets– noting that investment funds are also vulnerable in this environment. Amid high levels of uncertainty and market volatility, these funds may feel the consequences of renewed inflationary pressures, supply-chain problems and higher interest rates. Some investment funds particularly exposed to Russian assets have difficulties meeting redemption requests.
- CMU. November's package of four legislative proposals
- AIFMD reform: clarifies the rules on delegation, requires that a fund manager employ at least two people full-time in the EU in order to be authorised in the EU and strengthens information sharing and supervisory convergence among EU supervisors, in particular through peer reviews to be performed by ESMA, harmonises rules for managers of loan-originating funds across the EU.
- ELTIF reform: removing the minimum €10,000 investment, and the 10 percent maximum exposure threshold for retail investors and aligning suitability tests with MiFID II.
- MMFR reform: referencing the consultation which has been launched to collect additional input from stakeholders.
- Loan Fund reform, harmonising the regime for loan origination funds across the EU.
- Digital Finance. The EU's Digital Operational Resilience Act is currently being negotiated. A proposed Regulation on Markets in Crypto Assets in 2020 is also progressing.
- Sustainable Finance. The cornerstone is the EU Taxonomy. The Disclosures Delegated Act came into force on 1 January 2022. The Commission prepared non-binding guidance on reporting Taxonomy eligibility and is considering additional legal guidance this year on reporting obligations for taxonomy alignment. SFDR has applied since March 2021. The Commission will soon adopt the regulatory technical standards developed by the European Supervisory Authorities. Also, the EU introduced sustainability factors into suitability assessments under MiFID 2 in 2021.
EU/ US Data Privacy Framework
The EU Commission and the United States announced that they have agreed in principle on a new Trans-Atlantic Data Privacy Framework. The framework will foster trans-Atlantic data flows and address the concerns raised by the EU Court of Justice in the Schrems II decision of July 2020. The framework reflects more than a year of detailed negotiations between the US and EU It will provide a durable basis for trans-Atlantic data flows. It will facilitate further US-EU cooperation on digital policies. The teams of the US Government and the EU Commission will now work to translate this arrangement into legal documents that will need to be adopted on both sides to put the framework in place. For that purpose, these US commitments will be included in an executive order that will form the basis of the EU Commission's assessment in its future adequacy decision.
ESA report on risks and vulnerabilities in the EU financial system – recommended policy actions for financial institutions and market participants
In their recently published joint committee report on risks and vulnerabilities in the EU financial system, the ESAs advise a number of policy actions for national competent authorities (NCAs), financial institutions and market participants. The ESAs advise these policy actions in light of perceived risks and vulnerabilities in the EU financial system, arising principally from increased inflation, the COVID-19 pandemic and the Russian invasion of Ukraine. Financial institutions should consider this succinct report and factor it into their horizon scanning and compliance risk frameworks. Read More
EU AML package: the current state of play
In July of last year, the European Commission announced a package of legislative proposals designed to strengthen the EU's AML/CFT framework. Read More
For more information please contact a member of the Asset Management & Investment Funds team.
Date published: 29 April 2022