Asset Management & Investment Funds: EU & International Developments - Dec 2021

Further delay to SFDR EU Taxonomy environmental related disclosures to 1 January 2023

The European Commission confirmed in a letter dated 25 November 2021 that the effective date of the Level 2 regulatory technical standards (RTS) for SFDR as amended by the EU Taxonomy Regulation will be delayed by a further six months to 1 January 2023.  One implication of this for SFDR A8 and A9 UCITS and AIFs and their management companies, is that the prospectus disclosure templates contained in the RTS are required to be issued as part of the prospectus or supplement by 1 January 2023. 

The letter also confirmed that the first reference period for principal adverse impact (PAI) statements, for those financial market participants that will publish a PAI statement, will be 1 January 2022 to 31 December 2022 and the first publication date will be 30 June 2023. Those financial market participants will need to begin assessing PAIs using the PAI indicators set out in the ESA-adopted RTS.

The delay of the RTS does not affect compliance with disclosures required under Level 1 of the EU Taxonomy Regulation by 1 January 2022.

EU Taxonomy delegated act on climate

The EU Taxonomy Regulation climate delegated act (the climate DA) was published in the Official Journal on 9 December 2021.  The climate DA establishes the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives. It applies from 1 January 2022.  For SFDR A8 and A9 investment funds making EU taxonomy related environmental disclosures under Level 1 of the EU Taxonomy Regulation on 1 January 2022, the climate DA does not amend or supplement the legal text of the disclosure requirements.  It does mean the technical criteria by which funds can assess taxonomy alignment of the economic activities undertaken by underlying investments are now confirmed in EU law.

A8 EU Taxonomy delegated act

A8 of the EU Taxonomy Regulation obliges entities subject to the Non-Financial Reporting Directive (NFRD) to publish information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the EU Taxonomy Regulation. The NFRD currently applies to large EU public interest entities with more than 500 employees including listed companies, banks and insurance companies. A delegated act (the TR transparency DA) specifying the content and presentation of information to be disclosed and the methodology to comply with A8 of the EU Taxonomy Regulation disclosure obligation was published on 10 December 2021. It applies from 1 January 2022.  The TR Transparency DA reporting requirements do not apply to UCITS or AIFs as they are not subject to the NFRD.  SFDR A8 or A9 UCITS and AIFs investing in entities which must publish information under A8 will be able to receive that information from the underlying entity and take it into consideration for taxonomy alignment assessment of the UCITS' or AIF's underlying assets.

ESMA UCITS Q&A - Fee rebate arrangements - time to review existing arrangements​

UCITS management companies (ManCos) may choose to review existing UCITS fee rebate arrangements in light of the clarity provided in a new ESMA UCITS Q&A.

ESMA updated its UCITS Q&A with a new Q&A (Section XII, Question1) on the rules on UCITS ManCo fee rebate arrangements. The new Q&A confirms that the payment of rebates by a UCITS ManCo from its own resources to individual investors is subject to UCITS inducement rules. The new Q&A serves as a useful reminder of the need to ensure that UCITS ManCos can meet NCA expectations in relation to rebate arrangements.

A summary of the requirements follows.

UCITS rules (and specifically Article 29 of Directive 2010/43/EU) 34) set strict conditions for fees or commissions paid or received to/from a third party in relation to investment management and administration of the UCITS. Those conditions ensure that ManCos act honestly, fairly and professionally. They ensure UCITS best interests, investors’ fair treatment and the transparency of UCITS operations.

ManCos must ensure, in respect of the fee rebate arrangement:

  • Prior disclosure to the UCITS, in a transparent, comprehensive, accurate and understandable manner, of the existence, nature and amount of the fee, commission or benefit or, where the amount cannot be ascertained, the method of calculating that amount.
  • That the payment of the fee or commission, or the provision of the non-monetary benefit is designed to enhance the quality of the relevant service and not impair compliance with the ManCo's duty to act in the best interests of the UCITS.

ManCos should ensure that they are in a position to demonstrate that: 

  • These arrangements will “enhance the quality of the relevant service” for the UCITS. That requirement refers to the quality of the UCITS services to the benefit of all investors and not only to investors who benefit from those arrangements. 
  • Those arrangements will “not impair compliance with the ManCo’s duty to act in the best interests of the UCITS”. In particular, Article 22 of Commission Directive 2010/43/EU sets out rules related to the “Duty to act in the best interests of UCITS and their unit-holders”. Under that Article, ManCos are bound to treat all unit-holders fairly, act in the best interest of the unit-holders and to refrain from placing the interest of any group of unit-holders above others. Therefore, ManCos should be able to justify that all investors pay their fair share in the funds functioning (taking into account management fee discount) and the UCITS cost structure. Those arrangements should not have a negative impact on other investors. 

The Q&A points out that ManCos should be able to provide accurate and documented justifications to National Competent Authorities, upon request.

Cessation of LIBORs and EONIA

ESMA published a statement by the EUR Risk Free Rates Working Group (RFRWG) on the cessation of EUR, GBP, CHF and JPY LIBORs and EONIA, and ceasing use of USD LIBOR in new contracts, at the end of 2021

The RFRWG reminds market participants to cease entering into new contracts that use EONIA and EUR, GBP, CHF, JPY and USD LIBORs as soon as practicable and in general terms by 31 December 2021. The statement references the recommendations of the RFRWG as well as the positions adopted by EU Commission, FCA and US regulatory authorities.

The Chairman of the RFRWG sent a letter to the European Commission formally requesting the designation of a statutory replacement rate for GBP and JPY LIBORs under the EU Benchmarks Regulation. Outcomes remain pending. 

EBA consultation on draft guidelines on the use of remote customer onboarding solutions.

The European Banking Authority (EBA) launched a public consultation on draft guidelines on the use of remote customer onboarding solutions. The consultation closes 10 March 2022.

The draft guidelines set common EU standards on the development and implementation of sound, risk-sensitive initial customer due diligence (CDD) policies and processes for remote customer onboarding. They set out the steps financial institutions should take when choosing remote customer onboarding tools and when assessing the adequacy and reliability of such tools, in order to comply effectively with their AML/CFT and data protection obligations.

Once adopted, these guidelines will apply to all financial sector operators that are within the scope of the AML/CFT Directives.

Financial Institutions have seen a growing demand for remote customer onboarding solutions, amplified by restrictions on movement caused by the COVID-19 pandemic.

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 16 December 2021