Asset Management & Investment Funds: EU & International Developments: Feb 2020

ESMA Strategy on Sustainable Finance

The European Securities and Markets Authority (ESMA), published its Strategy on Sustainable Finance. The strategy sets out how ESMA will place sustainability at the core of its activities by embedding Environmental, Social, and Governance (ESG) factors in its work. The key priorities for ESMA include transparency obligations, risk analysis on green bonds, ESG investing, convergence of national supervisory practices on ESG factors, taxonomy, and supervision.

Steven Maijoor, Chair, said:

“The financial markets are at a point of change with investor preferences shifting towards green and socially responsible products, and with sustainability factors increasingly affecting the risks, returns and value of investments. ESMA, with its overview of the entire investment chain, is in a unique position to support the growth of sustainable finance while contributing to investor protection, orderly and stable financial markets.”

The key priorities for ESMA highlighted in the strategy include: 

  • pursuing convergence of national supervisory practices on ESG factors with a focus on mitigating the risk of greenwashing, preventing misselling practices, and fostering transparency and reliability in the reporting of non-financial information
  • ensuring ESG guidelines are adhered to in the entities that ESMA supervises directly, while being ready to accept any new supervisory mandates related to sustainable finance
  • completing the regulatory framework on transparency obligations via the Disclosures Regulation
  • reporting on trends, risks and vulnerabilities (TRV) of sustainable finance by including a dedicated chapter in its TRV Report, including indicators related to green bonds, ESG investing, and emission allowance trading (see below)
  • using the data at its disposal to analyse financial risks from climate change, including potentially climate-related stress testing in different market segments
  • participating in the EU Platform on Sustainable Finance that will develop and maintain the EU taxonomy and monitor capital flows to sustainable finance

ESMA’s work spans the investment chain from issuer to investment funds, investment firms and retail investors. It has already delivered on several objectives of the EU’s action plan on financing sustainable growth and will continue to assist the EU institutions to achieve sustainable finance goals, including by providing advice on areas where new Level 1 and Level 2 measures may be necessary.

To help deliver its strategy ESMA set up a Coordination Network on Sustainability in 2019. The network is composed of experts from national competent authorities and ESMA staff. A consultative working group of stakeholders will be established in the coming months.

Steven Maijoor delivered a keynote address on sustainable finance issues at the European Financial Forum in Dublin. In his speech, Mr Maijoor focused on, amongst other issues, regulatory authorities' role in tackling climate change, the need for reliable ESG standards and their supervision and the need for measures across the whole of the investment chain.

ESMA report on Trends, Risks and Vulnerabilities

ESMA published the first Trends, Risks and Vulnerabilities (TRV) report of 2020. ESMA identifies continued high risks and a weaker economic outlook as markets remain highly sensitive to geopolitical events. The risk outlook is stable, however risks are high, particularly in the securities markets and for retail investors. This TRV is the first report since the entry into force of the new ESA Regulation on 1 January 2020 and, in line with ESMA's new mandate, includes new sections about sustainable finance (page 33) and consumer protection. 

Risk outlook is stable, with an increase in potential sources of financial risk:

  • Market risk remained very high in the second half of 2019, due to excessive asset valuations in the context of weaker growth prospects, looser monetary policy and continuing uncertainties such as those on Brexit and on US-China trade relations. Equity markets experienced recurring episodes of volatility and bond spreads tightened in signs of continuing search-for-yield. Markets remained highly sensitive to events, as was visible in reactions to recent oil price shocks and the US repo squeeze
  • Credit risk and liquidity risk remained high. Credit risk, in particular, remains elevated with deteriorating corporate debt quality and increasing risks of fallen angels (bonds being downgraded to below BBB) as the share of BBB-rated debt grows
  • Consumer risks persist across key investment products as market risks increase. Overall, retail investors remained cautious, predominantly allocating savings to bank deposits. 
  • Looking ahead, ESMA sees a weaker economic outlook and continuing uncertainty over the potential impact of the coronavirus, global trade negotiations and Brexit

This TRV also takes an in-depth look at specific risk issues in bonds, BigTech and short-termism.     

Scope of SFTR reporting obligations for non-EU AIFs

The International Securities Lending Association (ISLA) published correspondence between AIMA, the European Commission and ESMA that clarifies the scope of the reporting obligations for non-EU AIFs under SFTR.

The correspondence clarified that Non-EU AIFs (i.e. AIFs not established in the Union), are not subject to the obligations set out in Article 4(1) SFTR, even if the AIFM is authorised or registered under AIFMD, except in respect of SFTs concluded in the course of the operations of a branch in the Union of the Non-EU AIF.

AIMA wrote to the European Commission and ESMA in January after ESMA published its final report and guidelines on reporting under Articles 4 and 12 of the SFTR. AIMA examined the SFTR scope on non-EU AIFs and its conflict in relation to the drafting of the Level 1 text. ESMA sought clarification about a statement in the final report that non-EU AIFs with EU-authorised or registered AIFMs are subject to the SFTR reporting obligation. AIMA considered that, as a blanket statement, this was incorrect, and set out its analysis of the position. It called on the Commission and ESMA to adopt an FAQ to address the point and provide clarity to the market as a matter of urgency.

The Commission and ESMA responded separately to AIMA:

  • The Commission analysed the provisions of the SFTR and confirmed that non-EU AIFs (that is, AIFs not established in the EU) are not subject to the reporting obligations in Article 4(1), even if the AIFM is authorised or registered under AIFMD. This is the position except in respect of SFTs concluded in the course of the operations of an EU branch of the non-EU AIF
  • ESMA set out its interpretation of the text of the reporting guidelines and concluded that it did not believe that there was a need for an FAQ on the topic

To access the documents, please click here.

ESMA consultation on the provision of investment services and activities in the EU by third-country firms under MiFIR and MiFID II

ESMA launched a consultation on draft technical standards on the provision of investment services and activities in the EU by third-country firms under MiFIR and MiFID II. The consultation includes draft regulatory and implementing technical standards on applications for registration and additional reporting,

This consultation arises because of amendments to MiFIR and MiFID II introduced by the Investment Firms Regulation and the Investment Firms Directive, most of which amendments will come into effect in June 2021.

The consultation will be of interest to third-country firms providing investment services and activities in the EU on a cross-border basis or through a branch. The consultation will close on 31 March 2020.

AIFMD MoUs signed by the EU authorities     

ESMA issued an updated list of AIFMD MoUs signed by the EU authorities, dated 20 February 2020.

ESRB letter on issues within the AIFMD framework

The European Systemic Risk Board (ESRB) published a letter dated 3 February to the European Commission on shortcomings in the framework of the AIFMD.

The ESRB identified areas for improvement in AIFMD reporting, including on information about funds' interconnectedness, leverage and liquidity risk.

The ESRB explains that it has identified the operationalisation of existing macroprudential policy instruments as a priority. It is of the view that NCAs could benefit from an operational framework for suspension of redemption in the public interest.

The letter refers to the IOSCO February 2018 recommendations on fund liquidity. The letter also indicates that the Commission will report on its review of the AIFMD in early 2020. 

ESMA's product intervention powers – AIFMs and UCITS Mancos

ESMA issued its final Report on product intervention requirements under MiFIR. The report found that these product intervention measures protected retail investors by limiting distribution of speculative products to retail clients.

The technical advice includes a recommendation that NCAs and ESMA should have the powers to apply product intervention measures directly to AIFMs and UCITS management companies. ESMA states that this would address the risk of arbitrage between MiFID firms and fund management companies which was flagged in ESMA’s opinion of January 2017.   

Brexit

ESMA issued an update on governance and reporting obligations for UK entities from 1 February 2020 following the UK's withdrawal from the EU. Under the Withdrawal Agreement, EU law will continue to apply to the UK, as if it were a Member State, during the transition period from 1 February 2020 to 31 December 2020. This means for instance that:

  • rights and obligations for UK entities under EU law will also continue to apply – such as reporting and notification obligations under MiFIDII/ MiFIR, EMIR, CSDR, AIFMD, UCITS, MMFR
  • ESMA will continue to directly supervise registered Credit Rating Agencies, Trade Repositories and Securitisation Repositories established in the UK during this period

ESMA will continue monitoring the application of EU law to/in the UK and will closely monitor developments in preparation for the end of the transition period. ESMA will also engage and provide input as necessary with/to the European Commission.

The FCA also updated its Brexit webpage.

AML / CTF

The European Banking Authority (EBA) issued an 11 page factsheet on the EBA's new AML/ CTF role, its strategic AML/ CTF objectives and how it intends to lead, coordinate and monitor on AML/ CTF matters. Since 1 January 2020, the EBA is mandated to lead, co-ordinate and monitor the AML/ CTF efforts of all EU financial services providers and competent authorities and to contribute to preventing the use of the financial system for the purposes of ML/ TF.

The EBA issued a consultation paper on the revision of guidelines issued by the European Supervisory Authorities in June 2017 on simplified and enhanced customer due diligence (CDD) and the factors credit and financial institutions should consider when assessing ML/TF risk (the Risk Factor Guidelines).

These Guidelines set out factors that institutions should consider when assessing the ML/TF risk associated with a business relationship or occasional transaction. They provide guidance on how financial institutions can adjust their customer due diligence measures to mitigate the ML/TF risk they have identified. They also support competent authorities’ AML/CFT supervision efforts when assessing the adequacy of firms’ risk assessments and AML/CFT policies and procedures.

The update aims to reflect changes in 5AMLD and new ML/TF risks, including those identified in the ESAs' joint opinion on ML/TF risks published in October 2019.

In its revised version of the Guidelines, the EBA is proposing significant changes to various topics, including:

  • Enhanced customer due diligence related to high-risk third countries
  • Business-wide and individual AML/CTF risk assessments
  • CDD measures, including on the identification of the beneficial owner
  • Terrorist financing risk factors
  • New guidance on emerging risks, such as the use of innovative solutions for CDD purposes

The consultation closes 5 May 2020. The EBA will repeal the June 2017 version of the Guidelines once the revisions have been finalised.

The European Commission published a Roadmap ‘Towards a new comprehensive approach to preventing and combating money laundering and terrorism financing’ with a 4 weeks consultation period (deadline 11 March). The Roadmap is high level. The AML Action Plan is due to be published on 25 March.

The European Commission published a press release noting that it wrote to Cyprus, Hungary, the Netherlands, Portugal, Romania, Slovakia, Slovenia and Spain for not having notified any implementation measures for 5AMLD which was to be implemented by 10 January 2020.

For more information in relation to this topic please contact your usual contact on the A&L Goodbody Asset Management & Investment Funds team.

Date published: 28 February 2020