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

SFDR- ESA letter to EU Commission on priority areas of uncertainty

As previously reported in this bulletin, the European Supervisory Authorities (ESAs) are tasked with delivering draft regulatory technical standards the Regulation on sustainability-related disclosures in the financial services sector (SFDR). The ESAs wrote to the EU Commission detailing priority areas of uncertainty in the interpretation of SFDR "that would benefit from a more urgent clarification to facilitate an orderly application of SFDR from 10 March 2021".

These priority areas of SFDR are set out in detail in the Annex to the letter. They cover: 

  • the application of SFDR to non-EU AIFMS and registered AIFMs 
  • the application of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group 
  • the meaning of “promotion” in the context of products promoting environmental or social characteristics  
  • the application of Article 9 of SFDR 
  • the application of SFDR product rules to portfolios and dedicated funds

You can read our detailed In Focus paper on SFDR here.

ESMA reminder of the MiFID II rules on reverse solicitation following Brexit

The European Securities and Markets Association (ESMA) published a reminder to firms of the MiFID II rules on reverse solicitation of clients by third country.

ESMA noted (among other issues) that "with the end of the UK transition period on 31 December 2020, some questionable practices by firms around reverse solicitation, where the product or service is marketed at the client´s own exclusive initiative, have emerged. For example, some firms appear to be trying to circumvent MiFID II requirements by including general clauses in their Terms of Business or through the use of online pop-up "I agree" boxes whereby clients state that any transaction is executed on the exclusive initiative of the client.

ESMA CSA on the supervision of costs and fees of UCITS

The European Securities and Markets Authority (ESMA) launched a Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on the supervision of costs and fees of UCITS (including EPM). The CSA will be conducted during 2021.

The CSA will assess compliance with the cost-related provisions in the UCITS framework and the obligation not to charge investors undue costs. NCAs will take into account the supervisory briefing on the supervision of costs published by ESMA in June 2020.

The CSA will also examine entities employing Efficient Portfolio Management (EPM) techniques to assess whether they comply with the requirements in the UCITS framework and ESMA Guidelines on ETFs and other UCITS issues.

The CSA will be carried out on the basis of a common methodology developed by ESMA. The CSA assessment framework, including scope, methodology, supervisory expectations and timeline, is the outcome of a joint effort to carry out comprehensive supervisory action in a convergent manner.

Throughout 2021, NCAs will share knowledge and experiences through ESMA to ensure supervisory convergence in how they supervise cost-related issues. Ensuring greater convergence in the supervision of costs is an integral part of ESMA’s broader efforts on the cost of retail investment products. 

IOSCO and ETFs

The International Organization of Securities Commissions (IOSCO) issued a questionnaire (closing 1 March 2021) for industry participants on exchange traded funds (ETFs). The survey aims to enhance IOSCO's understanding of certain aspects of ETFs, including during the market volatility in March/April 2020 due to the COVID-19 pandemic and, in particular, issues related to fixed-income ETFs.

ESMA AIFMD Leverage Guidelines for NCAs

ESMA issued its final report on AIFMD Leverage Guidelines under Article 25 of AIFMD (AIFMD Leverage Guidelines). The AIFMD Leverage Guidelines will apply to NCAs.

Article 25 of AIFMD provides for NCAs to:

  • identify the extent to which the use of leverage in the AIF sector contributes to the build-up of systemic risk in the financial system, risks of disorderly markets or risks to the long-term growth of the economy
  • impose limits on the level of leverage that individual AIFMs may employ so as to safeguard the stability or integrity of the financial system

ESMA's AIFMD Leverage Guidelines set out a two-step approach to the assessment of leverage-related systemic risk (as proposed by IOSCO). They provide NCAs with a set of indicators to consider when performing their risk assessment and a set of principles that they should take into account when calibrating and imposing leverage limits. They aim to ensure that NCAs adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met. 
The AIFMD Leverage Guidelines follow a 2018 recommendation by the European Systemic Risk Board for ESMA to produce guidance, and an ESMA consultation in 2020. In general, respondents agreed with ESMA’s approach on the assessment of leverage related systemic risk and the design of leverage limits. The AIFMD Leverage Guidelines are stated to be without prejudice to further IOSCO work on leverage, the AIFMD review and any further calibration of the indicators that may be deemed appropriate in the future.

Next steps: The AIFMD Leverage Guidelines will be translated into the official EU languages and then published on ESMA’s website. They will apply two months after the publication of the translations.

ESMA Guidelines on outsourcing to cloud service providers

ESMA published its final report on guidelines on outsourcing to cloud service providers (CSPs) (CSP Guidelines). The CSP Guidelines aim to help firms identify, address and monitor the risks arising from cloud outsourcing arrangements. They address:

  • the risk assessment and due diligence that firms should undertake on their CSPs
  • the governance, organisational and control frameworks that firms should put in place to monitor the performance of their CSPs and how to exit their cloud outsourcing arrangements without undue disruption to their business
  • the contractual elements that their cloud outsourcing agreement should include
  • the information to be notified to NCAs

The CSP Guidelines also give guidance to NCAs on the supervision of cloud outsourcing arrangements to foster a convergent approach in the EU.

ESMA conducted a public consultation on these Guidelines to gather the views of relevant stakeholders. The report contains a feedback statement summarising the responses received and highlighting the amendments and clarifications introduced in the final guidelines to take into account the feedback received during this consultation.

Next steps: The CSP Guidelines will be translated into the official EU languages and published on ESMA’s website. The publication of the translations in all official languages of the EU will trigger a two-month period during which NCAs must notify ESMA whether they comply or intend to comply with the CSP Guidelines.

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

Date published: 29 January 2021