1. Legal & Regulatory
1.1 UCITS and AIFMD Update
EU
On 20 July 2023, the European Parliament, Council of the EU and the European Commission ("Commission") announced their provisionally agreed position on proposed amendments to the UCITS Directive and under the Alternative Investment Fund Managers Directive (EU) 2011/61 ("AIFMD"). The revised regime will harmonise the rules governing liquidity management tools, in line with international recommendations to support financial stability. It will also increase transparency on the so-called 'delegation rules', by ensuring that supervisors are informed about the extent to which fund managers rely on expertise from third parties. Further, the new rules will establish a harmonised framework for funds that originate loans especially to companies in the EU, offering new funding opportunities to the real economy while safeguarding investor protection.
On 27 September 2023, the European Parliament indicated it will consider both amending directives during its plenary session on 5 to 8 February 2024.
For more information on the AIFMD proposals, please see our update, A Step Closer to AIFMD 2.0.
On 18 July 2023, the European Securities and Markets Authority ("ESMA") published its 2022 annual report on penalties and measures issued under the UCITS Directive (EC) 2009/65 and its 2022 annual report on penalties and measures issued under AIFMD. In the UCITS report, nine national competent authorities ("NCAs") imposed a total of 38 penalties. The total aggregated value of financial penalties imposed amounted to over €97 million. In the AIFMD report, 10 NCAs imposed a total of 128 penalties. The total aggregated value of financial penalties imposed amounted to over €2 million.
Luxembourg
On 1 August 2023, the Commission de Surveillance du Secteur Financier ("CSSF") issued a press release on the availability of standardised model articles of incorporation ("SMA") for new UCITS fund launches. The SMA aims to ease the drafting of the articles of incorporation and facilitate the CSSF's examination of each new UCITS application. The editable template, permits users to tailor the articles of incorporation, however, the CSSF recommends that amendments are limited to retain the benefit of standardisation. It is not a new regulatory requirement, nor will it guarantee CSSF approval of the new UCITS. The current approval process remains unchanged. The CSSF also issued a user guide on the SMA.
As a reminder, the CSSF released a standardised model prospectus in November 2022.
For more information on the standardised model prospectus, see our
Funds & Investment Management Update Ireland
and Luxembourg Q4 2022.
1.2 Central Bank Discussion Paper on Macroprudential Policy for Investment Funds
On 18 July 2023, the Central Bank of Ireland ("Central Bank") published An approach to macroprudential policy for investment funds. It looks at key considerations for developing and operationalising a macroprudential framework for the funds sector given its growing importance for the functioning of the financial system and real economy. The paper also seeks views on a number of issues, including: the nature of the systemic risk in this context; the current regulatory framework for the funds sector; the objectives and principles of macroprudential policy; the design of macroprudential tools; and considerations for operationalising the macroprudential framework for the funds sector. Comments are invited until 15 November 2023.
1.3 Sustainable Finance Update
On 6 July 2023, ESMA launched a common supervisory action ("CSA") with NCAs on sustainabilityrelated disclosures and the integration of sustainability risks. This involves ESMA and NCAs (including the Central Bank and the CSSF) reviewing the asset management sector to assess sustainability-related disclosures and the integration of sustainability risks and specifically the risks stemming from incorrect and misleading disclosures on sustainability. The aim is to foster convergence in how the NCAs supervise sustainability related disclosures. ESMA also specifically references adherence to UCITS Directive and AIFMD which require UCITS management companies and AIFMs to factor the consideration of sustainability risks into their investment due diligence process, risk management process and conflicts of interest policy (across all the funds managed, not just article 8 and article 9 funds). On 6 September 2023, the CSSF issued a press release outlining the CSA process and indicated, on 29 August 2023, that it had contacted in-scope Luxembourg investment fund managers ("IFMs") by e-mail and technical information and deadlines would be communicated to these entities on a bilateral basis.
On 31 July 2023, the Commission adopted the European Sustainability Reporting Standards for use by all companies subject to the Corporate Sustainability Reporting Directive. The standards cover the full range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest. They also take account of discussions with the International Sustainability Standards Board and the Global Reporting Initiative to ensure a very high degree of interoperability between EU and global standards and to prevent unnecessary double reporting by companies.
The reporting requirements will be phased in over time for different companies.
On 13 September 2023, the Commission published a draft Commission delegated directive amending Directive (EU) 2013/34 as regards adjustments to the size criteria for micro, small, medium-sized and large companies to account for the effects of inflation. The adjustments mean that micro, small and medium-sized companies will not be subject to many of the EU financial and sustainability reporting provisions applicable to larger companies in Directive (EU) 2013/34 as amended by the Corporate Sustainability Reporting Directive and the Taxonomy Regulation.
On 14 September 2023, the Commission published two consultations (a public consultation and a targeted consultation) on the implementation of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector ("SFDR"). Both aim to assess potential shortcomings in the SFDR framework. These relate to legal certainty, the useability of the legislation and its ability to stop greenwashing. The Commission wants to understand how SFDR has been implemented and what issues stakeholders have faced, including its interaction with other parts of the European sustainable finance framework. The targeted consultation includes sections specifically aimed at regulators, public bodies, financial market participants, investors and NGOs with an in-depth knowledge of SFDR.
Both close on 15 December 2023. The Commission intends to adopt a report on SFDR in Q2 2024.
For more information, please see SFDR 2.0 – Time for Evolution Not Revolution
On 28 September 2023, the Joint Committee of the three European Supervisory Authorities published their second annual report on the extent of voluntary disclosure of principal adverse impacts under the Article 18 of SFDR. It notes:
- The results show an overall improvement compared to the previous year, although there is still significant variation in the extent of compliance with the requirements and in the quality of the disclosures both across financial market participants and jurisdictions.
- Disclosures appear easier to find on websites compared to the previous year.
- When financial market participants do not consider principal adverse impacts, they should better explain the reasons for not doing so.
- While encouraged to do so under the SFDR, financial market participants are generally not disclosing to what extent their investments align with the Paris Agreement.
- Voluntary disclosures of PAI consideration by financial products will be further analysed in future reports.
The report also includes recommendations for the Commission to consider ahead of the next comprehensive assessment of SFDR.
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