Investment Funds Update Europe: Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles - Issue 5, 2018: European Union Developments

by Dechert LLP
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European Commission Publishes Legislative Proposals on Sustainable Finance Which Impacts Asset Managers 

The EU Commission presented a package of measures on 24 May 2018, as a follow-up to its action plan on financing sustainable growth. The package includes 3 proposals aimed at:

  • Establishing a unified EU classification system of sustainable economic activities ('taxonomy'). 
  • Improving disclosure requirements on how institutional investors integrate environmental, social and governance (ESG) factors in their risk processes.
  • Creating a new category of benchmarks which will help investors compare the carbon footprint of their investments.

In addition, the Commission is, from 24 May to 21 June 2018, seeking feedback on amendments to delegated acts under the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive to include ESG considerations into the advice that investment firms and insurance distributors offer to individual clients. The new requirements shall apply 18 months after the date of entry into force.

The proposed new legal rules could have a significant impact on asset managers, institutional investors, insurance distributors and investment advisors as they will have to disclose how they integrate ESG risks in their investment decision-making and advisory process.

The Commission has published a Factsheet for further information.

Read: Factsheet: Delivering on sustainable finance for a greener and cleaner economy: First actions.

ESMA Updates Q&A on Short-Selling Regulation

ESMA updated its Q&A on the Short Selling Regulation (“SSR”) on 28 May 2018.

The overall SSR Q&A revises a pre-existing answer regarding locate arrangements, further specifying the requirements for ‘easy-to-borrow and purchase’ lists.

The purpose of the Q&A is to promote common supervisory approaches and practices in the application of SSR. It aims at providing investors and other market participants with clarifications on the applicable requirements.

Read ESMA Q&A on SSR.

ESMA Publishes Final Guidelines on MIFID II Suitability Requirements

ESMA published its Final Report on Guidelines on certain aspects of the MiFID II Suitability Requirements on 28 May 2018.

The assessment of suitability is one of the most important requirements for investor protection in the MiFID framework. It applies to the provision of any type of investment advice, whether independent or not, and portfolio management. Investment firms providing investment advice or portfolio management must, under Article 25(2) of MiFID II and Articles 54 and 55 of the MiFID II Delegated Regulation, provide suitable personal recommendations to their clients or have to make suitable investment decisions on behalf of their clients.

The Guidelines in the Final Report build on the text of ESMA’s 2012 MiFID I Guidelines on Suitability, which have been largely confirmed and broadened in order to:

  • Consider technological developments of the advisory market notably the increasing use of automated or semi-automated systems for the provision of investment advice or portfolio management (robo-advice).
  • Build on NCAs’ supervisory experience on the application of suitability requirements (including the 2012 guidelines).
  • Take into account the outcome of studies in the area of behavioural finance.
  • Provide additional details on some aspects that were already covered under the 2012 guidelines.

The Guidelines, by supporting a consistent and harmonised application of the requirements in the area of suitability, will ensure that MiFID II’s objectives are achieved.

Sustainable Finance

Furthermore, following the publication of the original Consultation Paper (CP), the Commission published its Action Plan on sustainable finance. In the Action Plan, the EC stated that “[…] firms should ask about their clients' preferences (such as environmental, social and governance factors) and take them into account when assessing the range of financial instruments and insurance products to be recommended, i.e. in the product selection process and suitability assessment.”

ESMA has included, pending changes to the legal framework, a good practice for firms addressing this issue. The good practice will contribute to raising firms’ and supervisors’ attention and awareness of this issue. ESMA will monitor the legislative proposals under the EC action plan and will consider making focused amendments to the guidelines to reflect changes to the MIFID II delegated acts on the topic of sustainability.

Background

The Final Report analyses, and summarises, the responses to the CP and explains how the responses have been taken into account.

ESMA published a CP on 13 July 2017, containing proposed guidelines which confirmed and broadened the existing MiFID I guidelines on suitability, issued in 2012. The consultation period closed on 13 October 2017. ESMA received 53 responses, 6 of which were confidential. ESMA also received advice from the Securities and Markets Stakeholder Group’s (SMSG).

Read Guidelines on certain aspects of the MiFID II suitability requirements.

ESMA Updates UCITS Q&A

ESMA updated its Q&A on the application of the UCITS Directive on 25 May 2018. 

The Q&A document includes one new question and answer on:

  • The application of remuneration disclosure requirements to staff of the delegate of an UCITS management company to whom investment management functions have been delegated.

The guidance mirrors similar guidance issued by ESMA in relation to its AIFMD Q&A in October 2017.

ESMA will periodically review this Q&A document and update it where required.

Read ESMA Q&A on the Application of the UCITS Directive.

ESMA Updates Q&A on MiFIR Data Reporting

ESMA updated its Q&A on data reporting under MiFIR on 25 May 2018. 

The Q&A provides clarifications in relation to the requirements for submission of transaction reports and reference data under MiFIR. In particular, the Q&A relates to complex trades and national client identifiers for natural persons.

The Q&A on complex trades provides new answers on reporting transactions and reference data for instruments where the execution results in a complex trade as defined under Article 12 of RTS 22.

The amendments to the existing Q&A on national client identifiers for natural persons further clarify how the following three national identifiers specified in Annex II of RTS 22 should be represented: the Czech ID, the Liechtensteinian ID, and the Romanian ID.

The purpose of this Q&A is to promote common supervisory approaches and practices in the application of MiFIR. It provides guidance to investment firms, trading venues, ARMs and systematic internalisers on compliance with the reporting provisions of MiFIR.

The European Securities and Markets Authority (ESMA) has today updated its Questions and Answers (Q&As) regarding the implementation of the European Market Infrastructure Regulation (EMIR).

The Q&A provides clarification reporting to trade repositories.

The purpose of these Q&As is to promote common supervisory approaches and practices in the application of EMIR. They provide responses to questions posed by the general public and market participants in relation to the practical application of level 1 and level 2 provisions relating to transparency and market structures issues.

Read ESMA Q&A on EMIR.

ESMA Updates Investor Protection and Intermediaries Topics

ESMA updated its Q&A on MiFID II and MiFIR Q&A on investor protection and intermediaries topics on 25 May 2018. 

ESMA has added 9 new or updated Q&As to its Q&A on MiFID II/MiFIR investor protection topics. The new or updated Q&As cover the topics of best execution, client categorisation, provision of investment services and activities by third country firms, and other issues.

The overall MiFID II Q&A provide clarifications on the following topics:

  • Best execution
  • Suitability and appropriateness
  • Recording of telephone conversations and electronic communications
  • Post-sale reporting
  • Record keeping
  • Investment advice on an independent basis
  • Inducements (research)
  • Information on charges and costs
  • Underwriting and placement of a financial instrument
  • Client categorisation
  • Inducements
  • Provision of investment services and activities by third country firms
  • Application of MiFID II after 3 January 2018, including issues of ‘late transposition’
  • Other issues

MiFID II applies from 3 January 2018 and will strengthen the protection of investors by both introducing new requirements and reinforcing existing ones. The purpose of this Q&A is to promote common supervisory approaches and practices in the application of MiFID II/ MiFIR for investor protection topics.

Read ESMA Q&A on MiFID II and MiFIR investor protection and intermediaries topics.

ESMA Updates Q&A on Benchmarks Regulation

ESMA updated its Q&A on the Benchmarks Regulation (“BMR”) on 24 May 2018. 

The overall BMR Q&A provides a new answer regarding the following topic:

  • How prospectuses should include reference to the register of administrators and benchmarks.

The purpose of this Q&A is to promote common supervisory approaches and practices in the application of BMR. It aims at providing investors and other market participants with clarifications on the applicable requirements.

Read ESMA Q&A on the BMR.

 

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