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Asset Management & Investment Funds: EU & International

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EU retail investment package will update the UCITS Directive, the AIFMD and the PRIIPs Regulation

The European Commission’s retail investment package issued. It proposes (among other things) updates to the UCITS Directive, the AIFMD and the PRIIPs Regulation. It comprises:

  • an amending Regulation, which revises the PRIIPs Regulation


Value for money rules for retail investors:

  • The pricing process for UCITS ManCos and AIFMs will be strengthened by:
    • introducing value for money rules
    • defining the conditions for considering what costs are due (i.e. considered legitimate), costs are borne by investors in a way that ensures fair treatment of investors
    • providing rules in the pricing process to ensure that these conditions are met.
  • UCITS ManCos and AIFMs will be obliged to reimburse the UCITS or its investors where undue costs have been charged to the UCITS or its unit-holders and establish a process for this.
  • This builds on rules on pricing processes which apply to PRIIPs which ensure that products that are offered to retail clients offer good value for money.
  • These rules on value for money will apply to UCITS and AIFs that are marketed to retail investors.
  • The requirements will apply to both manufacturers and distributors of retail investment products. Manufacturers and distributors must clearly identify all costs and charges of the product and assess them against the characteristics of the product and the expected return, to ensure that the product offers retail investors good value for money.
  • Distributors are also under an obligation to identify and quantify any costs that have not already been taken into account by the manufacturer and to assess whether they are justified and proportionate to the needs and objectives of their clients.

Cost and performance benchmarks:

  • The European Securities and Markets Authority (ESMA) and EIOPA are to develop, make publicly available, and regularly update cost and performance benchmarks against which the manufacturers and distributors must compare their products prior to offering them on the market. To facilitate the development of benchmarks, the UCITS Directive, AIFMD, MIFID and the IDD, will be amended to introduce reporting obligations (to ESMA and EIOPA) for manufacturers, distributors and NCAs, building on existing reporting obligations and limiting new obligations to what is strictly necessary.
  • A deviation from the relevant benchmark should introduce a presumption that costs and charges are too high, and that the product will not deliver value for money, unless the manufacturer or distributor is able to demonstrate otherwise. The comparison should be undertaken during the pricing process where a benchmark is available. The fact that the benchmark, which would be considered relevant for the product, is not available is not a circumstance alleviating the manufacturer or distributor from the obligation to demonstrate that costs and charges are justified and proportionate.
  • To ensure that all costs are covered in the benchmarks, distributors (i.e. investment firms, insurance undertakings and insurance intermediaries) must report the costs of distribution of PRIIPs, including details on the cost of advice and inducements, to NCAs for sharing with ESMA or EIOPA to enable them to develop benchmarks.

Amending PRIIPs regulation:

  • The amending PRIIPs regulation​ will make several changes to PRIIPs KIDs in order to make them more suitable to the evolving needs of investors and use on digital devices (such as smartphones and tablets) and increase legal clarity:
    • Introduction of a summary dashboard, to make key information on costs and risks of investment products highly visible at the top of the document.
    • More flexibility to display information from PRIIPs KIDs in a digital and user-friendly way, notably by allowing the use of layering. I.e. the possibility to click on the titles of different sections of the KID and expand the text of the sections of interest, which complements the fixed document, such as in PDF format, that exists today. The package also specifies conditions for more interactive features.
    • A new sustainability section in the KID to make information on sustainability-related characteristics of investment products more visible, comparable and understandable for retail investors. This section will build entirely on existing sustainability disclosures, avoiding any new reporting burdens.
    • Adapted rules for presentation of key information on multi-option products (MOPs), ensuring better visibility on total costs of such products while allowing some degree of flexibility.
    • Improved legal clarity on the exclusion of specific products (e.g. corporate bonds) that were not originally intended to be captured by the PRIIPs regulation.​

The proposals are part of the CMU and will progress through the EU legislative process and, as currently drafted, have an 18 month transition period.

Press release is available here.

Undue costs: ESMA proposes revisions to the UCITS Directive and AIFMD

ESMA had published an opinion to the European Commission with suggested revisions to the legislative provisions of the UCITS Directive and the AIFMD to deal with “undue costs”. This occurred in advance of the publication of the European Commission’s retail investment package (discussed above).

This was prompted by one of the findings of the ESMA 2021 Common Supervisory Action (CSA) on costs and fees (discussed here), which showed divergent market practices as to what industry reported as “due” or “undue” costs in funds. This is an area of focus for ESMA because of:

  • the high investor protection relevance in this topic
  • a lack of supervisory convergence on this topic leaves room for regulatory arbitrage and risks hampering competition in the EU market
  • differences of approach may lead to different levels of investor protection depending on where a fund or fund manager is domiciled

ESMA’s proposal started with the supervisory expectations enshrined in the 2020 supervisory briefing on the supervision of costs and fees and grounds these expectations in clearer legal requirements.

The opinion sets out proposed amendments to Article 14 of the UCITS Directive and Article 12 of the AIFMD to introduce the concept of undue costs into those frameworks. The retail investment package does not track ESMAs proposed changes but is aligned.

ESMA also proposes that the European Commission clarify the eligibility of costs using the list of costs set out in Commission Delegated Regulation (EU) 2017/653, as updated (PRIIPs Level 2). The assessment of the eligibility of cost should take into account the type of fund and proposed regulatory technical standards.

ESMA has set up a dedicated page on the topic.

Verena Ross, Chair of ESMA, said:

“If we want to enhance retail investors’ participation in capital markets, we should ensure that the expected return of investment products isn’t impacted by undue costs. That investors get value for their money is even more important in the current market situation, with heightened inflation and tightening of financial conditions.

With its Opinion to the European Commission on undue costs in funds, ESMA calls for legislative amendments to the UCITS Directive and the AIFMD. By further harmonising the notion of undue costs among Member States, the proposal aims at preventing investors from being charged with undue costs and ensuring appropriate compensation for investors.”

ESMA reports that improvements are needed in supervision of asset valuation

​ESMA published its report on the CSA with National Competent Authorities (NCAs) on the supervision of the asset valuation rules under the UCITS and AIFM Directives. It concluded that improvements in supervision are needed. ESMA encourages the use of enforcement, where appropriate.

In the final report ESMA presents its analysis and conclusions from the 2022 CSA exercise, and finds room for improvement in the following areas:

  • the appropriateness of valuation policies and procedures
  • valuation under stressed market conditions
  • independence of the valuation function and use of third-party valuers
  • early detection mechanisms for valuation errors and compensation to investors

ESMA emphasises that NCAs’ supervision should address the deficiencies identified in the course of the CSA exercise and keep paying close attention to potential valuation issues arising from less liquid assets, whose nature can amplify the structural liquidity mismatches of certain types of investment funds. This is particularly true for funds investing in private equity and real estate assets which might be more exposed to revaluation risks in light of the heavy reliance on long-term models and the illiquidity of their assets.

The CSA was launched in January 2022, with the aim of assessing, fostering and enforcing the compliance of supervised entities with the organisational requirements with respect to asset valuation. The CSA also looked at their adherence to valuation principles and methodologies with a view to reflecting a true and fair value of their financial positions both under normal and stressed market conditions in line with the applicable rules.

ESMA will facilitate discussions among NCAs on the topic of asset valuation, particularly under stressed market conditions, in order to ensure that both market participants and NCAs are better prepared to address valuation-related challenges in future periods of stress. ESMA welcomes that NCAs have planned to follow-up on the deficiencies identified in the course of the CSA and encourages the use of enforcement, where appropriate.

Financial services: Commission adopts draft Memorandum of Understanding with the United Kingdom

The European Commission has adopted a draft Memorandum of Understanding (MoU) establishing a framework for structured regulatory cooperation in the area of financial services with the United Kingdom. This follows on from the Joint Declaration on Financial Services Regulatory Cooperation between the European Union and the United Kingdom – which accompanies the Trade and Cooperation Agreement (TCA). It is now subject to final political endorsement by the Council, before it can be signed by the European Commission on behalf of the EU.

Press release is here.

Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said: “The Windsor Framework allowed the EU and the UK to open a new chapter in our partnership based on a spirit of mutual trust and cooperation. I am confident that our relationship and future engagement in financial services will be built on a shared commitment to preserve financial stability, market integrity, and the protection of consumers and investors.”

The MoU, when signed by both parties, will create the administrative framework for voluntary regulatory cooperation in the area of financial services between the EU and the UK, outside of the TCA structures. This includes the establishment of a Joint EU-UK Financial Regulatory Forum, which will serve as a platform to facilitate structured dialogue on issues related to financial services, similar to what the Commission has with other third country jurisdictions, such as the United States.

The MoU does not deal with the access of UK-based firms to the Single Market – or EU firms’ access to the UK market – nor does it prejudge the adoption of equivalence decisions.

Throughout the process, the European Commission has engaged closely with the European Parliament and the Council. On the EU’s side, the legal form of the text is a Union Non-Binding Instrument.​

ESMA AIFMD Q&As – new Q&A on non-EU AIFM pre-marketing activities

ESMA updated its Q&As on the application of the AIFMD with a section on marketing and a new Q&A on whether non-EU AIFMs are allowed to carry out pre-marketing activities pursuant to Article 30a of the AIFMD. The answer clarifies that Article 30a of the AIFMD does not cover pre-marketing activities by non-EU AIFMs. Therefore, non-EU AIFMs should not be allowed to carry out pre-marketing activities pursuant to the AIFMD. However the answer clarifies that national laws, regulations and administrative provisions may allow non-EU AIFMs to carry-out pre-marketing activities at national level and where this is the case, non-EU AIFMs do not benefit from a passport allowing them to carry out these activities in other Member States. The answer notes that, in line with recital 12 of Directive (EU) 2019/1160, such national laws, regulations and administrative provisions should not in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs.

IOSCO publishes good practices for the implementation of its principles for ETFs

On 12 May 2023, the International Organization of Securities Commissions (IOSCO) published Good Practices Relating to the Implementation of the IOSCO Principles for Exchange Traded Funds (ETFs) (ETF Principles). They cover effective product structuring, disclosure, liquidity provision, and volatility control mechanisms.

IOSCO reviewed its 2013 ETF Principles. No major gaps were identified, and no major regulatory issues were reported by IOSCO members or industry participants. The ETF structure has generally remained resilient during historical stress events. IOSCO had previously published a Thematic Note – Findings and Observations during COVID-19 Induced Market Stresses, summarising its findings regarding the operation and activities of the primary and secondary ETF markets during COVID-19.

IOSCO found differences among jurisdictions in the way that ETFs operate, how they are regulated and the markets in which they trade. IOSCO concluded that the ETF Principles would benefit from being supported by a set of good practices, as examples of how a jurisdiction could implement them. IOSCO identified a set of 11 good practices, which are organised under the following four categories:

  • effective product structuring (including on fees and on clear differentiation of ETFs from other exchange traded products and collective investment schemes)
  • disclosure
  • liquidity provisions (including market monitoring and ensuring orderly trading)
  • volatility control mechanisms (including communication between trading venues)

The good practices focus on the distinctive features of ETFs, namely the trading of ETF shares in the secondary market and the associated arbitrage mechanism. Jurisdictional examples of the good practices relating to the first three categories are included.

ESAs issue consolidated Q&As on SFDR

The European Supervisory Authorities (ESAs) published a consolidated Q&A on SFDR Level 1 and SFDR Level 2 (together SFDR).

The consolidated Q&As do not add new guidance. The consolidated Q&A combines responses given by the European Commission to questions requiring interpretation of Union Law, which are colour coded in blue, and responses generated by the ESAs relating to the practical application or implementation of SFDR, which are not colour coded.

This is helpful publication for navigating the clarifications provided in the numerous Q&As that have issued, namely:

  • answers provided by the European Commission on the interpretation of the SFDR, published on 14 July 2021, in response to the ESA’s questions of 7 January 2021
  • answers provided by the European Commission on the interpretation of the SFDR, published on 17 May 2022, in response to the ESAs questions of 10 December 2021
  • European Commission Q&As of 6 April 2023 on the interpretation of the SFDR, in response to the ESA’s questions of 9 September 2022
  • ESA’s Q&As of 17 November 2022, on the application of SFDR Level 2

You can read more about the detail of the Q&As here.

ESAs issue consolidated Q&As on PRIIPs KID

The ESAs published a set of consolidated Q&As on the PRIIPs Regulation ​and related Delegated Acts. The consolidated Q&A includes a new introduction and combines responses given by the European Commission to questions requiring interpretation of Union Law, which are colour coded in blue, and responses generated by the ESAs relating to the practical application or implementation of the PRIIPs Regulation, which are not colour coded.

​​Only new Q&A (whose answer was provided by the European Commission in January 2023) is in section XI. Investment funds [Last update 27 January 2023] Q&A 4. It confirms that UCITS (or their management companies) shall send the PRIIPs KID (instead of the UCITS KIID) to the home competent authority of the UCITS (Article 82 of the UCITS Directive 2009/65/EC does still apply).

​ELTIFs – consultation

ESMA is consulting on draft regulatory technical standards (RTS) under the revised ELTIF Regulation. Interested stakeholders are invited to provide input by 24 August 2023.

The RTS will specify the way the new requirements of the revised European long-term investment fund (ELTIF) regulation, in particular on the redemption policy and matching mechanism, will apply.

In the consultation paper ESMA is seeking stakeholders’ views on:

  • the circumstances in which the life of a ELTIF is considered compatible with the life-cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF
  • the circumstances for the use of the matching mechanism, i.e. the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors
  • costs disclosures

ESMA will consider the feedback it receives to this consultation in Q3/Q4 2023 and expects to publish a final report and submit the draft technical standards to the European Commission for endorsement by 10 January 2024 (when the revised ELTIF Regulation will apply).

You can read more about the revised ELTIF Regulation here.

​​ESA’S publish Joint Annual Report for 2022

The ESA joint committee (JC) have published its 2022 Annual Report, which provides an account of its joint work completed in 2022.​​

In 2022 the JC focused on issues of cross-sectoral relevance, including:

Joint Risk Assessment: two Joint Risk Reports in Spring and Autumn.

Sustainable finance (SFDR).

  • The ESAs issued an updated Joint Supervisory Statement on the application of the SFDR.
  • In June, the ESAs published a clarification on the ESAs’ draft RTS under SFDR. This clarified PAI disclosures, financial product disclosure and DNSH disclosures.
  • The ESAs published their first report on the extent of voluntary PAI disclosure of investment decisions on sustainability factors. Implementation varied across jurisdictions with discrepancies in how the PAIs were disclosed and in the level of details used in explaining why FMPs did not take into account PAIs of their investment decisions.
  • In September, the ESAs published a Final Report containing RTS amending the SFDR Delegated Regulation related to disclosures in financial products of investments in fossil gas and nuclear energy. The amendments added a ‘yes/no’ question to identify whether financial products make fossil gas or nuclear energy Taxonomy-aligned investments. In case of a positive answer to the question, additional graphical representations are required. The ESAs also proposed minor technical revisions to the SFDR Delegated Regulation.
  • The ESAs published practical application Q&As providing clarifications on the SFDR Delegated Regulation.
  • The ESAs progressed the amendment of the SFDR Delegated Regulation with further PAI indicators and to include specific financial product disclosures on decarbonisation targets (i.e., reduction of greenhouse gas emissions or GHG). The ESAs aim to submit a final report with draft RTS to the Commission in 2023.


  • In February, the ESAs published a Joint Report on Digital Finance. The ESAs presented ten cross-sectoral and two insurance-specific recommendations for actions to ensure the EU regulatory and supervisory framework remains fit for the digital age.
  • The Digital Operational Resilience Act (DORA) includes several policy mandates for the ESAs. A Sub-Committee develops technical advice and draft technical standards, guidelines and recommendations mandated by DORA or the European Commission to be delivered in 2023 or 2024.

Consumer protection and financial innovation

  • The JC continued to work on PRIIPs, Q&As and review.
  • The ESAs worked on addressing the risks to consumers arising from crypto-assets and issued a Joint Warning on crypto-assets in March 2022.

Other relevant cross-sectoral JC work

  • The ESAs published their Final Report on EMIR draft RTS with regards to intragroup contracts with new draft amending RTS on the risk mitigation techniques for OTC derivative contracts not cleared by a CCP, notably bilateral margining.
  • The ESAs issued a statement to provide clarifications for the period between the publication of the report and the completion of the no-objection procedure by the European Parliament and the Council.
  • The JC approved the draft consultation paper on the guidelines to set up a cross-sectoral system for the exchange of information on the fit and proper assessments, paving the way for a public consultation in early 2023.
  • Work also continued on the related IT solution consisting of a cross sectoral NCAs’ contact list and searchable shared database of holders of qualifying holdings, directors and key function holders assessed for Fitness and Probity.

Amendments to MiFIR RTS on transparency requirements for equity and non-equity instruments

The following were published in the Official Journal of the European Union (the OJ):

  • Commission Delegated Regulation (EU) 2023/944 amending and correcting the regulatory technical standards (RTS) laid down in Delegated Regulation (EU) 2017/587 as regards certain transparency requirements applicable to transactions in equity instruments.
  • Commission Delegated Regulation (EU) 2023/945 amending the RTS laid down in Delegated Regulation (EU) 2017/583 as regards certain transparency requirements applicable to transactions in non-equity instruments.

Both regulations were made under the Markets in Financial Instruments Regulation (600/2014) (MiFIR). The amendments relate to certain reporting fields, flags, and transitional provisions. Both regulations will enter into force on 5 June 2023. Parts of the Regulations will apply from 1 January 2024.

Amendments to RTS on MiFID II tick size regime

The following was published in the OJ:

  • Commission Delegated Regulation (EU) 2023/960 amending Delegated Regulation (EU) 2017/588 which contains RTS supplementing the MiFID II Directive. The amendments concern the annual application date of the calculations of the average daily number of transactions for shares, depository receipts and exchange-traded funds for the purposes of the tick size regime.

It will come into force on 5 June 2023.


Proposed AML Regulation, 6AMLD and AMLA Regulation

The proposed AML Regulation, 6AMLD and AMLA Regulation continue through the EU legislative process. The Council of the EU published the following notes:

  • information note on the proposed Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (2021/0239) (AML Regulation)
  • information note on the proposed Directive on the mechanisms to be put in place by the member states for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing Directive (EU) 2015/849 (2021/0250)) (MLD6)
  • information note (9359/23) on the proposed Regulation establishing the AMLA (2021/0240) (AMLA Regulation)

The notes contain tables comparing the negotiating positions taken by the European Commission, the Council and the European Parliament ahead of the start of trialogue negotiations on the legislation.

EU list of high-risk third-country jurisdictions

The European Commission is updating the list of high-risk third-country jurisdictions presenting strategic deficiencies in their anti-money laundering/countering the financing of terrorism (AML/CFT) regimes. Two third-country jurisdictions are being added to the list: Nigeria and South Africa, while two other jurisdictions are being delisted: Cambodia and Morocco.

The update of the list of high-risk third-country jurisdictions takes the legal form of a delegated regulation and annex which will enter into force after scrutiny and non-objection of the European Parliament and the Council over a period of one month (which can be prolonged for another month).

Press release is here.

This list takes into account the information from the Financial Action Task Force (FATF) and the changes decided at the last FATF Plenary of February 2023 in the list of ‘Jurisdictions under Increased Monitoring‘ (grey list). Considering the level of financial systems’ integration, the Single Market would be exposed to serious risks of money laundering and terrorist financing if the EU were not to consider adding jurisdictions identified by the FATF to the EU list.

European financial institutions and other gatekeepers, including notaries, lawyers, and accountants (obliged entities) are required to apply enhanced vigilance in transactions involving high-risk third-countries (enhanced customer due diligence). This applies to existing customers as well as new customers.

Under Article 9 of Directive (EU) 2015/849, the 4th Anti-money Laundering Directive, the Commission is mandated to adopt and update such a list regularly in order to take into account information from international organisations and standard setters in the field of AML/CFT, such as the FATF.

The Commission had previously published its revised EU methodology for the identification of high-risk third countries.

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