REGULATORY CLIENT UPDATE / APRIL 2021
In March, the CSSF has launched the first implementation phase of a common supervisory action (CSA) by ESMA on the supervision of costs and fees in UCITS by asking a sample of Luxembourg-based UCITS managers to complete a dedicated questionnaire for all their UCITS under management. The context is ESMA’s current focus on cost and charges in UCITS funds.
The Sustainable Finance Disclosure Regulation (SFDR) came into force on 10 March 2021. It applies at a product level (e.g. for UCITS, ETFs and AIFs sold in the EU) as well as an entity level (e.g. for UCITS Management Companies, AIFMs and MiFID Investment Firms). It entails ESG-specific transparency obligations that will need to be made to all investors in the product, complemented by disclosures made by the asset managers on their websites. The disclosures require a strategic positioning of these products by asset managers regarding their sustainability approach.
Luxembourg Market Update:
According to the European Fund and Asset Management Association (EFAMA), net inflows into UCITS equity funds as of January have exceeded €50bn for the third straight month in a row, a level that had never been reached before November 2020, the European Fund and Asset Management Association has reported. EFAMA attributes this to the arrival of the first Covid-19 vaccines, which restored investor optimism about future growth prospects. Net sales for UCITS and alternative investment funds totalled €83bn, down from €174bn in December 2020. UCITS recorded net inflows of €66bn, compared to €121bn in December 2020.
Regulatory Developments in and beyond Luxembourg:
11 February 2021:
Changes to MiFID II to allow certain bundling of research and execution
The European Parliament has approved amendments to MiFID II research rules and best execution reporting to offer relief to participants in the wake of the COVID-19 pandemic.
Under the changes, asset managers will be permitted to bundle payments for research and execution provided that the research is on issuers with a market cap of less than €1 billion over 36 months.
The adopted MiFID amendments need to be transposed into national laws before they are applicable.
5 March 2021:
CSSF press release on the supervision of costs and fees in UCITS
The CSSF published a communiqué on ESMA’s common supervisory action (CSA) with National Competent Authorities on the supervision of costs and fees of UCITS. Both initiatives follow the publication of a briefing by ESMA in June 2020 on the same topic.
The aim of the CSA on costs and fees is to assess the compliance of supervised entities with the relevant cost-related provisions in the UCITS framework and the obligation of not charging investors with undue costs. The CSA also covers entities employing Efficient Portfolio Management (EPM) techniques to assess whether they adhere to the requirements set out in the UCITS framework and ESMA Guidelines on ETFs and other UCITS issues (ESMA/2014/937).
The CSSF launched the first phase of the CSA in March by asking a sample of Luxembourg-based UCITS managers to complete a dedicated questionnaire for all UCITS managed, i.e. Luxembourg domiciled UCITS and foreign domiciled UCITS.
10 March 2021:
Sustainable Finance Disclosure Regulation (SFDR) came into force
The regulation applies at a product level (e.g. for UCITS, ETFs and AIFs sold in the EU) as well as an entity level (e.g. for UCITS Management Companies, AIFMs and MiFID Investment Firms). It entails ESG-specific transparency obligations that will need to be made to all investors in the product, complemented by disclosures made by the asset managers on their websites. The disclosures require a strategic positioning of these products by asset managers regarding their sustainability approach. They will be required to be transparent about the following: i) sustainability risks, ii) principle adverse impacts (PAI), and iii) classification of the product under SFDR. This is currently done on a principle-basis, but will be enhanced by regulatory technical standards expected during 2021 that contain detailed rules on the content, methodologies and presentation of disclosures.
24 March 2021:
ESMA publishes the results of the CSA on UCITS Liquidity Risk Management
The European Securities and Markets Authority (ESMA) published the results of its CSA on the compliance of UCITS managers with their Liquidity Risk Management obligations that was launched on 30 January 2020. The CSA showed that the overall level of compliance with the applicable rules was satisfactory in most cases. However, there was also a need for improvement of identified shortcomings in some cases regarding e.g. documentation, procedures, methodology and governance.
Further work is planned at the level of ESMA to promote convergence in the way local regulators follow-up on the findings of the CSA. In addition, ESMA will consider whether the results of CSA should lead to any follow-up policy work.
In the same context, ESMA urged asset managers to improve their liquidity management to ensure that retail fund investors can redeem their holdings even in times of stress.
30 March 2021:
ESMA UCITS Q&A and AIFMD Q&A updates
ESMA issued an update of its Questions and Answers on the application of the UCITS Directive. Two additional Q&As have been added on the ESMA’s guidelines on performance fees in UCITS and certain types of AIFs and provide clarification on the crystallisation of performance fees and on the timeline of the application of the performance reference period.
The ESMA Questions and Answers on the application of the Alternative Investment Fund Managers Directive have also been updated and also contain clarification on the crystallisation of performance fees, on the timeline of the application of the performance reference period and the scope of the guidelines in respect of European Long-Term Investment Funds (ELTIFs).
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Disclaimer: This regulatory update has been prepared for clients of ONE group solutions and its subsidiaries for informational purposes and is not intended to be relied upon as professional advice. Please visit: https://www.one-gs.com/
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