.png)
Highlights:
The European Securities and Markets Authority (ESMA) has releasedits final report on the guidelines on funds’ names using ESG orsustainability-related terms (the “Guidelines”), which also include a minimuminvestment threshold and qualifying criteria for different categories of ESG-and sustainability-related terms. The purpose of these Guidelines is to ensurethat fund names using ESG- or sustainability-related terms are fair, clear andstraightforward.
Luxembourg Market Update:
Luxembourg'sregulated investment funds saw a 1.7% increase in net assets in March,extending the sector's growth over the past six months, to a total of €5.485trnat the end of the month, according to the CSSF. Net inflows amounted to€1.844bn, while rising financial markets contributed €90.09bn. The regulatorsays the number of legally distinct fund structures fell from 3,260 at the endof February to 3,251, comprising 2,124 umbrella funds with 12,777 sub-funds and1,127 single-portfolio fund entities, and that all equity fund segments saw netoutflows in March.
RegulatoryDevelopments in and beyond Luxembourg:
18April 2024: FATF ministers commit to stepping up efforts to fight moneylaundering, terrorist and proliferation financing
TheMinisters of the Financial Action Task Force (FATF) met in Washington DC todiscuss strategic issues and to take stock of FATF progress over its lastmandate. Ministers reaffirmed their unwavering commitment to combat financialcrime, and fully support the FATF as the global standard-setter for preventingand combatting money laundering, terrorist financing and the financing of theproliferation of weapons of mass destruction (AML/CFT/CPF).
Despitethe significant progress made, the ministers noted the presence of some gaps ineffective implementation of the FATF standards. As per the MinisterialDeclaration, further efforts are also required on supervisionand preventive measures, beneficial ownership transparency, investigating andprosecuting money laundering, and confiscating the proceeds of crime.
Ministersalso committed to fully and effectively implement the FATF standards and tohold any member countries accountable if they fail to do so.
TheMinisterial Declaration highlights how FATF will continue its strategic focuson countering terrorist financing and encourage all jurisdictions to strengthencooperation to better detect, investigate, prosecute and disrupt terroristfinanciers. In addition, the FATF encourages all jurisdictions to implementmeasures to prevent WMD (Weapons of Mass Destruction) proliferators fromraising and moving funds. FATF ministers will meet next in April 2026
24April 2024: Circular CSSF 24/857 on stress test scenarios under MMFR
Thepurpose of the Circularis to inform you that the CSSF, as competent authority, integrates the latest versionof the ESMA Guidelines on stress test scenarios under the MMF Regulation (Ref.ESMA50-43599798-9011), as published on 19 December 2023, in its administrativepractices. All money market funds (MMFs) under the supervision of the CSSF andLuxembourg managers of MMFs shall duly comply with the 2023 Guidelines.
29April 2024: CSSF launches new webpage on CSRD
TheCSSF has launched a new webpageconcerning the Corporate Sustainability Reporting Directive (CSRD). On theupper right of the webpage, there are links to an overview on the CSRD, itsscope and application as well as the main requirements of the EuropeanSustainability Reporting Standards (ESRS). The latter includes links to thework of the European Financial Reporting Advisory Group (EFRAG) in thiscontext.
2May 2024: CSSF publication of Overseas Funds Regime roadmap
TheCSSF informs that the UK Financial Conduct Authority (FCA) and HM Treasury havejointly issued a roadmap to explain how the Overseas Funds Regime (OFR) isintended to be opened to European Economic Area (EEA) funds authorised underDirective 2009/65/EC, as amended, following the UK Government’s decision togrant equivalence in relation to those funds (with the exception of moneymarket funds).
Byway of a reminder, the OFR is meant to replace the current Temporary MarketingPermissions Regime once it expires. The CSSF invites Luxembourg domiciled UCITSand management companies to closely monitor any implications deriving therefromwith a view to ensuring a smooth continuity of their marketing activitiestowards UK investors.
Allthe necessary information and practical specifications in relation to theaforesaid roadmap can be found on the FCA’s website.
3May 2024: EC releases a summary of responses to SFDR review
TheEuropean Commission (EC) has published a summaryof the responses received in the course of the SFDR review consultation.
Ofnote:
· There is a divergence amongrespondents regarding on whether the SFDR is the right place to setentity-level disclosure requirements;
· Many respondents indicated that theywould support a hybrid approach combining established SFDR concepts with avoluntary categorisation framework, although there were diverging views on theapproach to be taken in detail. Irrespective of the chosen approach, mostrespondents emphasised the importance of the categories being focused on retailinvestors, incorporating international frameworks, and leveraging existingnational labels;
· Respondents were predominantlylocated in EU countries, with France, Germany, Belgium, Spain, and Luxembourgbeing the most represented.
7May 2024: ESMA Call for Evidence on the review of the Commission Directive2007/16/EC on UCITS eligible assets
ESMAhas launched a Call forEvidence in the context of the European Commission’s formalrequest to ESMA to provide technical advice on the review of the CommissionDirective 2007/16/EC on UCITS eligible assets (‘UCITS EAD’). The Commission hasmandated ESMA to carry out an assessment of the implementation of the UCITS EADin the Member States and to analyse whether any divergences have arisen in thisarea and to provide a set of recommendations on how the EAD should be revisedto keep it in line with market developments.
Tothis end, ESMA seeks stakeholders input on a number of questions, inter alia,to gather insights on the manner and the extent to which UCITS have gaineddirect and indirect exposures to certain asset classes that may give rise todivergent interpretations and/or risk for retail investors (e.g.structured/leveraged loans, catastrophe bonds, emission allowances,commodities, crypto assets, unlisted equities).
ESMAwill consider all comments received by Wednesday, 7 August 2024.
8May 2024: ESMA answers new Q&As on performance fees
TheEuropean Supervisory and Markets Authority (ESMA) has answeredthe following new questions on performance fees:
· Can the manager of a Fund of Funds(FoF) charge performance fees?
· Where a manager applies an additionalreference indicator to the performance fee model (e.g.: a hurdle rate on top ofthe High-Water Mark model or the benchmark model), should the minimumperformance reference period be applied to the additional reference indicator?
Boththe Q&As on UCITS and the AIFMD have been updated.
14May 2024: CSSF AML/CFT Conference for Investment Firms
Inorder to foster interaction with the investment firms under its supervision,the CSSF held an online conference on 23 April 2024 highlighting the key issueson AML/CFT for the sector. Representatives of the Luxembourg Ministry ofJustice and the Luxembourg Financial Investigations Unit (FIU) were amongst thespeakers.
Thespeakers gave feedback and clarifications on the following topics:
· Key take-aways from AML/CFTinvestment firms’ supervision.
· Results of the FATF’s MutualEvaluation 2023.
· Findings, typologies and bestpractices by the FIU.
Theconference slides can be found here.
15May 2024: ESMA publishes its Final Report on Guidelines on funds’ names usingESG or sustainability-related terms
ESMAhas published its Final Reporton Guidelines on funds’ names using ESG or sustainability-related terms. Inthis Final Report, ESMA provides an overview of the feedback received on therelated ESMA consultation, which ran from 18 November 2022 to 20 February 2023,and explains how this feedback has been considered. The Final Report alsocontains the final Guidelines on funds’ names (the “Guidelines”). TheseGuidelines apply to UCITS management companies (as well as UCITS which have notdesignated a UCITS management company), alternative investment fund managersincluding internally managed AIFs, EuVECA, EuSEF and ELTIF and Money MarketFund managers.
Thepurpose of the Guidelines is to specify the circumstances where the fund namesusing ESG or sustainability-related terms are unfair, unclear or misleading.Investment fund managers and internally managed funds (“IFMs”) that include ESGor sustainability-related terms in the names of the UCITS and AIFs they managemust comply with the requirements included in the Guidelines.
Categoriesof terms
ESMAdistinguishes different categories of ESG- and sustainability-related terms:
· “Environmental”-related terms meanany words giving the investor the impression of promoting environmentalcharacteristics, e.g. “green”, “environmental”, “climate”, etc. These terms mayalso include the abbreviations “ESG” and “SRI”.
· “Sustainability”-related terms meanany terms derived from the base word “sustainable”, e.g. “sustainably”,“sustainability”, etc.
· “Impact”-related terms mean any termsderived from the base word “impact”, e.g. “impacting”, “impactful”, etc.
· “Transition”-related terms encompassany terms derived from the base word “transition”, e.g. “transitioning”,“transitional” etc. and terms deriving from “improve”, “progress”, “evolution”,“transformation”, “net-zero”, etc.
· “Social”-related terms mean any wordsgiving the investor an impression of promoting social characteristics, e.g.“social”, “equality”, etc.
· “Governance”-related terms mean anywords giving the investor the impression of a focus on governance, e.g.“governance”, “controversies”, etc.
Minimuminvestment threshold
Allfunds using ESG- or sustainability-related terms should meet an 80% minimumthreshold in the proportion of investments used to meet environmental or socialcharacteristics or sustainable investment objectives in accordance with thebinding elements of the product investment strategy, as disclosed in the SFDRpre-contractual template (Annexes II and III of CDR (EU) 2022/1288).
Otherrequirements
Inaddition to the requirements outlined above, the following categories ofESG-related terms should comply with the following:
· Funds using “Sustainable”-relatedterms should commit to investing meaningfully in sustainable investmentsreferred to in Article 2(17) of the SFDR.
· Funds using the term “Transition”should ensure that investments are on a clear and measurable path to social orenvironmental transition.
· Fund names with the term “Impact”should ensure that investments are made with the intention of generatingpositive and measurable social or environmental impact alongside a financialreturn.
Whena fund name combines several ESG-related terms, the Guideline requirementsshould apply cumulatively with the exception of terms used with “Transition”where only the CTB exclusions apply, as well as the requirement to have a clearand measurable path to social or environmental transition.
TheGuidelines will apply three months after the date of their publication onESMA’s website in all EU official languages. IFMs of any new funds createdafter the date of application of the Guidelines, should apply these Guidelinesimmediately in respect of those funds. IFMs of funds existing before the dateof application of the Guidelines should comply with the Guidelines with respectto those funds at the latest six months after the date of application of theGuidelines.
24May 2024: European Council approves CSDDD
TheCouncil of the EU has approvedthe final text of the Corporate Sustainability Due Diligence Directive (CSDDD).The Directive introduces obligations for large companies regarding adverseimpacts of their activities on human rights and environmental protection.
Withthis approval, the legislative process ends and as a next step, the final textwill be published in the Official Journal of the EU. The Directive will enterinto force twenty days later. It foresees a two years implementation time forMember States.
TheDirective will apply, depending on the size of the companies following thistimeline:
· 3 years from the entry into force ofthe directive for companies with more than 5 000 employees and €1 500 millionturnover;
· 4 years from the entry into force forcompanies with more than 3 000 employees and €900 million turnover;
· 5 years from the entry into force ofthe directive for companies with more than 1 000 employees and €450 millionturnover.
27May 2024: ESMA publishes report on application of MiFID II marketingrequirements
ESMAhas issued a combined reporton its 2023 Common Supervisory Action (CSA) with National Competent Authorities(NCAs) on marketing disclosure rules under MiFID II. In the report, ESMAoutlines several areas of improvement:
· Marketing communications need to beclearly identifiable;
· They need to contain a clear andbalanced presentation of risks and benefit;
· In cases where products and servicesare marketed as having ‘zero cost’, they should also include references to anyadditional fees.
ESMAfurther encourages NCAs to consider the use of sanctions in case of breaches. Inview of the substantial role that marketing communications and advertisementscan play in determining consumer behaviour and influencing investmentdecisions, ESMA and the NCAs will continue working on the topic.
27May 2024: CSSF Communiqué on crypto-asset ATMs
TheCSSF recommends that persons interested in conducting crypto-asset transactionson ATMs located in Luxembourg verify beforehand whether the providers operatingthese ATMs are registered as “Virtual Asset Service Provider” (“VASP”) with theCSSF. The list of VASPs is available in the application “SearchEntities”. Furthermore, please be reminded that anyprovider wishing to operate such an ATM in Luxembourg must register with theCSSF as VASP beforehand. More information on the registration procedure isavailable on the CSSF website (Registrationof a virtual asset service provider (VASP).
28May 2024: C SSF communiqué on PRIIPS level 1 and level 2 regulation
TheCSSF has issued a communiquéon PRIIPs level 1 and level 2 Regulation, which require “manufacturers” ofpackaged retail and insurance-based investment products (PRIIPs) to review theinformation contained in the key information document (KID) at least everytwelve months following the date of its initial publication. With reference toexisting guidance, the CSSF also reminded Luxembourg UCITS and UCITS managementcompanies of the aforementioned review requirement for the year 2024.
30May 2024: ESMA publishes report on application of MiFID II marketingrequirements
ESMAhas published a statementoffering initial guidance to firms using Artificial Intelligence technologies(AI) when they provide investment services to retail clients.
Theguidance analyses the risks inherent to the use of AI, such as:
· Algorithmic biases and data qualityissues;
· Opaque decision-making by a firm’sstaff members;
· Overreliance on AI by both firms andclients for decision-making; and
· Privacy and security concerns linkedto the collection, storage, and processing of the large amount of data neededby AI systems.
TheESMA reiterates that when using AI, firms are expected to comply with relevantMiFID II requirements, particularly when it comes to organisational aspects,conduct of business, and their regulatory obligation to act in the bestinterest of the client.
30May 2024: OJEU publishes a delegated act (DEA) related to DORA
The Official Journal of the European Union (OJEU) haspublished a delegatedact supplementing the Digital Operational Resilience Act (DORA) Regulation (EU)2022/2554 by specifying the criteria for the designation, by the EuropeanSupervisory Authorities (ESAs) of ICT third-party service providers as criticalfor financial entities.
The assessment process consists of two steps, aimedat determining whether an ICT third-party service provider that is critical forfinancial entities. The assessment considers:
· The systemic impact of ICTthird-party service providers on the stability, continuity or quality of theprovision of financial services;
· The systemic character and importanceof the ICT services provided to financial entities;
· The criticality or importance of thefunctions;
· The degree of substitutability.
30May 2024: OJEU publishes four delegated acts (DEAs) related to MiCA
The OJEU has published four delegated actssupplementing the Market in Crypto-Assets (MiCA) Regulation (EU) 2023/1114.
The firstdelegated act aims to specify the fees that theEuropean Banking Authority charges to issuers of significant asset-referencedtokens and issuers of significant e-money tokens.
The seconddelegated act aims to specify the procedural rulesfor the European Banking Authority to impose fines or periodic penalty paymentson issuers of significant asset-referenced tokens and significant e-moneytokens.
The thirddelegated act determines the amount of oversightfees that the Lead Overseer will charge critical ICT third-party serviceproviders and details how those fees are to be paid.
The forthdelegated act specifies certain criteria forclassifying asset-referenced tokens and e-money tokens as significant.
For further information, please contact:
Tobias Ettlin
m: +352 691 111 931
Disclaimer: This regulatory updatehas been prepared for clients of ONE group solutions and its subsidiaries forinformational purposes and is not intended to be relied upon as professionaladvice. Please visit: https://www.one-gs.com/