18 MAY 2016

ESMA speech on ongoing AIFMD work

ESMA has published a speech given by Verena Ross, Executive Director of ESMA, at the AIMA Global Policy and Regulatory Forum. The speech sets out the ongoing work being carried out by ESMA in relation to the Capital Markets Union (CMU) and the AIFMD.

Loan origination by funds

The speech sets out that there is now greater acceptance by policymakers of the potential for investment funds to originate loans and that some Member States have introduced bespoke loan origination regimes. Ross states that, against this backdrop, ESMA provided an opinion on this topic in April 2016 and has commenced work on a common European framework for loan origination by investment funds.

AIFMD asset segregation

Following a public consultation on asset segregation in December 2014, ESMA is currently assessing possible segregation models, and considering the extent to which models allow for omnibus accounts. ESMA expects to publish a document on the issue by the end of 2016.

AIFMD leverage and reporting

Ross states that ESMA is in the process of developing more detailed guidance on both the circumstances in which leverage may be used under AIFMD and the linked issue of what managers are required to report to home regulators. ESMA encourages managers to flag any problems or issues via AIMA and intends to continue to update its AIFMD Q&A with reporting issues.

AIFMD passporting

In relation to the extension of the AIFMD passport, ESMA is continuing to assess non-EU countries. Following feedback from the Commission in January 2016, the second wave of countries (Australia, Japan, Canada, Cayman Islands, Bermuda and Isle of Man) is now being assessed. ESMA is also gathering further information to form conclusive opinions on the outstanding first wave countries (Hong Kong, Singapore and the US) following a request from the Commission for further information.

UCITS remuneration guidelines

The speech highlights the ongoing debate surrounding the UCITS remuneration guidelines and, in particular, the issue of "proportionality". ESMA has written to the European Council, Commission and Parliament suggesting greater clarity regarding proportionality and awaits a response.


ESMA has published a revised version of its AIFMD Q&As to include the following:

Marketing of AIFs

  • ESMA has clarified that, in relation to marketing of EU AIFs in the home Member State of the AIFM, it does not make a difference whether the EU AIF is domiciled in the AIFM's home Member State or a different Member State.
  • Under Article 31, an authorised EU AIFM may market an EU feeder AIF in the AIFM's home Member State only where the EU feeder AIF has an EU master AIF which is managed by an authorised EU AIFM.

Calculation of AUM

"Committed capital" should not, generally, be taken into account when calculating AUM for the purposes of Article 3(2). However, as national valuation rules and the AIF rules or articles of incorporation are to be taken into account when determining AUM, "committed capital" may be taken into account in certain circumstances.

Similarly, "committed capital" should generally not be taken into account when calculating the additional own funds requirement for the purposes of Articles 9(3) and 9(7).


ESMA has published an update to its Q&As on the Application of the EuSEF and EuVECA Regulations.

The purpose of the Q&A document is to promote a common supervisory approach in the application of Regulation (EU) No 346/2013 on European social entrepreneurship funds (EuSEF) and Regulation (EU) No 345/2013 on European venture capital funds (EuVECA).

The updated Q&A clarifies that EuSEFs and EuVECAs may use the respective designations "EuSEF" and "EuVECA", even where such funds are marketed solely within their home Member State.


ESMA has published a new Q&A in relation to the Market Abuse Regulation (MAR) which aims at enhancing market integrity and investor protection.

The MAR updates and strengthens the existing Market Abuse Directive framework, which will be repealed when MAR comes into force on 3 July 2016, by extending its scope to new markets and trading strategies and by introducing new requirements.

The Q&As are developed and published as ESMA is required to play an active role in building a common supervisory culture by promoting common approaches and practices.

The new Q&A confirms that MAR is not limited to firms or entities providing investment services under MIFID. The obligation to detect and identify market abuse applies to "persons professionally arranging or executing transactions" and that term includes buy side firms, such as investment management firms (including AIFs and UCITS managers), as well as firms professionally engaged in trading on own account. The obligation to detect and report suspicious orders and transactions under Article 16(2) of MAR has similar reach.


ESMA has issued a Discussion Paper on distributed ledger technology (DLT) also known as "blockchain".

Distributed ledgers are essentially records, or ledgers, of electronic transactions. Their uniqueness lies in the fact that

they are maintained by a shared or distributed network of participants and not by a centralised entity as in current market practice. Another distinguishing feature is the extensive use of cryptography to store assets and validate transactions. While blockchain technology was originally designed for Bitcoins, the innovation has spread to traditional financial services.

ESMA has been looking at this area for some time and is now seeking more in-depth feedback to further its assessment.

The paper analyses the potential benefits of DLT such as higher security, greater efficiency in clearing and settlement and reduced costs. It also reviews the key EU regulations which would be applicable to DLT. These include the European Market Infrastructure Regulation (EMIR), the Settlement Finality Directive (SFD), and the Central Securities Depositories Regulation (CSDR).

ESMA sees a number of legal and technical challenges that would need to be overcome before DLT could be applied widely to securities markets. Some of these challenges are related to the technology itself such as the scalability of the technology and the interoperability with existing systems. Other challenges are mainly related to the governance framework, privacy and regulatory issues.

The consultation is intended to help ESMA to assess the opportunities and challenges posed by DLT from a regulatory standpoint and to help ESMA form an opinion on whether a specific regulatory response to the use of this technology in securities markets is needed.

Responses are invited by 2 September.


The European Commission (the Commission) is seeking responses to a consultation issued in relation to certain action that could be taken to further facilitate the cross-border distribution of funds across the EU, thus strengthening the development of the CMU. The consultation period is open from 2 June 2016 until 2 October 2016 and aims to focus specifically on UCITS or AIFs (including ELTIFs, EuVECAs and

EuSEFs) and to complement other work carried out by the Commission with a view to improving the single market for investment products and asset management.

The Commission is consulting on the:

  • Marketing rules and restrictions, primarily in relation to the significant costs which can be incurred in researching each individual EU Member State's financial promotion and consumer protection regimes, as well any on-going obligations.
  • Distribution costs and regulatory fees, which can vary between home and host Member States in both scale and how they are calculated. The Commission asks whether costs act as a barrier to cross-border distribution.
  • Administrative arrangements, which, when using the marketing passport to sell EU funds to retail investors, may be applied in order to facilitate the ease of subscription, redemption and receipt of distributions for investors. The benefit derived by local investors from such arrangements may not always justify the burden of compliance and, as such, they may pose yet another barrier.
  • Distribution networks, with the ever increasing use of online platforms to aid distribution of funds, the Commission aims to better understand the barriers that may hinder the use of online and direct distribution across borders.
  • Notification processes, occurring whenever documentation must be updated or modified. Such processes can prove burdensome and costly in order to correctly notify the authorities in the host Member State.
  • Taxation, which, on occasion, can create barriers on the basis of differential tax treatment between Member States. The Commission is therefore seeking feedback on how to promote best practice and avoid discriminatory tax treatment.

The driving force behind the consultation is simply to create a deeper single market for capital which will, in turn, strengthen Europe's economy and encourage investment across all Member States. The CMU is intended to mobilise capital and channel it into companies (including small and medium enterprises), as well as infrastructure projects with the aim of expanding and creating jobs.

To put the reasoning into context, one third of UCITS that are capable of being marketed cross-border are sold only in one Member State (in addition to its home country), and mainly back to the Member State where the asset management company is domiciled. The next c.30 per cent of funds are only sold in less than five Member States (outside of their home country). To draw comparisons from across the Atlantic, there are more than 30,000 UCITS funds available for sale in Europe in contrast to roughly 7,000 mutual funds in the US. Furthermore, the average European mutual fund (c.200m) is approximately seven times smaller than its US counterpart.

This disparity between UCITS funds and their US counterparts has overarching consequences for the economies of scale which they rely on, as well as fund costs. The Commission therefore wishes to minimise any real or potential barriers to cross-border distribution in order that European funds may emulate some of the success and benefit that is experienced in the US.

JUNE 2016

FCA launches Advice Unit for firms developing automated advice models

The FCA has on its website published details of an Advice Unit to provide feedback to firms developing automated models which seek to provide low cost advice to consumers. This is closely linked to the advice gap relating to investments, pensions and protection identified by the Financial Advice Market Review.

It is intended that the Advice Unit will provide individual regulatory feedback to firms and publish resources for the benefit of all firms.

The Advice Unit will be free of charge and will be offered to those firms who meet the eligibility criteria outlined on the FCA website.

Applications from interested firms are made by completing an application form. The deadline for applications is 1 July 2016.


The FCA has published a revised modification by consent of its Conduct of Business Sourcebook (COBS) 14 direction to amend timing rules in relation to providing a Key Investor Information Document (KIID).

As part of the implementation of the revised UCITS Directive (UCITS IV), new rules were introduced on 1 July 2011 that require a KIID to be provided to every investor in a UCITS scheme in good time before the investment is made.

Some firms face practical difficulties in providing a KIID before the transaction is concluded. This is particularly so where the client is using a means of distance communication such as phone, text, email, or internet-based messaging. The modification by consent is intended to allow any firm that is required to provide a KIID to a client to do so immediately after the conclusion of the transaction, if:

  • the client has given instructions by means of distance communication; and
  • the firm is not able to provide the document in good time before the transaction is concluded.

The specific exclusions in COBS 14.2.16R and 14.2.17R in relation to UCITS schemes and EEA UCITS schemes are therefore dis-applied when this modification is used.

The modification is available to authorised fund managers of UCITS and to firms that sell, personally recommend or arrange the sale of units in a UCITS scheme or an EEA UCITS scheme that is a recognised scheme in the UK.

The FCA has decided to extend the modification by consent, due to expire 31 June 2016, to 31 December 2018, or when the relevant rules are revoked, amended or no longer apply.

To take advantage of this modification by consent firms must write to the FCA, who will then confirm the modification has been granted and publish this on the FCA website.

JUNE 2016

Extension of modification by consent for managers publishing NURS-KIIs

Many managers of NURSs obtained a modification by consent from the FCA to permit them to publish NURS-KIIs (based upon the UCITS KIID) rather than simplified prospectuses. Such modifications are due to expire on 30 June 2016.

The FCA has informed the Investment Association that the existing modification by consent will be extended for a further two years. This will not be an automatic extension and firms acting under this modification by consent will need to re-apply to the FCA's Central Waivers Team for a new modification.