EU Commission “no-deal” Contingency Action Plan in Financial Services (and other sectors).

On 19 December 2018, the Commission adopted a number of proposed measures under its 18 November 2018 Contingency Action Plan in the event of a no-deal Brexit (with remaining measures to be ready by 15 February 2019). The European Parliament and the Council are now expected to adopt the Commission's proposals.

Following a thorough examination of the risks linked to a no deal scenario in the financial sector, the EU Commission found that only a limited number of contingency measures are necessary to safeguard financial stability in the EU27. The Commission therefore adopted (on 19 December) the following acts:

  • A temporary and conditional equivalence decision for a fixed, limited period of 12 months to ensure that there will be no immediate disruption in the central clearing of derivatives.
  • A temporary and conditional equivalence decision for a fixed, limited period of 24 months to ensure that there will be no disruption in central depositaries services for EU operators currently using UK operators.
  • Two Delegated Regulations facilitating novation, for a fixed period of 12 months, of certain over-the-counter derivatives contracts, where a contract is transferred from a UK to an EU27 counterparty.

The Commission is encouraging firms to inform clients on steps taken and how they are implementing them. For their part, EU clients of UK firms are encouraged to prepare for a scenario in which their provider is no longer subject to EU law.

This topic is discussed in our fuller briefing here.

EU Commission report on the operation of the AIFMD

On 10 January 2019, the EU Commission published a report (dated 10 December 2018) on the operation of the AIFMD.

The report was prepared by KPMG, which the EU Commission contracted in 2017 to carry out research on how the AIFMD has worked in practice and to what extent its objectives have been met. The report provides and assesses evidence for the Commission's mandatory review of the AIFMD under Article 69 of the AIFMD.

KPMG carried out a general survey of the stakeholders most affected by the AIFMD and an evidence-based survey. The report sets out the key findings from these surveys. In particular, it concludes that the AIFMD has played a major role in helping to create an internal market for AIFs and a harmonised and stringent regulatory and supervisory framework for AIFMs. Moreover, it assesses that most of the provisions have contributed to the achievement of the AIFMD's specific and operational objectives, have done so effectively, efficiently and coherently, remain relevant and have EU added value.

The report also identifies certain areas that require further analysis. These include:

  • Inadequate and duplicative reporting requirements and overlapping reporting obligations with other EU legislation.
  • Harmonisation of the calculation methodologies for leverage across the AIFMD, the UCITS Directive and other relevant legislation.
  • Impairments to the effectiveness of the valuation rules due to the binary choice between internal or external valuation, and the differing national interpretations of the extent of the liability of external valuers.
  • The coherence of the remuneration rules with other pieces of legislation and guidelines.
  • Excessive investor disclosure requirements, which means they are ignored or prevent investors from obtaining a clear understanding of the AIF's investment proposal.
  • Inconsistencies between the investor disclosure rules and other EU investor disclosure regimes, which give rise to duplicative, and potentially inconsistent, disclosures.
  • A lack of transparency regarding the different national rules and supervisory processes relating to the marketing passport, due to member states adopting different approaches about which activities constitute "marketing".

The Commission will continue its work on the AIFMD review and will report to the co-legislators in 2019.

Proposed new Investment Firms regulatory framework

The European Council is proposing new regulations for investment firms so as to make the rules which apply to investment firms more proportionate and more appropriate to the level of risk which they take.

The packages of measures comprise a regulation and a directive and set out a new regulatory framework for investment firms. They define prudential requirements and supervisory arrangements that are adapted to investment firms' risk profile and business model while ensuring financial stability.

Currently, all EU investment firms are subject to the same capital, liquidity and risk management rules as banks. The capital requirements regulation and directive (CRR/CRD4) are based on international standards intended for banks. They are not adapted to the specificities of investment firms.

Under the new framework, investment firms would be subject to the same key measures, in particular as regards capital holdings, reporting, corporate governance and remuneration, but the set of requirements they would need to apply would be differentiated according to their size, nature and complexity.

The equivalence regime, as set out in MIFID2/MIFIR that would apply to third country investment firms is strengthened. The proposals detail some of the requirements for giving third country investment firms access to the single market and grant additional powers to the EU Commission. In particular, in case the activities performed by third country firms are likely to be of systemic importance, it allows the EU Commission to apply some specific operational conditions to an equivalence decision to ensure that ESMA and national competent authorities have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.

Negotiations between the Council and the Parliament on the proposals will commence soon.

ESMA annual statistical report on retail investment products

On 10 January 2019, ESMA published its first annual statistical report on the performance and costs of retail investment products in the EU. The report covers UCITS, AIFs sold to retail investors (retail AIFs) and structured retail products (SRPs). It highlights in particular the significant impact of costs on the final returns that retail investors make on their investments.

Issues raised by ESMA include:

  • For UCITS funds, the charges, taken all together, reduce their gross returns by one quarter on average. Retail investors are impacted to a much higher extent than institutional investors, with retail clients paying on average twice as much as institutional clients. On-going costs such as management fees make up over 80% of the total costs paid by customers.
  • In terms of overall returns, passive equity funds consistently outperform active equity funds. Much of this is down to the fact that costs for actively managed equity funds are significantly higher than for passively managed funds and exchange traded funds.
  • There is significant variation in costs and gross performance across member states.
  • The lack of available and usable cost and performance data, especially for retail AIFs and SRPs, is a significant issue from an investor protection perspective.

Anti-Money Laundering/ Combating the Financing of Terror / Corruption

Wolfsberg Group guidance on use of sanctions screening by financial institutions

The Wolfsberg Group published guidance on the use of sanctions screening by financial institutions (FIs) as a control in the detection, prevention and disruption of financial crime and, in particular, sanctions risk.