Cross-border distribution and supervision of UCITS and AIFs.
On 8 June 2017, the European Commission published a communication on its mid-term review of the capital markets union (CMU) action plan. The purpose of the mid-term review is to set out an additional set of actions that complement the initiatives set out in the Commission's original action plan for the CMU that have not yet been completed. Among other things, the Commission intends to:
- Amend the Solvency II Delegated Regulation ((EU) 2015/35) to review the prudential treatment of private equity and privately placed debt.
- Give ESMA additional powers to promote the effectiveness of consistent supervision across the EU.
- Adopt a legislative proposal on a new prudential framework for investment firms.
- Assess the case for an EU licensing and passporting framework for FinTech activities.
- Publish an impact assessment for a possible legislative proposal to facilitate the cross-border distribution and supervision of UCITS and AIFs (para 4.6).
The Commission notes that investment funds in the EU are still small and less cost-efficient than in some other jurisdictions, while the distribution of funds remains geographically limited. A significant reason for this is the lack of regulatory and supervisory convergence, including divergent national requirements on the use of the marketing passport under the UCITS and AIFM Directives. Greater cross-border distribution and digital cross-border distribution would allow funds to grow, allocate capital more efficiently across the EU, and compete within national markets to deliver better value and greater innovation. Barriers to the cross-border distribution of investment funds were also mapped by the Commission and an expert group of Member States' representatives. The result was a roadmap of measures endorsed by Member States in May 2017 to tackle the first set of barriers identified and to identify and dismantle other potential barriers in CMU-relevant areas. The roadmap contains measures in other areas such as withholding tax procedures. Under priority action 7, the Commission will launch an impact assessment with a view to considering a possible legislative proposal to facilitate the cross-border distribution and supervision of UCITS and AIFs in Q1 2018.
On 22 June 2017, the European Commission published an inception impact assessment on reducing barriers to the cross-border distribution of investment funds on a bespoke webpage inviting feedback by 19 July 2017. The initiative set out in the impact assessment (or roadmap) aims to improve the functioning of the single market for EU investment funds by reducing national regulatory barriers to the cross-border distribution of funds.
The policy areas to be considered include the following:
- Marketing. Options include the harmonisation of national marketing requirements and practices, harmonisation of what constitutes marketing and sharing of best practices between member states.
- Administrative requirements. Options include prohibiting requirements in national legislation to appoint local agents in the host member state, or prescribing conditions under which a local agent may be required.
- Regulatory fees. Options include creating a central repository for information on regulatory fees and introducing a principle of proportionality between the fee and supervisory work undertaken.
- Notification requirements. Options include simplifying the process for updating notifications under the marketing passport, establishing a central hub for notifications and amending criteria for when updating notification is required.
- Online distribution. Options include providing clarity relating to the application of marketing rules for online distribution and taking steps to address other barriers, including national implementation of anti-money laundering rules and know-your-customer requirements.
The policy options which may develop the role of ESMA (regulatory fees and notification requirements) may, alternatively, be covered by the Commission's review of the European Supervisory Authorities (ESAs) (that is, the EBA, EIOPA and ESMA), which it launched in March 2017. The Commission consulted on the cross-border distribution of investment funds in June 2016.
On 7 June 2017, ESMA published its response to the European Commission's consultation on FinTech, which was published in March 2017. ESMA welcomes the Commission's initiative to take stock of the EU's FinTech industry.
It makes many points including the following:
- Artificial intelligence and big data analytics for automated advice and businesses. While ESMA acknowledges potential benefits, it also believes that the use of such technologies trigger a number of concerns.
- Crowdfunding. ESMA calls for a specific crowdfunding EU-level regime, which would ensure investors across the EU are equally protected and enable crowdfunding platforms to operate cross-border based on a common regulatory framework.
- RegTech. ESMA notes that the use of technology by market participants and regulators to comply with regulatory and supervisory requirements is not new. It recognises the possible additional benefits that RegTech could entail for regulators if they use more of these technologies, in particular for data reporting and analysis.
- Outsourcing and cloud computing. ESMA stresses that outsourcing arrangements, including to the cloud, should be implemented in a manner that complies with European legislation, including on data security and data protection rules.
- Distributed ledger technology (DLT). Following the publication of its report in February 2017, ESMA continues to monitor market developments around DLT and consider whether a regulatory response is necessary.
- Role of regulation and supervisors. ESMA believes that entities providing the same service should be regulated and supervised equally. However, FinTech start-ups might benefit from regulatory advice to navigate the applicable legal framework.
- Role of industry: standards and interoperability. ESMA strongly supports the objective of data standardisation and harmonisations.
ESMA product governance guidelines under MiFID II
On 2 June 2017, ESMA published its final report on guidelines on product governance requirements under the MiFID II Directive which will apply from 3 January 2017. MiFID II introduces product governance requirements to ensure that firms who manufacture and distribute financial instruments act in clients' best interests. The guidelines are set out in Annex IV to the final report and mainly address the target market assessment. ESMA made some changes to the draft guidelines on which it consulted in October 2016, including in respect of portfolio diversification. It also provided additional practical examples to help with application of the guidelines. They will be translated into the official EU languages and published on ESMA's website. The publication of the translations in all official languages of the EU will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the guidelines.
ESMA Q&As on MiFID II and MiFIR investor protection
On 6 June 2017, ESMA issued updated Q&As on MiFID II and MiFIR investor protection topics with updated Q&As in sections 8 (post sale reporting), 9 (information on costs and charges) and 10 (appropriateness/ complex financial instruments). ESMA confirms that non-UCITS are complex per se and cannot be sold without an appropriateness test. Accordingly, Irish Retail Investor AIFs now require an appropriateness test pre-sale (as do structured UCITS). It also confirms that the PRIIPs RTS new funds methodology may be used for transaction costs disclosure in respect of UCITS for the purposes of MiFID cost disclosure obligations.
EuVECAs and EuSEFs
On 30 May 2017, the European Commission published a press release announcing that it has reached agreement with the Council of the EU and the European Parliament on the proposed Regulation amending the EuVECA Regulation and the EuSEF Regulation.
The press release states that the agreement reached:
- extends the range of managers eligible to market and manage EuVECA and EuSEF funds to larger fund managers (that is, those with assets under management of more than EUR500 million);
- expands the ability of EuVECA funds to invest in small mid-caps and small and medium-sized enterprises (SMEs) listed on SME growth markets;
- decreases costs by explicitly prohibiting fees imposed by competent authorities of host member states where no supervisory activity is performed; and
- simplifies the registration process and determines the minimum capital necessary to become a manager.
The European Parliament is expected to consider the proposed Regulation amending the EuVECA Regulation and the EuSEF Regulation 11 to 14 September 2017. This proposed Regulation is part of the EU's CMU aiming to diversify funding sources for EU businesses and long-term projects.
Anti- Money Laundering/Combating the Financing of Terror/Corruption
ESA Risk Factors Guidelines.
The Joint Committee of the three European Supervisory Authorities (the ESAs which comprise the EBA, EIOPA and ESMA) published its final and long awaited Guidelines on the risk factors (generic and sector specific) to be taken into consideration where simplified customer due diligence (SDD) and enhanced customer due diligence (EDD) is appropriate. Competent authorities and firms are required to comply with these guidelines by 26 June 2018.
European Commission supra-national risk assessment
The EU Commission issued a supra-national assessment of the ML/TF risks in different sectors and financial products affecting the internal market and relating to cross-border activities. It identifies the areas which are most vulnerable to ML/TF risks as well as the techniques most commonly used by criminals to launder illicit funds, and includes recommendations to member states on how to manage such risks. It identifies the areas which are most at risk and the most widespread techniques used by criminals to launder illicit funds. It also includes recommendations to member states.
The Commission issued the materials listed below.
- Report from the Commission to the European Parliament and the Council on the assessment of the risks of money laundering and terrorist financing affecting the internal market and relating to cross-border activities;
- Annex 1: Staff working document: Part 1;
- Staff working document on improving cooperation between EU Financial Intelligence units;
- Press release: Strengthened EU rules to tackle money laundering, tax avoidance and terrorism financing enter into force Council of EU Presidency consolidated compromise text on proposed Directive on countering money laundering by criminal law.
Proposed Directive on countering money laundering by criminal law
On 30 May 2017, the Council of the EU published a note, from the Presidency to the Council, relating to the proposed Directive on countering money laundering by criminal law (originally published in December 2016). The aim of the proposed Directive is to ensure a harmonised and comprehensive criminalisation of money laundering offences across the EU, and also to ensure harmonisation in the level of sanctions for committing money laundering offences.
On 12 June 2017, the European Parliament updated its procedure file to reflect that the Parliament will consider 5AMLD at its 23 to 26 October 2017 plenary session. The Parliament's Economic and Monetary Affairs Committee (ECON) and its Civil Liberties, Justice and Home Affairs Committee (LIBE) adopted their report on 5AMLD in February 2017. The report contains a draft Parliament legislative resolution, together with opinions from the Committee on Development (DEVE), the Committee on international trade (INTA) and the Committee on Legal Affairs (JURI). The European Commission published its 5AMLD proposal in July 2016.
Consultation on steps firms should take where third country's law prevents implementation of group-wide AML and CTF policies and procedures
On 31 May 2017, the Joint Committee of the ESAs published a consultation paper on draft regulatory technical standards (RTS) which specify the minimum measures firms should take to mitigate the risks of money laundering and terrorist financing where a third country's law prevents the implementation in their branches or majority-owned subsidiaries of group-wide policies and procedures on AML and CTF. The draft RTS are set out in section 4 of the consultation paper and comments are invited on the draft RTS by 11 July 2017.
IMF speech at FATF plenary
On 22 June 2017, the Financial Action Task Force (FATF) published a speech by Christine Lagarde, International Monetary Fund (IMF) Chair, on the IMF and FATF working together to combat money laundering and terrorist financing. Ms Lagarde identified the following as three current, shared priorities:
- Fighting corruption and tax evasion. The fight against corruption and tax evasion must be intensified. The IMF will shortly be releasing new analysis that shows how systemic corruption can seriously undermine a country's ability to deliver sustainable and inclusive growth.
- CFT. The IMF is working on practical guidance for its members on how to implement targeted financial sanctions that are consistent with the FATF CFT standard. This guidance should be available by 2019. The IMF has recently published a staff discussion note on FinTech and financial services: initial considerations. This note provides a framework for assessing the impact of technological innovation within the financial sector.
- Maintaining correspondent banking relationships. The IMF is supporting countries that are at risk of losing vital banking services that keep them connected to the global financial system as an important policy priority. These correspondent banking relationships are especially important for small countries with small financial systems.
Outcomes of the plenary meeting of the FATF, Valencia, 21-23 June 2017
The main outcomes of the plenary meeting of the FATF, Valencia, 21-23 June 2017 were:
- Work on combating terrorist financing.
- Work on improving transparency and beneficial ownership.
- Discussion of the mutual evaluation reports of Denmark and Ireland. The FATF expects to publish the mutual evaluation reports of Denmark and Ireland in September, after their quality and consistency review, in accordance with its procedures.
- Statement on Brazil’s progress in addressing the deficiencies identified in its mutual evaluation reports since the FATF’s statement of February 2017.
- Two public documents identifying jurisdictions that may pose a risk to the international financial system:
- Jurisdictions with strategic AML/CFT deficiencies for which a call for action applies, including an update on Iran’s engagement with FATF; and
- Jurisdictions with strategic AML/CFT deficiencies for which they have developed an action plan with the FATF, including an update on AML/CFT improvements in Afghanistan and Lao PDR.
- Adoption of a revision to the interpretative note to Recommendation 7 (Targeted Financial Sanctions Related to Proliferation).