European Union: Investment Management Update - January 2024

• On 21 December 2023, The UK and Swiss governments have signed the Berne Financial Services Agreement. The agreement provides for mutual equivalence in certain areas, based on a recognition of equivalent regulatory outcomes and substitutive compliance (meaning that some services can be provided in both countries despite complying with different sets of rules). The broader relevance is that the agreement is being framed by governments and industry groups as "a benchmark for international financial services cooperation". The UK Government has a stated aim to pursue common global standards in financial services via bilateral agreements with other jurisdictions and common standards via global standard-setters such as IOSCO and FSB.
  The Berne Financial Services Agreement

• On 14 December 2023, and the IRSG published the final version of the UK's voluntary code of conduct for ESG ratings and data product providers. While the code of conduct will be maintained by , the FCA has endorsed the code as an interim measure before future regulation. The FCA's public statement on the code emphasises that it is aligned with IOSCO's recommendations and that it is a means of promoting international consistency in this space. To note, other jurisdictions such as Japan and Singapore have, or are developing similar codes based on globally consistent standards. The UK's standard is designed to be "inter-operable".
  Code of Conduct for ESG Ratings and Data Products Providers (icmagroup.org)
  FCA welcomes the launch of industry code of conduct for ESG ratings and data products providers | FCA

• On 20 December 2023, the FCA published a Policy Statement on the framework for a UK consolidated tape and a consultation on payments to data providers and forms for Data Reporting Services Providers, within the same document (CP23/15). The Policy Statement contains final rules and guidance on a bond market consolidated tape, which will operate from 2025. The FCA suggests that the framework could be adapted for data on equities and ETFs, and further policy development will happen this year. The FCA also consults on how a Consolidated Tape Provider (CTP) should make payments to data providers. The consultation closes on 9 February 2024 and the tender and authorisation of a CTP is due to be finalised in 2024.
  CP23/33: Consultation on Payments to data providers and forms for Data Reporting Services Providers including Policy Statement for the framework for UK consolidated tape (CP23/15) (fca.org.uk)

• On 20 December 2023, the FCA issued two consultations in relation to markets and trading. CP23/31 outlines detailed proposals for reforms to the UK's listing rules. The FCA proposes a single regime for equity shares and moving to stewardship disclosure rather than mandatory shareholder votes in some instances. CP23/31 will close for comments on 22 March 2024. While CP23/32 consults on a new transparency regime for bonds and derivatives and the definition of a systemic internaliser across all asset classes. The deadline for feedback is 6 March 2024.
  CP23/31: Primary Markets Effectiveness Review: Feedback to CP23/10 and detailed proposals for listing rules reforms (fca.org.uk)
  CP23/32: Improving transparency for bond and derivatives markets (fca.org.uk)

• On 18 December 2023, the PRA and the FCA issued a joint policy statement on margin requirements for non-centrally cleared derivatives (PRA PS18/23 and FCA PS23/19). The regulators will extend the exemption for single stock equity and index options from 4 January 2024 to 4 January 2026, with the potential for the exemption to be made permanent. The proposal to require supervisory pre-approval for initial margin models will not be pursued. The European Supervisory Authorities issued a similar statement on 20 December 2023, confirming the exemption for bilateral margin on single stock equity and index options from 4 January 2024 to 4 January 2026.
  PS18/23 – Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251 | Bank of England
  ESA 2023/23 - Amending RTS: Equity option bilateral margining
  ESA 2023/34 - No action opinion: Equity option bilateral margining

• On 6 December 2023, HM Treasury and the FCA issued a joint Discussion Paper on the Advice Guidance Boundary Review (DP23/5). The policy aim is to address the advice gap in which lower income investors are unwilling or unable to access advice that is perceived to be prohibitively expensive or unnecessary. The consultation proposes three broad areas for reform: further clarification of the boundary between financial advice and guidance, how firms can guide consumers through "targeted support" that does not constitute advice, and a simplified advice regime to allow firms to offer "streamlined advice" in certain circumstances. The consultation will close on 28 February 2024.
  HMT and FCA DP23/5: Advice Guidance Boundary Review - proposals for closing the advice gap

• On 6 December 2023, HM Treasury published a policy note and draft statutory instrument on a new UK money market funds regime to replace the on-shored EU Money Market Funds Regulation. The draft legislation is open to feedback until 24 January 2024. The FCA will assume responsibility for the new regime and is consulting on the detailed reforms that it proposes to include in its Handbooks. The consultation will close on 8 March 2024.
  Money Market Funds – Draft SI and Policy Note
  CP23/28: Updating the regime for Money Market Funds (fca.org.uk)

• On 4 December 2023, the FCA published a consultation on the operations of the upcoming Overseas Funds Regime or OFR (CP23/26). The consultation concerns the streamlined application process for UCITS currently in the Temporary Marketing Permissions Regime that wish to seek ongoing recognition under the OFR. The FCA also consults on proposals for notification of changes to a fund and mandatory disclosures for recognised overseas funds. The consultation does not address the equivalence of EU UCITS or other funds or jurisdictions, which the FCA emphasises is a decision to be taken by HM Treasury, or the imposition of additional requirements on overseas funds to ensure equivalence. The FCA's deadline for feedback is 12 February 2024.
  CP23/26: Implementing the Overseas Funds Regime (fca.org.uk)
• The FCA has published CP23/25, Quarterly Consultation Paper No 42. These proposed reforms include several minor rule changes arise from the FCA's Discussion Paper on improvements to the UK's asset management regime, published in 2023, with an aim of fixing identified issues. The proposals also address the Training and Competence Sourcebook, credit unions, pension providers, and MIFIDPRU. The most interesting fund-related changes includes allowing virtual and hybrid general meetings for fund unit-holders; allowing a broader range of investments under the QIS and amending the LTAF rules for consistency; and investments in second schemes. The deadline for feedback was 8 January 2024.
  FCA Quarterly Consultation Paper No 42 CP23/25

• The European Council and the European Parliament have agreed their respective positions on the ESG Ratings Regulation and will begin negotiations on the final text in within 2024. The Council position largely reflects the European Commission's original proposal, although, like the Parliament will not require ratings providers to manage their different types of business in separate legal entities. Both the Council and EP remove what is effectively an EC proposal for price regulation – fees to be capped at a level reflective of the costs incurred by the ratings provider – which will not be in the final draft. The EP's position is tougher in some areas, banning composite ratings and requiring separate E, S, and G disclosures and requiring double materiality. Some ongoing issues relate to the exclusion of asset managers' internal proprietary scoring systems from the regulation.
• On 19 December 2023, ESMA published a study which finds that firms paid insufficient attention to greenwashing cases and findings between 2020 and 2021. The paper suggests that the financial sector should take heed of lessons because of the investor protection and reputational issues involved, which may impact firms' share price. ESMA says that the conclusion underlines the importance of clear regulatory guidance on the credibility of sustainability-related claims.
  ESMA article: The financial impact of greenwashing controversies

• On 19 December 2023, ESMA published a final report containing its proposed RTS under the 'ELTIF 2' Regulation. The Level 2 rules mostly concern fund liquidity management and specify: redemptions no more frequent than quarterly, a minimum 12 month notice period (although there are exemptions and some discretion for national regulators), the removal of the mandatory minimum holding period, and a requirement to have certain liquidity risk management tools available (gating + either anti-dilution levies, swing pricing, or redemption fees). The RTS also require cost disclosures in compliance with the PRIIPs KID methodology. The European Commission must approve and adopt the final RTS, and it has given the industry until 4 January 2024 to comment on ESMA's draft.
  ESMA Final report on ELTIF RTS

• On 19 December 2023, ESMA published a consultation on the Central Securities Depositories Regulation (CSDR) cash penalty regime. The paper consults on the functioning of the existing regime and makes proposals for improvements. ESMA's deadline for feedback is 29 February 2024.
  ESMA Consultation Paper on Technical Advice on CSDR Penalty Mechanism

• On 19 December 2023, ESMA published a consultation on the digitalisation of retail financial services. The paper concerns the implications for investor protection under MiFID II. ESMA's proposals address the layering of information to different segments of investor, accessibility, marketing communications and practices, and digital engagement. The consultation will close on 14 March 2024.
  ESMA Discussion Paper on MiFID II investor protection topics linked to digitalisation

• On 14 December 2023, ESMA published an update on its fund name guidance for ESG funds. The statement says that, after considering feedback, ESMA will adapt its proposals for minimum standards for ESG funds. ESMA has dropped the proposal for a fund that has "sustainable", or a word derived from "sustainable" in its name to hold a minimum of 50% in "sustainable investments" as defined by the SFDR. This would have set a hard minimum standard for Art 8 funds under the SFDR, while Article 9 funds are expected to hold only sustainable investments. However, all funds with any ESG-related terms in their name must have a minimum of 80% of the fund's investments in assets that promote E/S characteristics or objectives. There are also changes to the guidance in relation to ESG benchmarks and the addition of a new category and standards for transitional funds.
  ESMA Public statement on Guidelines on funds' names

• On 14 December 2023, the EU agreed the final text of the Corporate Sustainability Due Diligence Directive (CSDDD). The regulation requires in-scope, larger EU companies to ensure that their supply chains do not breach European environmental and human rights standards and to make disclosures. The final agreement excludes financial services except to the extent of reviewing their own operations. This means that clients and investee/portfolio companies are out of scope. However, the legislation contains a review clause and financial services might be brought more fully into scope at a later point. The final agreement was politically contentious, went to the wire and has been criticised by environmental and human rights campaign groups. The final text should be published soon.
  Council press release: Corporate sustainability due diligence: Council and Parliament strike deal to protect environment and human rights

• On 13 December 2023, ESMA announced that it will undertake a pan-EU exercise with national regulators (termed a "Common Supervisory Action") to review ESG disclosures under the Benchmarks Regulation (BMR). The scope of the exercise covers benchmark administrators, whether domiciled inside or outside the EU, that have authorisation, registration, recognition, or endorsement of their benchmarks under the BMR. The aim of the exercise is to assess benchmark administrators' compliance with: (1) the disclosure of ESG factors in the benchmarks statement and in the benchmarks methodology; and (2) specific disclosure requirements relating to climate benchmarks' statement of methodology. The exercise will be undertaken throughout 2024 and conclude in Q1 2025.
  ESMA to launch and participate in Common Supervisory Action on ESG disclosures for Benchmarks Administrators

• On 4 December 2023, the ESAs published a final report on changes to the SFDR's disclosures. The report presents recommendations to the European Commission to change the current disclosure templates, in the form of draft RTS that would amend the SFDR Level 2 legislation (the Delegated Regulation). The Commission will have three months to decide whether to adopt, amend or reject the ESA's draft RTS (so by early March 2024). This process will happen independent of the Commission's broader SFDR Review that will decide on fundamental changes, such as the likely introduction of a fund labelling regime in the EU. It is possible that the timing of the RTS' adoption will provoke the Commission to make decisions on the SFDR review in tandem.
  ESAs Final Report SFDR Delegated Regulation amending RTS

International

• On 20 December 2023, the FSB and IOSCO published final reports on fund liquidity risk management. The FSB's report recommends measures to address liquidity mismatches in open-ended funds and reduce systemic risks arising from those mismatches. The new component of the proposals is a recommendation for a form of 'liquidity bucketing' of assets and funds, and the imposition of notice periods and redemption restrictions depending on the illiquidity of the fund. While IOSCO's report contains guidance on the use of anti-dilution tools, the standard-setters recommend that regulators incorporate the proposals in their respective jurisdiction.
  FSB P201223-1: Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-ended Funds
  IOSCO FR15/23: Anti-dilution Liquidity Management Tools – Guidance for Effective Implementation of the Recommendations for Liquidity Risk Management for Collective Investment Scheme
  
  
• On 5 December 2023, IOSCO published a report on international supervisory practices on greenwashing. The report finds that regulators do not have sufficient policies to address green-hushing (hiding supervisory-related actions to avoid negative market and public reactions) and green-bleaching (failing to mention sustainable investments to avoid the legal and regulatory issues related to greenwashing). The report also points to the lack of a common definition of greenwashing.FR12/23 Supervisory Practices to Address Greenwashing (iosco.org)