Investment Funds Update: Europe - Issue 6, 2017
August 07, 2017
Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles.
GERMANY
BaFin Publishes Guidance on the Authorization of Credit Institutions
BaFin issued a guidance notice on 20 July 2017 on the requirements for the application for a banking license in accordance with Sections 32 and 33 of the German Banking Act. The guidance includes a check list for the application and lists the documents that must be submitted to BaFin.
BaFin Publishes Guidance on the "Prudent Person Principle" for Solvency II Investors
BaFin published a guidance notice on 17 July 2017 on the requirements of the “Prudent Person Principle” which is set out in Section 124 of the Insurance Supervisory Law (Versicherungsaufsichtsgesetz – VAG) in the context of the use of derivative financial instruments by insurance undertakings who are subject to the Solvency II regulations. The guidance further defines the requirements of “efficient portfolio management” and “effective transfer of risk” and also clarifies the prerequisites for the risk management of insurance undertakings if investments in derivatives are envisaged.
Read the guidance notice (in German).
German Federal Ministry of Finance Publishes Letter on Cum/Cum Transactions
The German Federal Ministry of Finance (Bundesfinanzministerium – BMF) published a letter on 17 July 2017 on the tax treatment of so-called cum/cum transactions. The BMF generally states in its letter that it must be examined whether cum/cum transactions qualify as abuse of the procedure (Gestaltungsmissbrauch) in accordance with Section 42 of the German Regulation of Taxation (Abgabenordnung – AO) which should be the case if there was no economic reason for the transaction. The application of Section 42 AO will lead to the duty to refund any unduly reimbursed amounts of withholding tax. The BMF has listed several examples for relevant cum/cum transactions and furthermore contains statements regarding cum-cum transactions with investment funds.
In this context, BaFin has sent a questionnaire to all German banks in order to be able to assess the consequences of possible tax charges or penalties. In particular, BaFin intends to examine the consequences for the solvency of the banks and whether further bank supervision measures will be necessary.
Read the letter (in German).
Read the press release (in German).
Latest Investment Fund Statistics for Germany
The German Investment Fund Association BVI issued its latest investment statistics report dated May 2017, providing an overview of the net assets and net sales within the German investment fund and asset management markets. The statistics are broken down by asset class and provider. They provide information on net assets and net inflows of investment funds and assets outside investment funds.
IRELAND
Central Bank Issues FAQ on Brexit
The Central Bank has issued an FAQ document on Brexit, which provides general information to financial services firms who are considering relocating their operations from the UK to Ireland. It also includes some guidance on the Central Bank’s position regarding substance and outsourcing.
The Central Bank has also issued an update on Brexit, which is discussed below.
Central Bank Updates Fund Administrator Guidance
The Central Bank updated its guidance titled “Fund Administrator Outsourcing” on 28 June 2017 to reflect the best practices outlined in our recent letter to the industry following a themed review of the outsourcing of fund administration activities.
Read the Central Bank's guidance.
Central Bank Publishes New Investment Firms Regulation Q&A
The Central Bank published the second edition of its Investment Firms Regulations Q&A on 28 June 2017 containing amendments to existing questions ID 1005, 1006 and 1010 and new questions ID 1022-1025.
Central Bank Updates UCITS Q&A and Guidance on Share Classes
Following ESMA’s Opinion published on 30 January 2017 entitled Share Classes of UCITS, the Central Bank of Ireland has amended its guidance on UCITS and AIF share classes. The updates were published on 28 June 2017.
The Central Bank also published a new 18th edition of the UCITS Q&A. The new edition incorporates two new questions, ID 1077 and 1078, in order to provide clarity for stakeholders on the issue of share classes.
Central Bank Issues Warning on MiFID II Unauthorized Business
The Central Bank of Ireland issued a warning on 28 June 2017 to Irish firms which currently do not need Central Bank authorisation in order to conduct business, and which may require authorisation with the coming into force of MiFID II. The Central Bank recommends that firms that routinely engage in investment activity should review that activity in light of MiFID II.
Read the full text of the warning from the Central Bank.
Central Bank Update on MiFID II Preparations
Denise Murray, Head of Asset Management: Authorisations and Inspections Division, gave a speech on 28 June 2017 on the preparations the Central Bank is making in advance of MiFID II coming into force on 3 January 2018. She also spoke about the industry’s preparedness and firms’ implementation projects.
Read the Speech.
Central Bank Update on Approach to Brexit
Gerry Cross, Director of Policy and Risk, gave a presentation on 9 May 2017 on the Central Bank’s approach to Brexit. In particular, he noted that the Central Bank was seeing signification levels of interest from UK firms considering re-locating their European business to Ireland. He also noted that the Central Bank’s approach to authorisations is well-structured, transparent and predictable, and that firms should make their location decisions on the basis of reasons other than differing approaches to authorisation and supervision.
The Central Bank has also issued an FAQ on Brexit, which is discussed above.
LUXEMBOURG
CSSF Statement Confirming Support of ESMA's Position on Supervisory Convergence/Regulatory Arbitrage
The CSSF published a statement confirming its support of ESMA’s position on the matter of supervisory convergence / regulatory arbitrage and specifically to the sector specific opinions.
CSSF Publishes Press Release on the Prospectus Regulation
The CSSF published a reminder that the new Regulation 2017/1129 on prospectuses which replaces Directive 2003/71/EC will enter into effect as of 21 July 2019 with some of the provisions to be applicable as of 20 July 2017 and 21 July 2018, respectively.
Read the press release (in French).
ALFI Publishes Press Release on the pan-European Personal Pension Product (PEPP)
ALFI published a Press Release in which it welcomed the PEPP.
CSSF Newsletter No. 198 - July 2017
The CSSF published its newsletter of July 2017.
Read the newsletter (in French).
CSSF Publishes Press Release on Global Situation of Undertakings for Collective Investment
The CSSF published its press release regarding the global situation of undertakings for collective investment at the end of May.
Read the press release (in French).
UK
FCA Publishes Draft Rules to Extend the Senior Managers and Certification Regime to all Firms
The FCA published its long-expected consultation paper (CP17/25) on 26 July, with proposed rules to extend the senior managers and certification regime (SM&CR), which is currently applicable only to senior managers in the banking sector, to all firms authorised by the FCA. The extended SM&CR would replace the current FCA approved persons regime.
The FCA considers that the extension will make individuals more accountable for their conduct and competence, thus strengthening market integrity.
The proposals include five conduct rules that will apply to all financial services staff at FCA authorised firms and which will enforce individual accountability for acting with integrity, due care, skill and diligence and will ensure that individuals are open and cooperative with regulators, treat customers fairly and observe proper standards of market conduct.
The responsibilities of senior managers will be clearly defined and such persons can be held personally to account. They will be approved by the FCA and appear on its register.
Under the Certification Regime, firms will certify individuals for their fitness, skill and propriety on an annual basis, if they are not covered by the Senior Managers Regime but their positions significantly impact customers or firms. The existing exemption for firms under the Approved Persons Regime will be maintained in a category called “Limited Scope Firms”.
A follow-up consultation paper on the SM&CR’s relevance for appointed representatives is due in November.
The FCA expects to issue its final rules on the extended regime in the summer of 2018.
Read Dechert’s OnPoint "FCA Publishes Proposed Rules to Extend Senior Manager & Certification Regime to All Financial Services Firms".
FCA Publishes Final Report on its Asset Management Market Study and Consults on Proposed Rules
The FCA has published its final report on its asset management market study (AMMS).
The report confirms the FCA's interim findings that price competition is weak in a number of areas of the industry and that investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark.
In its interim report, the FCA had consulted on whether to make a market investigation reference to the Competition and Markets Authority (CMA) on the investment consultancy market. The FCA considered that competition was being adversely affected in the institutional advice market by a weak demand side, persistent levels of concentration, high barriers to entry and vertically integrated business models. In its final report, the FCA has provisionally decided to reject undertakings in lieu of a market investigation reference offered by the three largest investment consultants. It invited comments on that decision by 26 July 2017, and will announce its decision in September 2017.
In a consultation paper published alongside the AMMS, the FCA proposes a significant package of remedies that seek to make competition work better in this market. Implementation of the remedies will take place in a number of stages; with some requiring consultation, others not. The proposed remedies include a strengthened duty on asset managers to act in the best interests of investors, introducing an all-in fee so that investors in funds can easily see what is being taken from the fund, a number of measures aimed at helping retail investors identify which fund is right for them, clarifying and strengthening the use of benchmarks and providing tools for investors to identify persistent underperformance.
The FCA will launch a market study into investment platforms and recommends that HM Treasury considers bringing investment consultants into the FCA's regulatory perimeter.
The deadline for responses to the consultation is 28 September 2017.
The FCA also states that it wants to do some more work in other areas following the AMMS. It has set out its current thinking on issues including fund objectives, use of benchmarks, performance reporting and the transparency of fees and charges in its AMMS final report. It plans to consult on these further issues, where relevant, later in 2017.
FCA Publishes Second MiFID II Policy Statement with Final Rules
The FCA published its second policy statement (PS17/14) on 3 July 2017 on the UK implementation of MiFID II (No. 2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR).
PS17/14 sets out the FCA's final rules relating to matters including conduct of business and client assets, and largely track its position in its MiFID II consultation papers. The final rules are set out in the following Handbook instruments:
- Glossary (MiFID 2) Instrument 2017 (FCA 2017/36).
- MiFID 2 Fees (Data Reporting Applications) Instrument 2017 (FCA 2017/37).
- Markets and Organisational Requirements (MiFID 2) Instrument 2017 (FCA 2017/38).
- Conduct, Perimeter Guidance and Miscellaneous Provisions (MiFID 2) Instrument 2017 (FCA 2017/39).
MiFID II applies from 3 January 2018.
EUROPEAN UNION DEVELOPMENTS
AIFMD and UCITS - ESMA Publishes Updated Q&As
ESMA published updated Q&As on AIFMD and UCITS V on 11 July 2017.
The AIFMD Q&As include three new questions and answers on the reporting requirements for:
- loans purchased on the secondary market;
- conversion of the total value of assets under management; and
- currency of the net asset value.
The UCITS Q&As include two new questions and answers on:
- issuer concentration; and
- group links, independence and cooling-off periods
Read the associated press release.
MiFID II - ESMA Issues Guidelines on MiFID II Product Governance Requirements and Updates
Q&As ESMA issued its final report on 6 June 2017 on product governance guidelines. The guidelines address issues specific to manufacturers and distributors as well as issues common to both.
Read the associated press release.
On 6 June and 10 July, ESMA issued updated Q&As on MiFID II and MiFIR investor protection topics. The Q&A provide clarifications on the following topics:
- Appropriateness;
- Best execution; Suitability; Post-sale reporting; Inducements (research);
- Information on charges and costs; and
- Underwriting and placement of a financial instrument.
Read the Q&A on MiFID II investor protection topics.
Read the associated press release on MiFID II investor protection.
Read the associated press release on MiFIR investor protection.
On 7 July ESMA issued update Q&As on various MIFID and MIFIR market structures topics. The Q&As address the following:
Commodity derivatives issues
- Position limits and position reporting
Market data issues
- Reporting details and data fields
- Reference date
- Order Record Keeping
Market structure issues
- Multilateral trading systems
- Direct Electronic Access and algorithmic trading
- Access to CCPs and Trading Venues
Read the Questions and Answers on MiFID II and MiFIR market structures topics.
Read the associated press release.
On 19 June, ESMA issued its consultation paper on its proposed regulatory technical standards on the “trading obligation” for derivatives under MiFIR.
Once a class of derivatives needs to be centrally cleared under EMIR, ESMA must determine whether these derivatives (or a subset of them) should be traded on-venue, meaning on a regulated market (RM), multilateral trading facility (MTF), organised trading facility (OTF) or an equivalent third-country trading venue (the “Trading Obligation”).
Key elements of the consultation include:
- the proposal on how to phase-in the trading obligation for derivatives;
- ESMA’s approach concerning the instrument register to be maintained by ESMA for the trading obligation; and
- a high-level cost-benefit-analysis.
Read the associated press release.
PRIIPs: Guidelines and Q&As
The European Commission published guidelines on 7 July 2017 on key information documents for packaged retail and insurance-based investment products (PRIIPs). The guidelines are aimed at facilitating implementation of, and compliance with, the PRIIPs Regulation as well as improving consistent interpretation by defining various terms, such as ‘PRIIP manufacturer’.
On 4 July, ESMA and its fellow European Supervisory Authorities published Q&As on the PRIIPs key information document (KID) covering presentation, content and review of the KID as well as the methodologies underpinning the risk, reward and costs information.
ESMA Opines on Pre-Brexit Supervisory Convergence
Further to its cross-sectoral opinion in May, on 13 July ESMA issued sector-specific opinions on the supervisory approach to Brexit-related relocations of MiFID entities, funds and fund management companies.
The opinions are aimed at ensuring a consistent interpretation of the requirements relating to authorisation, supervision and enforcement, to avoid regulatory and supervisory arbitrage.
The opinions are available here:
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