Overview
Key legal developments and what’s coming next for marketing and selling funds and asset management services into Europe in 2023.
Amidst another year of economic volatility and political turbulence, the European regulatory landscape of cross-border distribution has continued to evolve in an attempt to respond to new and existing challenges. In our European focussed regulatory round-up we explore various developments from 2022 and look ahead to what is on the horizon for 2023.
EU's ambition for harmonisation
In the EU there continues to be a move towards tightening market access for third-country firms and harmonising approaches within the EU 27. We highlight the following as being of particular interest:
- In early December 2022, ESMA released a report on how National Competent Authorities (NCAs) handled firms relocating to the EU post-Brexit. The report is a good indicator of the EU's intentions to undertake future work to foster supervisory convergence both in reviewing delegation arrangements and to ensure that a relocation involves a strong set up for the relevant EU entities.
- On the topic of scrutiny of delegation arrangements, negotiations continued throughout 2022 in relation to the review of the AIFMD. All eyes are fixed on what the changes will deliver for the industry, including the proposed introduction of reporting requirements to enable ESMA to analyse market practices regarding delegation. It is currently expected that the package will not represent fundamental changes to existing global delegation models (particularly with regard to delegation to third countries) but rather, will seek to fine-tune existing delegation requirements. The final version of the text of the AIFMD II Directive is expected to come into force in 2025 (and it is likely that the relevant provisions will also be applied to UCITS funds).
- The implementation of the Cross-Border Distribution of Funds (CBDF) Directive by Member States continued in 2022 and is now largely complete. Our CBDF Trackers provide our subscribers with consolidated snapshots on issues relating to pre-marketing and reverse enquiry. They also consider the position on how certain requirements relating to marketing to retail investors (including facilities agent services and ex-ante approval of marketing communications) have been implemented and interpreted in each Member State. Many managers have welcomed the introduction of the harmonised pre-marketing regime for passported AIFs. There are still complexities where there is either a non-EEA AIFM or AIF and as such, the overall landscape remains far from harmonised with analysis still being required on a jurisdiction-by-jurisdiction basis. For example, in Denmark and Sweden pre-marketing by third-country firms became more restricted than it was before. For managers with retail investors, the facilities agent provisions have proved quite tricky to adapt to on a practical level, particularly for smaller firms.
In contrast to the efforts at EU level for limiting access, at individual Member State level, we have seen channels opening up. In July 2022, the Luxembourg CSSF expanded the list of jurisdictions which are deemed equivalent for the application of its national third-country regime to include the People’s Republic of China and Australia. In May 2022, amendments to Czech law expanded the ability for EU credit institutions and third-country firms to provide investment services to certain investors on a cross-border basis.
UK's ambition for regulatory reform
The UK’s desire for post-Brexit regulatory independence continues to drive its approach to financial services regulation. The Government and regulators issued a number of proposals in 2022 to adapt and develop the regulatory framework. We have highlighted three particular areas of interest to our subscribers, which are likely to develop further in 2023:
Financial Services and Markets Bill
In July 2022, the Government introduced the Financial Services and Markets Bill, which implements the UK’s future regulatory framework for financial services. It is currently progressing through Parliament and once in force will include measures relating to:
- the revocation of retained EU law
- the introduction of a “designated activities regime” to regulate certain activities related to financial markets and financial instruments which are outside the scope of current UK financial services regulation
- the establishment of a regulatory "gateway", which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms
- the ability for HM Treasury to make changes to domestic legislation to ensure that mutual recognition agreements can be fully implemented. The UK is currently negotiating such an agreement with Switzerland and hopes to enter into other mutual recognition agreements in the future
Edinburgh Reforms
In December 2022, a package of reforms to the framework for UK financial services regulation was announced. The package includes details on:
- the intention to revoke the PRIIPs Regulation as a matter of priority and remove UCITS disclosure requirements from legislation, with the Financial Conduct Authority (the FCA) instead becoming responsible for setting rules for retail disclosures. The FCA is currently seeking feedback on what a good disclosure regime would look like and suggests a move away from prescriptive disclosures towards a more flexible regime
- the reform of the Prospectus Regulation, with the UK proposing amending the circumstances where a prospectus will be required and introducing a new platform for securities offerings
Investor protection/Consumer duty
The UK has also focussed on a number of investor protection measures, with the final rules and guidance on a new consumer duty published in July 2022 (the first phase of implementation is expected to be in place by the end of July 2023), and the strengthened financial promotion rules for high-risk investments marketed to retail investors which came into effect in December 2022.
Investor protection in focus
As highlighted in relation to the UK above, consumer protection is high on the regulatory agenda for many regulators of global financial hubs.
In the EU, as UCITS prepare for the transition to PRIIPS KIDs beginning in 2023, the quality and standard of marketing communications has also been firmly in focus. Following the publication of ESMA's Guidelines for Funds' Marketing Communications in February 2022 (see our article here), it was interesting to note ESMA's clarification in July 2022 that fund managers are responsible for compliance with the guidelines. ESMA confirmed that this is irrespective of who is the actual entity marketing the fund and of the relationship it has with the third party distributor (whether it is contractual or not).
In its April 2022 report on measures required to improve retail investor protection, ESMA signalled its desire to produce a similar set of guidelines for marketing communications issued under MiFID II. The intention is to address the problem of aggressive marketing communications and issues related to misleading marketing campaigns on social media/online engagement practices. In addition, it seems that ESMA's recommendation that national regulators intervene in a timely and effective manner against misleading marketing practices has been heeded with some Member State regulators stepping up their scrutiny, particularly with regards to the growing role of social media and so-called "finfluencers" (see our Focus on Finfluencers article here).
The risks and challenges that online marketing methods present has also been a focus of IOSCO. In its October 2022 report, IOSCO proposed measures that regulators could introduce to manage these risks when marketing/selling to retail investors (see our article discussing these recommendations here).
ESG and Crypto-assets
Finally, it would be remiss of us to not address developments in ESG and crypto-assets, two topics that have dominated the headlines. At Rulefinder Marketing Restrictions - Asset Management our focus on these areas is limited to where firms need to consider specific requirements or restrictions when marketing/selling a fund with an ESG or a crypto-asset strategy.
On ESG, we continue to see the development of regulatory frameworks to integrate ESG practices, policies and procedures into investment processes. In the UK, the FCA issued proposals for sustainability disclosure requirements and labelling of investment products, with final rules and guidance expected by the end of the first half of 2023. In the EU, sustainability preferences have been added to the growing stack of ESG regulations asset managers must adapt to. In 2023, we can also expect to receive ESMA guidance on the use of funds’ names with ESG or sustainability-related terms, following its November 2022 consultation.
On crypto-assets, regulators globally are grappling with how to regulate the industry and are developing rules and guidance at different paces. Often our network of local counsel have told us that the regulation is not yet ready or is limited currently to restricting access for retail investors. In Ireland, for example, counsel suggested that firms may wish to note the approach the Central Bank of Ireland (the CBI) has taken to Irish domiciled funds with a crypto-asset strategy. The CBI has stated that it is highly unlikely to approve a retail fund proposing any direct/indirect exposure to crypto assets. In addition, funds marketed/sold to qualifying investors would need to make a submission outlining how the risks associated with such exposures could be managed effectively by the manager.
We will continue to closely monitor the direction of travel of all these proposed changes and their impact on our Rulefinder Marketing Restrictions - Asset Management service. Whatever 2023 may bring, we can be sure that it is shaping up to be another busy year for financial services regulation!
How aosphere can help
Our two online legal subscription services, Rulefinder Marketing Restrictions (sell-side), and Rulefinder Marketing Restrictions – Asset Management (buy-side), can help you navigate regulatory complexities by providing practical guidance applicable to the marketing of financial products and services and the marketing of open and closed-ended funds and managed accounts, covering the position for institutional and retail investors across 80+ jurisdictions.