Investment Funds Update: Europe - Issue 4, 2016

April 28, 2016

Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles.



Direct Lending by French Funds 

The Autorité des Marchés Financiers (the French financial markets regulator, the “AMF”) has published on 1 April 2016 the results from the public consultation organized at the end of last year with respect to direct fund lending in France, following the entry into force of the ELTIF Regulations. In these results, the AMF contemplates authorizing a limited number of French funds (i.e., specialised professional funds (fonds professionnels spécialisés), securitisation vehicles (organismes de titrisation) and professional private equity funds (fonds professionnels de capital investissement)) to make direct loans to borrowers, provided that certain criteria be met. Such criteria include, among others: constraints on fund leverage (30%, not for the purposes of making loans), no loans to financial companies, loans should be limited in duration by the funds’ term and the selling of loans should be limited. Furthermore, the management companies managing such funds shall have a specific programme of operations allowing for the possibility to grant loans. The French government will publish in the coming weeks a decree detailing the requirements to be met by such funds in France for direct lending.

Read AMF's press release from April 2016 "The AMF publishes the results of work on the possibility of investment funds granting loans".

Directive "UCITS V" Implementation

Ordinance n°2016-312 dated 17 March 2016 has transposed the Directive 2014/91/UE dated 23 July 2014 (“UCITS V Directive”). The main points implemented by the Ordinance under French law are with respect to (i) requirements for custodians and (ii) remuneration policy for management companies. The market abuse provisions of the UCITS V Directive will be implemented in French law through another text. The AMF General Regulations, as well as several AMF instructions, will be updated in the coming months to prepare for the entry into force of the UCITS V Directive. On 16 April 2016, the AMF has published a revised version of the AMF Instruction n° 2011-19 which indicates the information to be included in the French UCITS’ annual report with respect to the remuneration policies.

Read Ordinance n°2016-312 dated 17 March 2016 (in French).

Read the revised version of the AMF Instruction n° 2011-19 (in French).

AMF Training Day for French Management Companies' Compliance Officers

The AMF hosted on 22 March 2016 its training day for French compliance officers. Several issues have been discussed, including the UCITS V Directive implementation, the ELTIF Regulations, the 4th AML Directive, MiFID II. The slides of the presentations are available on the AMF website.

Update of the AMF General Regulations

An Arrêté dated 6 April 2016 and published on 16 April 2016 in the French Journal Officiel implements an update of the AMF General Regulations. This update aims at including several new provisions in the AMF General Regulations, including, among others:

  • UCITS V Directive: pursuant to the implementation under French law of the UCITS V Directive (see above), the AMF General Regulations now include revised provisions with respect to the role of the custodian of UCITS funds and detail the requirements with respect to the remuneration policies to implement for management companies;
  • ELTIF Regulations: as authorized in the ELTIF Regulations, ELTIFs can now be marketed to retail investors;
  • Capital requirements for French management companies: the General Regulations now explicitly refers to the EU Regulations n° 241/2014 (Capital Requirements Regulations) for French management companies’ own funds (see March 2016 update). The final version of the Position 2012-19 detailing the AMF’s requirements with respect to management companies’ own funds will be amended shortly to reflect these softened rules.

Read the Arrêté in full (in French). 




BaFin Market Survey on MiFID II  

BaFin published a market survey on 6 April 2016 which allows industry associations, market participants and financial services companies to raise questions and possible solutions regarding MiFID II (Markets in Financial Instruments Directive II), the MiFIR (Markets in Financial Instruments Regulation) and MAR (Market Abuse Regulation) directly to the BaFin. The questions may be included in BaFin FAQ’s and can be forwarded to ESMA (on a no name basis) for further clarification. 

Download the survey form to be completed.

BaFin Publishes Expert Article on Supervisory Colleges Under EMIR

Supervisory colleges (supervisory boards comprised by members of, inter alia, various relevant supervisory authorities) are a significant element of the supervisory framework overseeing central counterparties (CCPs) which are clearing systems for certain OTC-derivatives. The English article explains the purpose of supervisory colleges for CCPs under a European regime, their underlying laws and regulations, their organization and duties. There is now one college for every one of the 18 CCPs domiciled in the European Union. Each college is chaired by the CCP's competent authority. In Germany, there are two colleges for central counterparties: one for the CCP Eurex Clearing AG (Eurex Clearing), which BaFin authorized in cooperation with the European college on 10 April 2014, and one for CCP European Commodity Clearing AG (ECC), authorized on 11 June 2014.

Read the full article.

Latest Investment Fund Statistics for Germany

The German Investment Fund Association BVI has issued its latest investment statistics report dated 29 February 2016, giving 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.



New Irish UCITS V Regulations 

The European Communities (Undertaking for Collective Investment in Transferable Securities) (Amendment) Regulations 2016 (S.I. 143 0f 2016 ) (the “Regulations”) which transpose UCITS V into Irish law, were signed into law on 21 March 2016. The new Regulations amend the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (S.I. No. 352 of 2011). The publication of the Regulations provides further clarity in relation to the UCITS V regime in Ireland.

Read the regulations in full. 

Central Bank Publishes 12th Edition of UCITS Q&A

The Central Bank published a 12th edition of the UCITS Q&A on 24 March 2016. Question ID 1057 of the Q&A has been amended to make reference to the publication of Guidance entitled “Umbrella funds – cash accounts holding subscription, redemption and dividend monies” (the “Guidance”). New questions ID 1060 and ID 1061 have also been added to deal with this Guidance. A new question ID 1062 has been added dealing with the Securities Financing Transactions Regulation.

Central Bank Publishes 18th Edition of the AIFMD Q&A

The Central Bank published an 18th edition of the AIFMD Q&A. Question ID 1100 of the Q&A has been amended to make reference to the publication of Guidance entitled “Umbrella funds – cash accounts holding subscription, redemption and dividend monies” (the “Guidance”). New questions ID 1101 and ID 1102 have also been added to deal with this Guidance. In addition, a new question ID 1103 has been added dealing with the Securities Financing Transactions Regulation.

Central Bank Publishes Updated Guidance on Investor Money Regulations

The Central Bank published updated Guidance on 15 March 2016 on Investor Money Regulations for Fund Service Providers to assist industry interpreting and complying with the Investor Money Regulations (the “Regulations”). The Regulations become effective on 1 July 2016.



Luxembourg Press Release on the Panama Papers 

In its press release 16/19 dated 5 April 2016, the CSSF acknowledges that it has taken note of the Panama Papers released by the International Consortium of Investigative Journalists. The CSSF confirms that it will continue to request that Luxembourg banks and investment firms thoroughly follow their professional obligations, specifically with regard to the prevention of money laundering and that failure to do so will lead to appropriate consequences.

The press release also indicates that Luxembourg banks are collecting information with regard to automatic exchange of information with counterparts in the EU and OECD, covering both natural persons and beneficial owners of legal entities.

Read CSSF press release 16/19 in full.

CSSF Press Release 16/17 on Global Situation of UCIs and SIFs at the End of February 2016

CSSF press release 16/17 of 31 March 2016 summarizes the global situation of Undertakings for Collective Investment and Specialised Investment Funds at the end of February 2016 and contains an indication of the number of net assets of Undertakings for Collective Investment in accordance with, respectively, part I and II of the 2010 Law and the 2007 Law.

Read the CSSF press release 16/17 in full.

Publication of the Law of 15 March 2016 on OTC Derivatives, Central Counterparties and Trade Repositories 

The Law of 15 March 2016 on OTC derivatives, central counterparties and trade repositories was published in the Luxembourg Official Journal, the Mémorial, on 17 March 2016. The law entered into force on 21 March 2016.

The law clarifies the respective powers granted to the Luxembourg supervisory authority of the financial sector (Commission de Surveillance du Secteur Financier - CSSF) and the supervisory authority for insurance companies (Commissariat aux Assurances) in the context of Regulation 648/2012/EU (the European Market Infrastructure Regulation - EMIR) and specifies that the CSSF and the Commissariat aux Assurances are vested with powers of supervision, intervention, inspection and investigation to the extent defined in EMIR and that they may impose certain sanctions.

The law also transposes Directive 2013/14/EU on over-reliance on credit ratings and the transposition leads to the amendment of several Luxembourg laws. With respect to their risk-management methodology, Institutions for Occupational Retirement Provision (IORPs), UCITS management companies and AIFMs should avoid relying solely or mechanistically on credit ratings disclosed by credit rating agencies.

The Law is available here (in French).

CSSF Newsletter - March 2016

The CSSF published its March 2016 newsletter (number 182), which provides updates in relation to recent national regulation and statistics.

Read the newsletter in full (in French). 

Profit and Loss Account of Credit Institutions as at 31 December 2015

In its press release 16/13 of 15 March 2016 the CSSF estimates the financial result of the banking sector before provision for the year 2015 to be at an amount of 5.463 million euro. In comparison to the same period for 2014, the 2015 result before provisions therefore constitutes a 1.6% increase.

Read the CSSF press release 16/13 in full (in French). 



PRA and FCA Reject the Position Taken on CRD IV Bonus Cap Proportionality in the EBA’s New Remuneration Guidelines 

The PRA and FCA notified the European Banking Authority (EBA) that they will comply with all aspects of the EBA’s Guidelines on Sound Remuneration Policies issued on 21 December 2015, except for a guideline stating that the bonus cap introduced under the new Capital Requirements Directive (CRD IV) must be applied to all institutions subject to that directive and may not be disapplied on the basis of proportionality.

The bonus cap was introduced in the remuneration restrictions included in CRD IV, which came into effect on 1 January 2014 and applies to all EU banks and credit institutions and to certain MiFID investment firms (categorised as IFPRU Firms under the FCA rules). The new bonus cap requires CRD IV institutions to restrict any award of variable remuneration (i.e. a bonus) to a maximum of no more than 100% of the employee’s fixed remuneration (e.g. salary). This limit may be increased to a maximum of 200% with the approval of the institution’s shareholders.

However, in their guidance on the application of proportionality under their CRD IV remuneration codes, both the PRA and FCA had taken the position that the bonus cap could be disapplied on the basis of proportionality in certain cases.

As indicated above, the position taken by the EBA on this point in its December 2015 guidelines is contrary to that taken by the PRA and FCA. However, under the EU regulation establishing the EBA (No. 1093/2010), EBA guidelines of this sort are only issued to national regulators on a “comply or explain” basis. Specifically, within two months of the EBA’s issuance of a guideline, each national regulator is required to “confirm whether it complies or intends to comply with that guideline … [and in the event that a national regulator] does not comply or does not intend to comply, it shall inform the [EBA], stating its reasons.”

On the basis of their notice therefore, the PRA and FCA may continue to disapply the CRD IV bonus cap on the basis of proportionality, notwithstanding the position taken by the EBA.

Read the FCA's press release "PRA and FCA statement on compliance with the EBA Guidelines on Sound Remuneration Policies" (29 February 2016) 

FCA Publishes Key Findings of its Thematic Review of Inducements and Conflicts of Interest

The FCA published key high level findings from a 2015 thematic review of inducements and conflicts of interest on 18 April 2016. The review follows the FCA’s January 2014 publication of finalised guidance on inducements and conflicts of interest in the context of retail investment advice (FG14/1).

The FCA said it would not publish a separate report of this review because this work will be taken into account in its MiFID II consultation paper. However, given the delay in MiFID II implementation to 3 January 2018, it has decided to publish its key findings to remind firms of its expectations relating to the current rules.

The key findings of the review, which focussed on benefits provided and received by firms carrying out MiFID business and firms that carry out regulated activities relating to retail investment products, included:

  • Hospitality, whether provided or received, did not always appear to be designed to enhance the quality of service to the client. The FCA said it expects firms to consider and assess whether all aspects of the benefit are designed to enhance the quality of the service to the client, including the location and nature of the venue, as well as activities that are not conducive or required for business discussions, eg sporting and social events.
  • Hospitality that was not designed to enhance the quality of service to clients was sometimes offered in connection with other benefits that did meet the requirements. The FCA said that where an activity or event provides a number of non-monetary benefits, a firm must consider each benefit separately, and just because one benefit is designed to enhance the quality of service to a client and is capable of being paid or received without breaching the client's best interest rule, that does not mean that another benefit (not meeting these requirements) can be included with the compliant activity or event.
  • Hospitality logs did not always record relevant detail, or were not well maintained. The FCA said sufficient detail should be recorded to ensure effective monitoring and compliance.
  • Advisory firms incurred costs when facilitating training or educational material supplied by product providers and when collecting management information on behalf of a product provider. The FCA said product providers must not make payments to advisory firms in excess of the costs incurred. Such costs are likely to be an inducement and not allowed.
  • MiFID firms did not always provide clients with an indication of the value of allowable benefits provided. The FCA said clients must be given this information, so that they are aware of the possible level of inducements, and can decide for themselves whether to go ahead with an investment or seek more detailed information.

Read the findings in full.

Financial Advice Market Review – Final Report Published

On 14 March 2016, HM Treasury and the FCA published the final report on the financial advice market review (FAMR), which was launched in August 2015 to identify areas for regulators and the government to help both consumers and the industry benefit from new and more cost-effective ways of delivering high quality investment advice and guidance.

The report sets out 28 recommendations intended to tackle the barriers to consumers hoping to access advice and are partly directed at the FCA and the government, and partly directed at employers, services providers and consumers, covering three key areas:

  • Affordability: Recommendations to make the provision of mass market advice and guidance more cost-effective include:
    • the FCA should extend Project Innovate, and set up a dedicated team to help firms develop large-scale automated advice models bring these to market more quickly;
    • the FCA should consult on measures to support firms developing guidance services to help consumers make their own investment decisions; and
    • the government should consult on amending the statutory definition of regulated advice so that it must be based on a personal recommendation, in line with the definition set out in the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). This would create a single definition for regulated financial advice, and remove some of the barriers that exist for firms wishing to offer guidance services.
  • Accessibility: Recommendations to help consumers engage more effectively with advice include:
    • making consumers' own information more easily available to them and those who advise them, and the use of nudges to encourage customers to seek support at key life stages; and
    • measures to help employers give more support to their staff on financial matters.
  • Liabilities and consumer redress: The report also included recommendations to increase clarity and transparency about the way in which the Financial Ombudsman Service (FOS) deals with consumer complaints and the funding of the Financial Services Compensation Scheme (FSCS) to provide greater certainty for advisors regarding their future liability while maintaining robust consumer protection.

The FCA and HM Treasury are asked to report on progress made in 12 months, and then to review the outcomes of the FAMR in 2019.

Read the final report in full. 



AIFMD - Updated Q&A 

ESMA published an updated Q&A on the AIFMD on 5 April 2015. 

The new Q&A address notification requirements relating to additional investment in existing Alternative Investment Funds.

Read the associated press release "ESMA Publishes Updated AIFMD Q&A".

EMIR – Updated Q&A and Exemption from the Clearing Obligation for DK Pension Schemes

ESMA published an updated Q&A on EMIR on 4 April 2016. 

The new Q&A address the population of the “Clearing obligation” field in the trade reports. In particular, this Q&A explains how the description of the field should be interpreted, how it should be populated during the frontloading period and how long the counterparties are allowed to report value “X”

Read the associated press release "ESMA Updates its EMIR Q&A". 

Read the updated Q&A in full.

ESMA issued it opinion on the application of the EMIR clearing exemption for certain Danish pension scheme on 7 April 2016. These schemes will be exempt from the clearing obligation.

Read the associated press release "ESMA Issues Opinions on DK Pension Schemes to be Exempt From Central Clearing Under EMIR". 

Read the opinion in full

MiFID II - Draft RTS and the "Quick Fix"

ESMA wrote to the European Commission on 21 March 2016 regarding the draft MiFID II regulatory technical standards (“RTS ) in respect of position limits, ancillary activity and non-equity transparency, endorsing the European Commission’s proposed amendments.

On 7 April, the European Parliament’s Economic and Monetary Affairs Committee endorsed the European Commission’s proposal to delay the entry into force of MiFID II by a year (“Quick Fix”).

UCITS – Final Report Guidelines on Remuneration Policies Issued, Updated Q&A and Discussion Paper on UCITS Share Classes Issued

ESMA issued its final report on Guidelines on sound remuneration policies under the UCITS Directive and AIFMD (the “Guidelines”) on 31 March 2016 .

Regarding UCITS remuneration, the Guidelines do not include guidance on the possibility of dis-applying certain specific requirements on the pay-out process rules, and ESMA has written to the European Commission, European Council and European Parliament suggesting that further legal clarity is required.

Read the associated press release "ESMA publishes UCITS remuneration guidelines" (March 2016).

Read the guidelines in full. 

Read the letter to European the Commission, European Council and European Parliament. 

ESMA updated its Q&A on the application of the UCITS Directive on 5 April 2016. The updated Q&A include a new question and answer on UCITS investment in UCITS feeder funds.

Read the associated press release "ESMA Publishes Updated UCITS Q&A".

Read the updated Q&A in full. 

ESMA published a discussion paper on UCITS share classes on 6 April 2016. The paper describes the nature of share classes, the reasons for their existence and the key elements of share classes.

Read the associated press release "ESMA Publishes Discussion Paper on UCITS Share Classes". 

Read the discussion paper in full.

ESMA Opinion on Loan Origination Funds

ESMA published an Opinion on 12 April 2016 addressed to the European Parliament, the Council and the Commission on the components necessary for a common European framework which applies to loan origination by investment funds.

Read the associated press release "ESMA Publishes Opinion on EU Framework for Loan Origination by Investment Funds". 

Read the Opinion in full. 

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