Investment Funds Update - Europe - Issue 10, 2018

November 29, 2018

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



Publication by the FSMA of the 2017 statistics regarding pension funds 

The Financial Services and Markets Authority (“FSMA”) published the statistical data on 21 September 2018 on the sector relating to institutions providing occupational retirement provisions (“IORPs”) regarding the financial year 2017. 

The total balance sheet of the IORPs continues to rise mainly as a result, according to the FSMA, of the increase of cross-border activities. 

The 8th edition of this statistical overview is available on the FSMA’s website (in French or in Dutch). 

Amongst the most relevant items reflected in this overview, it can be stated that: 

  • At the end of 2017, there were 201 IORPs (versus 199 in 2016). 
  • The IORPs comprise a total of 1,734,315 members (i.e. an increase of nearly 4% in one year). 
  • At the end of 2017, the total balance sheet of all IORPs reached EUR 35.1 billion (i.e. an increase of 18% compared to 2016). Such an increase is essentially the result of the asset transfers from foreign pension funds. 
  • Belgian IORPs invested approximatively 75% of their assets in collective investment funds, mainly shares and bond funds. They also directly invested 11% of their assets in bonds and 9% in shares. The return on such investment came out to 5.3%. 

Read: The FSMA’s press release on this topic (French) and (Dutch

Update by the National Bank of Belgium (“NBB”) and the FSMA on asset management and shadow banking in Belgium 

The NBB and the FSMA published a joint updated study on asset management and shadow banking in Belgium on 25 October 2018, which represented an amount of EUR 147 billion at the end of 2017. The first joint report on this topic was dated 3 October 2017. 

The report addresses the trend towards a more market-based financial system, where financial intermediation also takes place outside the banking sector. 

According to this report, the term “shadow banking” should in fact be replaced by the more appropriate term “non-bank financial intermediation,” which can take many forms and support the economy by offering an alternative to bank borrowing. These assets mainly consist of money market funds and non-equity investment funds. 

It is generally admitted that non-bank financial intermediation can rise to systemic risks threatening the stability of the financial system. However, the report confirms that, at this stage, no substantial systemic risks have been identified in relation to asset management and non-bank financial intermediation. Developments in both areas and links with other sectors of the economy do, however, require careful monitoring. 

The so-called “step-in” risk is that groups selling investment funds may de facto feel (voluntarily) obliged to compensate clients for the risks associated with such investment funds, even if they are not contractually bound to do so. 

The regulators underline the importance of collecting data on asset management and non-bank financial intermediation. The FSMA has adjusted and expanded the statistical information to be submitted by investment funds. A Belgian royal decree providing investment funds with specific tools in case of liquidity problems should be published within the next few weeks. 

Read: The FSMA’s press release

FSMA issues a new warning regarding investments in cryptocurrencies 

Despite prior FSMA warnings (see Dechert OnPoint, July 2018), cryptocurrency fraud continues to trap more victims in Belgium. On 26 October 2018, the FSMA published a new warning against these forms of fraud and updated the list of fraudulent cryptocurrency trading platforms (21 new suspicious sites have been added, the list now totaling 99 websites). 

The FSMA’s warning describes how these types of fraud get started and what the fraudsters offer to the investors. It also provides some guidelines on how to determine if an offer constitutes fraud, gives a few recommendations and strongly advises victims of this type of fraud to file a complaint. 

Read: The FSMA’s warning 

Read: The list of fraudulent cryptocurrency trading platforms



Publication of decrees amending the regime of French direct lending funds 

The Ordinance n° 2017-1432 of 4 October 2017 introduced the possibility for "financing vehicles" (organismes de financement, OF) to grant loans. The OF are a category of investment funds which includes “securitization vehicles” (organismes de titrisation, OT) and the newly created “specialized financing vehicles” (organismes de financement spécialisé, OFS). Two decrees implementing this Ordinance have been published on 21 and 22 November 2018: 

  • The decree n° 2018-1004, inter alia, (i) amends the conditions under which the fonds professionnels spécialisés (professional specialized funds, FPS) can grant loans, (ii) provides that these conditions apply, for the most part, to OF, (iii) details the assets eligible for of the OF, (iv) authorizes redemption requests from investors in OFS and (v) imposes management companies of loan origination funds to implement specific stress tests ensuring the liquidity of their loans. 
  • The decree n° 2018-1008 provides further details concerning the conditions under which an OF can originate loans and details the conditions under which they can acquire and transfer receivables. 

Read: The decrees here and here 

Amendment to the AMF General Regulation: CSD Regulation 

The French Arrêté of 23 October 2018 amended the General Regulation of the Autorité des Marchés Financiers (the French financial markets regulator, AMF) to comply with the Regulation (EU) n° 909/2014 of 24 July 2014 (the Central Securities Depositories Regulation, “CSDR”). In particular the changes include: (i) the implementation of specific rules applying to depositories authorized under CSDR, (ii) the adaptation of the transfer of ownership rules applying to securities, and (iii) the removal or adaptation of the matters now addressed by CSDR or the AMF. 

Read: The regulation 

Information regarding the tax treatment of retrocessions of monetary benefits received by management companies 

Under Article 24 (8) of MiFID 2 and Article L. 533-12-3 of the CMF, asset management companies shall retrocede to its investors any fee, commission or monetary benefit received when providing the portfolio management investment service. The Tax Administration (Direction de la Législation Fiscale) has indicated that these retrocessions will be treated as revenus de capitaux mobiliers and therefore be subject to the “flat tax” of 30% (covering taxes and social security contributions).

Read: The full update (AFG login required)



German Federal Ministry for Economic Affairs and Energy publishes draft bill implementing MiFID II requirements for investment brokers and advisers regulated under the German Industrial Code 

The German Federal Ministry for Economic Affairs and Energy published on 7 November 2018 a draft bill amending the current rules set forth for investment brokers and advisers which are exempted from the MiFID II requirements (“free agents”). Based on Article 3 para. 1 of MiFID II, Member States may choose not to apply MiFID II to any persons for whom they are the home Member State, provided that the activities of those persons are authorized and regulated at national level and those persons: 

(a) are not allowed to hold client funds or client securities, and; 

(b) are not allowed to provide any investment service except the reception and transmission of orders in transferable securities and units in collective investment undertakings and/or the provision of investment advice in relation to such financial instruments, and; 

(c) in the course of providing that service, are allowed to transmit orders only to certain counterparties (e.g. authorized investment firms, credit institutions, branches of investment firms or of credit institutions authorized in a third country with comparably stringent prudential rules, collective investment undertakings authorized to market units to the public or investment companies with fixed capital, if their securities are listed or dealt on a regulated market in a Member State). 

Agents falling under the aforementioned exemption are generally exempted from the MiFID II regime and only regulated by Section 34f of the German Industrial Code (Gewerbeordnung) and the Financial Investment Mediation Regulation (Finanzanlagenvermittlungsverordnung – FinVermV). Nevertheless, Article 3 para. 2 of MiFID II provides that the Member States shall submit free agents to certain requirements of MiFID II. 

The draft bill therefore requires free agents, among other things, to provide information on all costs and associated charges relating to both the cost of investment broking or advice and the cost of the financial instrument brokered or recommended, including any third-party payments. With regard to product governance, free agents should be allowed to distribute the financial assets only within the target market. Concerning inducements the draft provides – in contrast to the MiFID II scheme – that free agents have to ensure that received or paid inducements must not be detrimental to the quality of the investment broking or advice and shall not affect the agent's obligation to act honestly, fairly and professionally in the best interests of the investor. The requirement that the received or paid inducement must enhance the quality of the respective investment service provided to the respective client, which is mandatory for MiFID firms, is however not applicable for free agents. Additionally, free agents must comply with the telephone and electronic recording obligations of MiFID II. Free agents have to tape all telephone or electronic conversations related to broking and advice on financial investments. The records must include those parts of the telephone conversations or electronic communications that relate to the service offered, the risks, the opportunities for returns or the design of certain financial assets or classes. 

In the current draft no transitional rule is included. If this remains, the new regulation would apply immediately after entry into force. 

Changed duties with regard to sub-custodians 

The delegated EU Regulations 2018/1618 and 2018/1619 will apply from 1 April 2020, which will change the delegated Regulation 231/2013 to the AIFMD ("AIFM Regulation") and the Delegated Regulation 2016/438 to the UCITS Directive ("UCITS Regulation") with regard to the depositary's duties in the case of sub-repositories. The changes allow sub-custodians to keep the assets in omnibus accounts so that a segregation per fund is no longer necessary at all levels of the custody chain. The new AIFM Regulation (see Article 99 para. 1 (a)) and the UCITS Regulation (see Article 16 para. 1 (a)) require that a sub-custodian is able to allocate the assets to the various funds only on the basis of appropriate documentation. At the same time, the flow of information within the custody chain is improved and the documentation and reconciliation processes between the depositary and sub-custodians are strengthened. In addition, AIF depositaries must obtain information about the insolvency law conditions in case of sub-custody in third countries (see Article 99 para. 2a AIFM-VO). 

Investment statistics 

The German Investment Fund Association BVI has issued its updated funds raising report, as of 8 November 2018. 

Investment funds generated net inflows of EUR 77.2 billion during the period from the beginning of January to the end of September, with open-ended special funds accounting for EUR 58.3 billion. Open-ended retail funds attracted EUR 17.8 billion and closed-ended funds raised EUR 1.1 billion. Discretionary mandates recorded outflows of EUR 13.8 billion. In September alone, funds registered new business of just under EUR 6 billion. The fund industry manages assets in investment funds and discretionary mandates in excess of EUR 3 trillion. 

At EUR 19.2 billion, balanced funds topped the sales chart within the open-ended retail fund segment. Of these inflows, EUR 14.2 billion went to funds that invest in equal parts in equities and bonds. Since the beginning of 2017, this group has once again been increasing its share in new business. Currently, these balanced funds make up almost three quarters of the inflows. Equity-oriented balanced funds collected EUR 3 billion, while bond-oriented funds registered inflows of EUR 2 billion. 



Central Bank says Brexit contingency planning must continue 

The Central Bank’s Director General for Financial Conduct, Derville Rowland spoke at the Irish Funds Annual UK Symposium on 15 November 2018, telling asset managers their contingency planning “must continue.” 

The Irish regulator has said that fund firms should disregard the draft Brexit withdrawal deal and continue to prepare for a cliff-edge scenario. Ms Rowland says that while the proposed deal “would obviously be a superior outcome to no deal,” it is “not clear” how the political issues surrounding the deal will be resolved. 

Read: The speech 

Central Bank discussion paper on outsourcing 

The Central Bank released Discussion Paper 8 on the topic of Outsourcing (“DP 8”) on 19 November 2018. In light of the evolving financial services landscape, growing international focus on outsourcing and increasing concerns in relation to outsourcing practices, the Central Bank embarked upon a review of outsourcing across the Irish financial sector. The purpose of DP 8 is to set out the Central Bank’s findings and observations from this review and obtain feedback from interested parties on key risks and evolving trends associated with outsourcing or any aspect of outsourcing. 

Interested parties are requested to provide responses to the questions posed in DP 8 along with any general observations on this topic by the closing date of 18 January 2019.

Read: The Discussion Paper 

Central Bank publishes corporate governance requirements 

The Central Bank has published its Corporate Governance Requirements for Investment Firms and Market Operators 2018 (the “CG Requirements”). The publication of the final CG Requirements follows the Central Bank’s publication of CP120: Second Consultation Paper on the Corporate Governance Requirements for Investment Firms and Market Operators (CP120) in May 2018. 

The CG Requirements provide clarity to industry and promote high standards of corporate governance within investment firms. 

Read: The CG Requirements 

Money Laundering and Terrorist Financing Act 2018 

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018 (the “AML Act 2018”) was signed into law on 14 November 2018 by the President of Ireland and the Fourth EU Money Laundering Directive (2015/849) is now fully transposed into national law. 

The core provisions of the AML Act 2018 relate to customer due diligence (verifying a customer's identity and assessing risk). They oblige designated persons to carry out a business-wide risk assessment, as well as an individual assessment in relation to each business relationship. The AML Act 2018 also sets out the increased functions and powers of the Financial Intelligence Unit of the Garda Síochána (the Irish police force). 

Read: The AML Act 2018



CSSF Publishes Application Form for MMF

The CSSF published a new application form for authorisation of a money market fund in accordance with Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on 20 November 2018.

Read: The application form  

CSSF Releases its November Newsletter 

The CSSF published its newsletter for November 2018.

Read: The newsletter



FCA issues direction confirming the notification process under its post-Brexit temporary permissions regime 

As previously reported, the UK government and the FCA are proposing to implement a Temporary Permissions Regime (TPR) for “inbound” European Economic Area (EEA) firms and funds in the event of a “no deal” Brexit. A TPR is proposed both for firms and funds authorised in an EEA country, such as Ireland, and providing investment services or marketing funds to UK customers under EU passporting arrangements prior to the date of the UK’s exit from the EU. The stated intention is to allow such inbound firms and funds to continue operating in the UK within the scope of their current passports for up to three years after a “no deal” Brexit while they apply for full (permanent) UK authorisation or recognition. 

On 9 November, the FCA issued a direction under the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 to the effect that EEA firms carrying on regulated activities in the UK under passporting arrangements must notify it if they intend to obtain a deemed permission or variation under the TPR. 

Notifications must be made on the FCA’s Connect system during the period beginning at 9 am on 7 January 2019 and ending on 28 March 2019. 

Read: The FCA’s direction 

FCA publishes second Brexit consultation paper 

Following publication of its first consultation in October, the FCA has published its promised second consultation paper proposing further changes to be made to the Handbook and EU-derived Binding Technical Standards. These amendments reflect the temporary permissions regime (see item above) among others. 

The FCA is also consulting on guidance on how non-Handbook guidance should be interpreted after exit day and on its approach to forms appearing in the Handbook. The FCA states that this consultation is not proposing wider policy changes and is not making other changes unrelated to Brexit in the Handbook or Binding Technical Standards. 

The closing date for comments is 21 December 2018. 

Read: The second consultation paper 

HM Treasury publishes draft regulations for the operation of UK ELTIFs, EuVECAs and EuSEFs after Brexit 

HM Treasury has published drafts of the following UK regulations required for the UK to continue to manage after Brexit UK European Long Term Investment Funds (ELTIFs), European Venture Capital Funds (EuVECAs) and European Social Entrepreneurship funds (EuSEFs):

  • the Venture Capital Funds (Amendment) (EU Exit) Regulations 2018; 
  • the Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018; and 
  • the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2018. 

These are to amend retained EU law in relation to these funds. They remove existing legislative provisions relating to co-operation and information sharing with EU authorities while maintaining existing investment rules for these types of funds domiciled in the UK. They also confirm that UK managers will be able to register or be authorised with the FCA to market qualifying funds in the UK under new labels (social entrepreneurship funds (SEF), registered venture capital funds (RVECA) and long-term investment funds (LTIF)). Existing UK managers already registered or authorised with the FCA will be automatically transferred to the new UK regime. 

The Regulations are proposed to come into force on exit day. 

Read: The draft regulations here, here and here



MiFID II – updated Q&A on market structures and transparency and supervisory briefing 

ESMA updated its Q&As on market structures and transparency topics on 14 November. The new Q&As provide clarification on the following topics: 

  • Making data available free of charge 15 minutes after publication (amendment to an existing Q&A); 
  • Obligations applicable to systematic internalisers in non-traded on a trading venue financial instruments; 
  • Definition of request for quote (“RFQ”) systems; Pre-trade transparency in RFQ systems; 
  • Concept of comparable size in market making agreements and voluntary provision of liquidity. 

Read: The Q&A are available here 

Read: The associated press release 

ESMA published a supervisory briefing on assessing suitability under MiFID II on 13 November. The briefing is meant to give market participants indications of compliant implementation of the MiFID II suitability provisions and covers the following topics: 

  • Determining situations where the suitability assessment is required; Information to clients about the purpose of the suitability assessment; 
  • Obtaining information from clients; 
  • Arrangements necessary to understand investment products; 
  • Arrangements necessary to understand the suitability of an investment; 
  • Suitability report;
  • Qualifications of firm staff; and 
  • Record keeping. 

Read: The briefing 

Read: The associated press release 

Other – clearing in the event of no-deal Brexit, short selling regulation Q&A and binary options ban

 ESMA released a public statement on its proposals for managing risks of a no-deal Brexit in the area of central clearing on 23 November.

The public statement confirms that ESMA is engaging with the European Commission to plan, as far as possible, preparatory actions for the recognition process of UK CCPs to permit ongoing central clearing of derivatives, in case of a no-deal Brexit. 

Read: The statement 

Read: The associated press release 

ESMA updated its Q&As on the short selling regulation and on certain aspects of credit default swaps on 14 November. 

The Q&As clarify that identification of the relevant competent authority, following entry into application of MiFID II/MiFIR, is no longer made under Commission Regulation No 1287/2006 but under Commission Delegated Regulation (EU) 2017/590 for the reporting of transactions to competent authorities. 

Read: The Q&As 

Read: The associated press release 

ESMA updated its Q&As on temporary product intervention measures on the marketing, distribution or sale of CFDs and binary options to retail clients on 9 November. The updated Q&As provide clarification on the application of temporary product intervention measures in relation to the prominence of the risk warning and further clarify what are considered “payments” for the purpose of entering into a CFD. 

Read: The Q&As 

Read: The associated press release 

On 9 November, ESMA renewed its prohibitions of marketing, distribution or sale of binary options to retail clients for a further three months from 2 January 2019. 

Read: The ban

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