Investment Funds Update - Europe - Issue 7, 2018

August 01, 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 its annual report 

The Financial Services and Markets Authority (“FSMA”) published its 2017 annual report on 8 June 2018. At the occasion of its presentation, the FSMA described the preventive and enforcement actions it had taken as well as the topics it had addressed in 2017. 

The FSMA’s key mission is “to contribute to the honest and fair treatment of financial consumers and to the transparency of the financial markets”. The FSMA can take a wide range of actions and seek to act preventively whenever possible. 

The ex-ante approval of advertisements for financial products is one example of such preventive actions. The FSMA wishes to prevent the use of misleading advertisements or those that do not satisfy the legal requirements. As a result, there are very few complaints with respect to advertisements. For example, in 2017, more than 3,200 advertisements received the FSMA’s prior approval. 

The ban on distributing particularly complex structured products also serves a preventive purpose. In 2017, almost half (20 out 50) of such products which included new features were rejected in Belgium as they were considered too complex. Another form of preventive action has been the introduction of new regulations such as the ban on the Belgian market of the distribution of binary options. The number of complaints related to such products has also significantly fallen. The warnings that the FSMA publishes against potentially illegal offers of financial products and services also fit within this preventive approach. Last year, the FSMA published 116 warnings (as compared to 54 in 2016) and such increase is due in part to the rise in notifications from consumers who can more easily liaise with the FSMA in this regard. 

In cases where a preventive action is not possible, the FSMA can take enforcement measures. One of the options available to the FSMA is to take administrative sanctions. In 2017, the FSMA imposed 13 such sanctions for a total amount of EUR 2.15 million. Another form of enforcement action is the withdrawal of the registration of financial intermediaries. In 2017, the FSMA withdrew 285 intermediaries from its register. 

In the course of the presentation of the FSMA’s annual report, the attendees’ attention was also drawn to the sectorial inquiries conducted by the FSMA in the areas of insurance and pensions, and to the new whistleblowers’ point of contact. Since the launch of such point of contact at the end of September 2017, the FSMA has received 51 reports from whistleblowers. 

Read: The annual report in French or Dutch 

FSMA issues a communication on the new draft prospectus law 

The new draft law implementing the prospectus regulation was published on 12 June 2018, on the Belgian Parliament’s website (DOC Chambre 54 – 3150) (the “Draft Prospectus Law”). A previous version had been subject to a public consultation launched on 24 November 2017 by the FSMA on key choices to be made under the new EU Prospectus Regulation which repeals and fully replaces the EU Prospectus Directive (Directive 2003/71/EC as amended) ("EU Prospectus Directive"). The Draft Prospectus Law was modified as a result of such consultation. On 22 June 2018, the FSMA issued a communication (FSMA_2018_09) setting out the main principles introduced by such Draft Prospectus Law. 

Read: The draft prospectus law (French and Dutch

Read: The FSMAs communication (French and Dutch

FSMA issues a new warning regarding investments in cryptocurrencies 

The FSMA receives an increasing number of consumer complaints regarding investments in cryptocurrencies. In its new warning issued on 21 June 2018, the FSMA once again warned the public about platforms offering investments in cryptocurrencies as these platforms are often operated by fraudsters who are now resorting to cryptocurrencies to swindle consumers. 

Read: The FSMAs warning 

Read: The FSMAs updated list of cryptocurrency trading platforms for which it has received questions/complaints from consumers where the FSMA has identified indicia of fraud



AMF publishes Q&A concerning money market funds ("MMF")

In time for MMF Regulations’ entry coming into force on 21 July 2018, the Autorité des Marchés Financiers (the French financial markets regulator) issued a guide on money market funds, outlining the main changes, authorization procedures, information requirements and characteristics of these funds. 

Existing money market funds shall be approved under the new regime before 20 January 2019.

Read: The AMF guide

AFG issues an action plan in the event that a benchmark materially changes or ceases to be provided

Supervised entities under Benchmark Regulation (EU) 2016/1011 of 8 June 2016 shall produce and maintain a plan setting out the actions that shall be taken in case that the benchmark which is used materially changes or ceases to be provided (Article 28). In this context, the AFG has issued a charter describing its recommended action plan. 

Read: The AFG action plan



BMF starts consultation of tax circular on investment tax act with associations 

The BMF (Federal Ministry of Finance) sent an updated draft tax circular on 15 June 2018 to industry associations. The updated draft includes, inter alia, statements on securities lending, on umbrella mutual funds and self-declarations, and on the tax requirements of an (tax transparent) investment fund. 

BMF presents draft bill for annual tax act 2018 

The BMF has sent to industry associations the draft law of the Annual Tax Act 2018. The amendments proposed in the draft bill include with regard to the Investment Tax Act the following changes: 

  • Adjusting the definitions of equity funds, mixed funds and real estate funds 
  • Changes to the deemed disposal arrangement as of 31 December 2017 and deemed acquisition as of 1 January 2018 for accounting investors 
  • Restriction of deemed capital gains as of 31 December 2017 on shares held as business assets 

In addition, changes in the Income Tax Act are envisaged, which could have an effect on investment funds. For example, non-assessment certificates from non-profit entities are to be limited to 20,000 euro per year. In addition, profits from the sale of shares in real estate companies are to be attributed to the income subject to limited taxation. 

New German court judgement reg. the compensation for defective issuer rating 

The Higher Regional Court of Düsseldorf had in its decision of 8 February 2018 (Az. I-6 U 50/17), dealt with the question of whether an investor, who was motivated to purchase a specific financial instrument also through the misleading rating of the respective issuer of that financial instrument, may demand damage compensation from the credit rating agency according to section 35a para. 1 p. 2 of the EU Regulation No. 462/2013 (Regulation on credit rating agencies, in the following “Rating Regulation”). The Higher Regional Court of Düsseldorf ruled that the investor could demand compensation based on section 35a para. 1 p. 2 of the Rating Regulation only from the rating agency if the rating was based on the financial instrument itself. If the rating only relates to the Issuer of the financial instrument, then the scope of section 35a para. 1 p. 2 of the Rating Regulation would not be applicable. 

Investment statistics as of 31 May 2018 

The German Investment Fund Association BVI has issued its latest investment statistics report as of 31 May 2018, 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. 

The latest statistic report is highlighting that in May, open-ended retail funds have registered outflows in the amount of EUR 1 billion net, whereas open-ended special funds raised shares of about EUR 2.4 billion. As at the end of May 2018, open-ended funds raised in total shares of about EUR 4 billion fewer than in April. 



Central Bank publishes twenty-third edition of UCITS Q&A

The Central Bank published the 23rd Edition of the Central Bank UCITS Q&A on 5 July 2018. A new question, ID 1002, in relation to UCITS investing in non-UCITS investment funds and provisions to be included in constitutional documents in such circumstances has been answered.

Read: The updated UCITS Q&A 

New Irish law ISDA master agreement published

The International Swaps and Derivatives Association (ISDA) published a new Irish Law version of the widely used 2002 ISDA Master Agreement on 28 June 2018, in a Brexit prompted update for the European OTC Derivatives market. The publication indicates expectations of a possible preference for the use of the law of an EU member state in ISDAs between European counterparties post Brexit, rather than the currently prevalent English law-governed ISDA Master Agreement. However, as with much of the impact of Brexit, the extent of movement remains to be seen.  

Read: The Irish law Master Agreements is available from the ISDA Bookstore 

Central Bank fund management companies guidance

The Central Bank published its markets update on 5 July 2018, which included guidance on the newly introduced CP86 organizational effectiveness role. Specific emphasis will be placed on assessing the appropriateness of the Fund Management Company’s resources and organizational structure. Through supervisory engagements with relevant firms, the Central Bank will focus on the assessment work performed by the organizational effectiveness role holder and, in particular, how the board of the Fund Management Company have implemented any proposals to improve organizational effectiveness.

Read: Central Bank Fund Management Companies Guidance – 5 July 2018 

New form for submission of Irish fund financial statementsThe Companies Registration Office in Ireland, published form FS1, the accompanying form for the financial statements submission requirement on 10 July 2018, which applies to certain investment companies as introduced by the Companies (Accounting) Act 2017. This new requirement relates to investment companies established as public limited companies (PLCs) and Undertakings for Collective Investment in Transferable Securities (UCITS) constituted as investment companies that are registered as PLCs in Ireland only and does not concern Irish Collective Asset-management Vehicles (ICAVs).

A company with a financial year-end of 31 December 2017 will be required to make the filing on or before 30 November 2018. 

Read: Dechert ONPOINT relating to Form FS1 for further information 

New AML bill published

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2018 (the “AML Bill 2018”) was published on 30 April 2018. The primary purpose of the AML Bill 2018 is to transpose, in part, the Fourth EU Money Laundering Directive (2015/849) into national law, and to give effect to the recommendations of the Financial Action Task Force. 

The core provisions of the AML Bill 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. 

Read: The AML Bill 2018 (as passed by Dáil Éireann on 5 July 2018)



Grand Ducal Regulation on CSSF fees published 

The Grand Ducal Regulation of 2 July 2018 amending the Grand Ducal Regulation of 21 December 2017 on fees levied by the Commission de Surveillance du Secteur Financier. 

Read: The published regulation in full in the official gazette 

CSSF issues press release on Hard Brexit

The CSSF published a press release regarding investment fund managers who wish to relocate or substantially change operational models to cope with Brexit-related aspects to point out that applications should be submitted as soon as possible. 

CSSF issues press release on the entry into force of the money market regulation 

The CSSF published a press release regarding the entry into force of Regulation 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (the “MMFR”) applies as of 14 July 2018. In the related circular 18/696 the CSSF implements ESMA Guidelines on stress tests scenarios under article 28 of the MMFR. 

Read: The press release in full on the CSSF website 

Read: The circular in full on the CSSF website 

ALFI release its annual report ALFI published its annual report 17/18. 

Read: The report



UK government publishes Brexit white papers 

The UK government has published two white papers, one on the future relationship between the UK and the EU and the other on legislating for the withdrawal agreement between the UK and the EU. In respect of financial services, the UK government is proposing a new economic and regulatory arrangement with the EU, based on the principle of autonomy for each party on decisions relating to access to its market, with a bilateral framework of treaty-based commitments. It proposes that the existing equivalence framework be expanded to encompass a broader range of cross-border activities. The UK government acknowledges that this arrangement cannot replicate the EU's passporting regime. There should be reciprocal recognition of equivalence between the UK and the EU under all existing third country regimes that takes effect at the end of the transition period. Future determinations of equivalence should be an autonomous matter for each party. However, the bilateral arrangement framework should contain provisions relating to: 

  1. Common principles for the governance of the relationship 
  2. Extensive supervisory co-operation and regulatory dialogue so that the UK and the EU should be able to understand and comment on each other's proposals at an early stage; and supervisory co-operation concerning firms that pose a systemic risk or that provide significant cross-border services on the basis of equivalence (or both). There should be codified procedures for routine co-operation and for co-ordination in crisis situations 
  3. Predictable, transparent and robust processes to ensure that the relationship is stable, reliable and enduring through a mixture of treaty-based bilateral agreements and the autonomous measures of the UK and the EU. These processes should relate to: (a) transparency assessment methodology for assessing equivalence; (b) a structured withdrawal process if either party considers withdrawing equivalence; and (c) long term stabilisation - there should be a presumption against unilateral changes that narrow the terms of existing market access regimes, other than in exceptional circumstances. 

Read: The white paper on the future relationship 

Read: The white paper on legislating for the withdrawal agreement 

Shortly after the publication of the first white paper, the FCA published a webpage for firms preparing for Brexit. 

Access: The FCA webpage 

FCA publishes a discussion paper on a potential new consumer duty of care 

The FCA has published a discussion paper on a new consumer duty of care for regulated firms to enhance behaviour in the financial services market. It has published this to gain a better understanding of whether there is a gap in its regulatory and legal framework, or the way it applies it in practice, that could be addressed by introducing a new duty of care to consumers. In the discussion paper the FCA uses a "New Duty" to cover all possible formulations of any new duty of care or fiduciary duty on firms; to better understand and consider possible alternative approaches that might address stakeholders' concerns raised in response to the FCA's consultation on its approach to consumers; to understand what a New Duty for firms might do to enhance good conduct and culture in financial services, including how this could influence consumer outcomes, alongside the SMCR; and to assess whether change is desirable and, if so, what form it might take, how it would work in practice alongside the current framework and what consequences it would have for consumers, firms and the FCA. In the discussion paper, the FCA also explains the various routes by which consumers can currently obtain redress when harm does occur and considers whether a New Duty would provide an additional route by which consumers could secure redress, and whether that is needed. 

Comments are being sought from regulated firms, etc, by the deadline of 2 November 2018. 

Read: The discussion paper 

FCA publishes investment platforms market study interim report 

The FCA has published an interim report on its market study to examine the relatively new but growing investment platform market. The interim report states that competition is working well for most consumers, but it has competition concerns about how investment platforms compete for particular customer groups. 

The FCA found various barriers and possibilities for confusion, etc, and so proposes to monitor market developments during the implementation of MiFID II, and potentially introduce new guidance, measures to improve transparency, measures to improve the feasibility, timing and cost of switching, and improve the monitoring of orphan clients. 

The FCA will assess industry progress before deciding whether it should introduce additional remedies. The deadline for comments is 21 September 2018. The FCA will publish its final conclusions in early 2019. 

Read: The interim report



AIFMD - ESMA updates AIFMD Memoranda of Understanding ("MoUs") 

ESMA updated its list of MoUs on 17 July 2018, singed the EU regulatory authorities (17 July 2018) – Croatia and Slovenia are still to sign MoUs. 

Read: The list of MoUs 

MIFID II - updated Q&A and public priorities on MIFID II 

Verena Ross highlighted on 17 July 2018, the state of play on MiFID II and the need for Legal Entity Identifiers (“LEIs”) for supporting regulators’ activities in the area of market abuse supervision and monitoring trade and transaction reporting. 

Read: The speech 

Read: The press release 

ESMA updated its Q&As on both MiFID II and MiFIR transparency topics on 12 July 2018, and MiFID II and MiFIR investor protection and intermediaries topics. 

The new Q&As address regulatory reporting following a corporate action, inducements and provision of investment services by third country firms. 

Read: The Q&As here and here 

Read: The press releases here and here 

The European Commission updated its webpage on MIFID transposition status on 29 June 2018. Poland and Romania have now communicated full transposition. Slovenia, Croatia, Portugal, Spain and Sweden still have not fully transposed.

Read: The EC status 

EMIR - clarifications on clearing for pension schemes and new consultation 

ESMA issued a clarification on the clearing obligation for pension scheme arrangements on 3 July 2018, confirming that indicates it expects national competent authorities should not prioritise their supervisory actions towards entities that are expected to be exempted again from the clearing obligation and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner. 

Read: The clarification 

Read: The press release 

ESMA launched a consultation on EMIR on 11 July, focussed on amending draft Regulatory Technical Standards regarding the treatment of intragroup transactions with a third country group entity. 

Read: The consultation 

Read: The press release 

Brexit - ESMA and European Commission issue reminders of consequences of "Hard Brexit" 

ESMA issued a reminder on 12 July, to UK firms looking to establish EU regulated subsidiaries as a “hedge” to mitigate against a Hard Brexit to submit applications to the relevant regulators in a timely fashion. 

Read: The reminder 

Read: The press release 

The European Commission issued a communication on 19 July to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank on preparing for the withdrawal of the United Kingdom from the European Union. 

Read: The communication 

Read: The annexes here and here 

Read: The press release 

Other - updated Q&As on product intervention measures on the marketing, distribution or sale of CFDs and Binary options to retail clients 

ESMA updated its Q&As on 12 July, on its temporary product intervention measures on the marketing, distribution or sale of CFDs and Binary options to retail clients. 

The updated Q&As provide clarification on the application of the temporary product intervention measures on clients established outside the Union and non-Union nationals.

Read: The updated Q&As 

Read: The press release

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