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Quarterly Regulatory Update

In this series of quarterly updates, we focus on the key regulatory changes that are contained within the congested EU and UK regulatory pipeline.


It goes without saying that the hot topic from a regulatory, governance and investor perspective is Environmental, Social and Corporate Governance (ESG). Setting the pace is the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation in the EU, closely followed by the open consultation and published Guiding Principles within the UK.

We are currently seeing focus on the Packaged Retail Investment and Insurance-based Products Key Information Document (PRIIPs KID), the UK Consumer Duty and forthcoming changes in industry templates, namely the European MiFID Template (EMT). Let’s start with what we know…

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PRIIPs – the KIDs are alright?

What does an EU prospect investing in a UK UCITS on 1 July 2022 need to know? Don’t forget a UK prospect investing in an EU UCITS on the same date!  

The answers are finally becoming a little clearer … what do we now know?

  1. EU funds
    • PRIIPs KID production for all EU domiciled and distributed funds will become effective from 1 July 2022. This will see existing UCITS KIIDs retire in the EU for sales to EU investors.
    • The KIID refresh for UCITS will go ahead in February 2022 with no effect.
    • The first annual PRIIPs KID refresh will be completed by 30 June 2023.
  2. UK UCITS
    • The UK has extended the applicability of the UCITS KIID until 31 December 2026.
    • This means that UK UCITS will continue to require the production of a UCITS KIID until this date when selling to a UK based investor.
  3. Selling UK UCITS into the EU:
    • If you sell cross-border into the EU, you will need to meet the local jurisdictional requirements. It is likely that you will need to produce a PRIIPs KID to meet these requirements.
  4. Selling EU funds into the UK:
    • If you continue to cross-border sell your EU UCITS into the UK, you will need to continue to produce a UCITS KIID and this will continue to form the pre-contractual document for UK investors.

A big announcement?

The new PRIIPs Regulatory Technical Standards (RTS) were published on 7th September 2021. We saw a significant amount of debate and lobbying from the industry throughout this period, which has delayed amendments by almost two years from the initial consultation. Despite this good progress, the European Fund and Asset Management Association (EFAMA) and industry associations have quickly followed up with concerns around implementation periods, requesting more time.

Why more time?

The new PRIIPs RTS incorporate a number of amendments and new requirements, all contained within a 46-page Annex, including:

  • A new and improved KID template
  • Changes to the methodology for the calculation of performance scenarios
  • A new manner of presenting performance scenarios
  • A modified summary of cost indicators and changes in how cost information is presented

Any amendments require significant implementation efforts. Each firm will be accountable for regulatory interpretation, data identification and gathering, implementation of the new calculation methodologies, the drafting and assurance of new documents, and even interaction and training of distributors. Then there are further website requirements which must not be forgotten.  

It would be wise to interpret, impact assess and engage your outsourced provider or internal teams as soon as possible… time is ticking!

What about the UK?

There is an adaptation difference between the EU and the UK which will require retail investment firms in both jurisdictions to keep on producing these documents. Furthermore, as it stands, there is no clarity as to whether PRIIPs KIDs will need to be lodged with the Regulators, unlike their UCITS counterpart. Some firms believe this will continue, however others are awaiting clarity.

On 20 July 2021, the FCA published Consultation Paper (CP) 21/23, “PRIIPs - Proposed scope rules and amendments to RTS”, in which it set out its proposed amendments to the UK’s on-shored PRIIPs regime. As well as changes to the RTS, the proposals would create a new Product Disclosure Sourcebook as part of the FCA rules. The CP also links to the FCA’s proposed new Consumer Duty, highlighting the importance of communication through disclosure, and aiming to relay the information consumers need, at the right time, presented in a way they can understand. The consultation period closed on 30 September 2021 and the intention is for the consequent rule changes to come into effect on 1 January 2022.

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The ESG focused regulatory round-up

ESG regulatory developments continue within the EU, by the UK Financial Conduct Authority (FCA) and more globally through the International Organisation of Securities Commissions (IOSCO). Despite progress with regulations and standards there is a lack of alignment, and this is giving investment management firms significant headaches.  

We saw the first regulation relating to ESG becoming effective on 10 March 2021 with the adoption of the SFDR. Despite early mover advantage, there remains confusion and concern, in equal measures, about the impending Level 2 measures and their delay by the European Commission (EC). The pioneering regulation aims to provide standardised disclosure rules for sustainable products; however cracks are forming through the delayed regulatory process, regulatory sequencing and globally diverging regulatory initiatives. This was seen in a recent IFPR publication, where ESG was omitted, in order to wait for global consistency.

So, what are the key areas of ESG focus at present?

The SFDR Level 2 delay

In July, the European Commission confirmed a 6-month delay in implementing the Level 2 regulatory technical standards, from 1 January 2022 to 1 July 2022. Essentially, the Level 2 RTS adds the technical detail of how to meet the requirements of the initial Level 1 text, by providing more granular detail on how disclosures should be made.

The delay presents several problems for investment firms that are in scope of SFDR. Aside from sequencing between the EU Taxonomy Regulation, which relies on the implementation of SFDR Level 2, the lack of clarity will leave firms struggling to comply with the requirement to collate data aligned to the mandatory metrics for periodic reporting. As it stands, fund level pre-contractual and periodic reporting is required from 1 January 2022, including data collated in a reference period from 1 January 2022 to 31 December 2022 which should be reported in 2023. With the delay in the RTS, the metrics have not been confirmed and the reference period would need backdating. Investment firms are currently reviewing the draft RTS and establishing if they have the data available to meet the draft metrics.

The FCA consults

The FCA have released CP 21/17, which focuses on the enhancing climate-related financial disclosures for asset managers, life insurers and FCA-regulated pension providers. The consultation closed on 10 September 2021, with finalised requirements expected to be published by the end of 2021. Similarly to SFDR, the UK are proposing periodic entity level and product level disclosures, however the FCA will align with the global Taskforce for Climate Related Disclosures (TCFD), which unfortunately does not directly align with the EU SFDR, meaning further complication.

IOSCO and the principles

Global regulators at the IOSCO are considering the creation of a set of standards, which could then form the backbone of ESG disclosure rules for the global marketplace. One of the issues being explored by IOSCO is whether its own standards would align with or diverge from the product classification thresholds of SFDR, with additional disclosure requirements for sustainability-focused products. Naturally, any divergence will present the industry with additional concerns, especially those with a global footprint.

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What is happening with European Data Templates?

European ESG Template (EET): The EET is currently under development by FinDatEx. The EET is being developed to meet the prudential, distribution and disclosure needs of insurers, pension schemes, banks and distributors. It is likely that the delay in the SFDR RTS will impact the development timeline for the EET, originally scheduled for delivery by 1 January 2022.

European PRIIPs Template (EPT): In May 2021 the FinDatEx PRIIPs working group resumed its activities. Aligned with the newly published PRIIPS RTS, the group are considering updates to the EPT/Comfort European PRIIPs Templates (CEPT) templates.

EMT v3.1: In February 2021, FinDatEx validated v3.1 of the European MiFID Template (EMT) as an interim template to ensure compliance under MiFID II. The changes in v3.1 have been introduced to allow reporting on product classification under SFDR, as well as to support country-specific changes for distribution in Germany and France.

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The UK Consumer Duty 

The FCA has published a Consultation Paper setting out their proposals for a new Consumer Duty, which will set a higher level of consumer protection in retail financial markets. The new Duty seeks to enhance the FCA's existing rules and tackle the harms seen in retail financial services markets, as well as addressing their causes. The Consumer Duty will have three key elements, which firms will need to adhere to:

  1. A new Consumer Principle, reflecting the overall standards of behaviour the FCA expects from firms in retail financial markets. The wording that is being consulted on is: "a firm must act in the best interests of retail clients" or "a firm must act to deliver good outcomes for retail clients."
  2. Cross-cutting rules, setting out three key requirements for firms;
    1. Take all reasonable steps to avoid foreseeable harm to customers.
    2. Take all reasonable steps to enable customers to pursue their financial objectives.
    3. Act in good faith.
  3. A suite of rules and guidance which set more detailed expectations for firm conduct in relation to four specific outcomes: communications, products and services, customer service and price and value.

In one key focus area, the FCA’s proposals state that firms communications are meant to consistently support consumers by enabling them to make informed decisions about financial products and services. This will mean that firms will need to ensure that customers are given the information they need, at the right time, presented in a way they can understand. This outcome primarily focuses on firms’ marketing activities, financial promotions and the pre-sale customer journey, however it is important to note that this outcome is intended to capture all of the firm’s communications with customers.

It is expected that the FCA will publish a second consultation on the text of any new rules by 31 December 2021, with new rules expected to be implemented on 31 July 2022.

As you can see, there continues to be a deluge of regulatory changes and a number of unknowns. It is now more crucial than ever that firms keep abreast of these changes and prepare as early as possible for the future requirements. Broadridge Fund Communication Solutions is actively engaged in industry working groups and forums, ensuring that we are always on the front foot with any changes, which we will of course immediately relay to you, allowing you to have confidence that you will always be adhering to the latest guidelines.

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