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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.

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EU and UK PRIIPs

Towards the end of 2021, we finally saw confirmation of an implementation date for the level 2 RTS. This means that EU UCITS and some other Alternative Investment Funds will no longer have an exemption and will be required to produce a PRIIPs KID document from 1 January 2023. It feels like for the first time in the past few years that asset managers will be able to plan with certainty for the implementation of these documents.

Firms must now ensure active engagement with their KIID and KID supplier to ensure the information required to populate these new templates is available. Despite the implementation timeline of 1 January 2023, now is the time to plan and begin the transitional programmes – as we all well know, implementation will not be just a quick flick of the switch!

It is rare to mention PRIIPs without a distinct undertone of frustration and this time the frustration is that the focus is not on the elements of the document itself but rather towards ‘a sensible timing’. Back in 2020 the European Commission (EC) launched a consultation on EU retail investment strategy, which closed in August 2021. The results may lead to a change in the way that the PRIIPs KID is structured and used although at a time when certain products will already have begun to use the document for the first time, meaning further disruption.

Although we were expecting to see the final RTS for UK PRIIPs before the end of last year for a very ambitious implementation in January 2022, earlier in November the FCA stated that the rules will emerge instead in Q1 2022, with an undefined implementation date after this. This statement was comprehensively well received within the industry, including by the Association of Investment Companies. Another delay is a good thing, argue many, it’s important to get the PRIIPs rules right. That said, there is still uncertainty and even without an implementation date it is still sensible to interpret the initial proposals, assess their impact, and work out how to adapt – or outsource – to meet them.

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More to the European ESG Template (EET) than meets the eye?

As with most significant information exchanges between product manufacturer and distributors, the industry has sought to make this newcomer template as simple and standardised as possible. In similar form to the European MiFID Template (EMT) and the European PRIIPs Template (EPT), we will soon be seeing the ESG incarnation – the EET.

Like its close friends the EMT and EPT, there will be a very familiar feel in terms of initial product information and the way it is populated. Where it differs is in the massive number of fields to be populated (currently over 600), the limited data at the portfolio level and the timeline for having this in place. The template was made publicly available from Friday 4th February and will undergo a public consultation throughout February and March. At that stage however, it is expected that only a sub-set of data would be able to be provided by the asset managers.

So why is the EET such a big deal? The EC adopted Delegated Acts makes key changes to MiFID II, UCITS and AIFMD rules to transform the EU’s economy to become more sustainable and carbon neutral by 2050.

The key changes will focus on clients’ sustainability preferences, placing a new obligation on those providing investment advice to identify client ESG preferences and manage client portfolios accordingly. In addition to the changes to suitability assessments, there will be changes to firms’ product governance, risk management and requirement for resource experience to meet the changes.

The effective date is August 2022. Put bluntly, if asset managers are unable to provide an EET in August 2022, there may be an impact to sales and marketing and we may see products not being considered for selection by wholesale distributors when they are conducting suitability assessments on their clients.

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Broadridge FCS NEW EET reporting solution – coming soon!

We are delighted to introduce Jonathan Halsall, new Product Manager at Broadridge Fund Communication Solutions who will be covering our regulatory reporting offerings.  Notably he will be taking on responsibility for our growing Environmental, Social and Governance (ESG) products. He comes to Broadridge with over 10 years of experience working with top tier banks and buy-side entities helping them meet their regulatory reporting obligations for their Over-The-Counter (OTC) Derivatives across the Americas, Europe as well as APAC.

One of his first responsibilities will be to launch Broadridge’s EET service. FCS sits at the centre of the fund industry and will continue to support both Asset Managers and their distribution channels.  The service will include the production and distribution of EETs as well as the collection and onward distribution of pre-prepared templates.

The aim of this new EET is to enable manufacturers utilising underlying funds to fulfil their own Sustainable Finance Disclosure Regulation (SFDR) reporting requirements by allowing for an exchange of machine readable quantifiable ESG data. In addition to this, it also allows for distributers, intermediaries and insurers to fulfil their own requirements under SFDR.

The draft version of the EET consists of a total of 620 data points, though this may seem like a large number, it is important to note that only a very limited number of these will be mandatory upon the initial launch of this new template.

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Broadridge FCS EET Working Groups

To assist firms that are looking to utilise the related services, Broadridge FCS are running regular working groups to engage with the industry, which will allow firms to learn more about the services on offer as well as to have input on design decisions. If you wish to be included in the working groups going forward, please contact jonathan.halsall@broadridge.com.

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The UK taking centre stage?

Unsurprisingly in the post-Brexit climate, there is a conscious push from the UK government to strengthen its own global ESG position, both within financial services and as a “green” role model for the rest of the world. COP 26 was a great example of this. The UK’s “Greening Finance: A Roadmap To Sustainable Investing” (the “Roadmap”) was published in late October 2021 and it progresses the UK ESG position by outlining the steps the government will be taking over the next few years. The aim is to make the UK the best place in the world for green and sustainable investment.

The roadmap covers four areas: disclosures and the circulation of information; a new taxonomy; the importance of stewardship and the UK’s global presence. It has been well received and provides a clear sequence, showing that the UK is trying to build on the lessons learned from the implementation of the EU Sustainable Finance Disclosure Regulation (SFDR). The FCA acknowledged the current data gap, stating that to close this gap UK-registered companies will eventually have to make the relevant disclosures to meet requirements comparable to their EU counterparts.

November 2021 also saw the publication of FCA DP 21/4 Sustainable Disclosure Requirements (SDR) and investment labels. This builds on many of the same themes and discusses how the taxonomy system may work.

The UK proposal covers five product labels:

  • Sustainable Impact - with an objective of delivering net positive social and/or environmental impact alongside a financial return. (SFDR Article 9 aligned)
  • Sustainable Aligned - has sustainable characteristics, themes or objectives and a high proportion of underlying assets (measured according to a minimum threshold) that meet the sustainability criteria in the UK Taxonomy (or that are established as verifiably sustainable where a taxonomy is not yet available). (SFDR Article 9 aligned)
  • Sustainable Transitioning - contains sustainable characteristics, themes, or objectives, but which do not yet have a high proportion of underlying assets meeting the sustainability criteria set out in the UK Taxonomy (or that are established as verifiably sustainable where a taxonomy is not yet available). In recognition of the important role in facilitating transition through active targeted investor stewardship, these products will pursue strategies that aim to influence underlying assets towards meeting sustainability criteria over time. (SFDR Article 8 aligned)
  • Responsible - considers the impact of material sustainability factors on financial risk and return, to better manage both risks and opportunities and deliver long-term, sustainable returns, but no specific sustainability goals. (SFDR Article 8 aligned)
  • Not promoted as sustainable - where sustainability risks have not been integrated into investment decisions and the product has no specific sustainability goals. (SFDR Article 6 aligned)

The benefit of using broader labels than those used by EU SFDR has been welcomed by the industry, as there has been apprehension at the SFDR Article 8 category thresholds. Despite this, firms that distribute products cross-border are concerned about the impact to distribution. Such firms will need to meet two different regimes and explain the differences to their clients.

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EU SFDR Level 2 RTS – where are we now?

We are beginning to see a theme with Level 2 RTS delays from the European Commission, and EU SFDR is no exception. The end of November saw a further six-month delay to the key European regulation, with the Level 2 RTS now effective on 1 January 2023. However this is not a cue for firms to rest, there is still a significant volume of work to be undertaken prior to the 1 January 2023. So what should the key focus be for the immediate future?

  • 1 January 2022 was a key date for SFDR – this is when the first reference period started. This means that firms must be collecting data relating to the Principle Adverse Impact Indicators from 1 January 2022 to 31 December 2022, so that firms can report on these indicators from June 2023.
  • 1 January 2022 was also the beginning of a reporting requirement for the EU Taxonomy. Preparation should have been commenced as significantly more detailed reporting aligned to SFDR implementation is required at the beginning of 2023.
  • In February 2022 a final draft of the bundled EU SFDR and Taxonomy standards are expected. This will require further detailed analysis, which would be best started sooner rather than later.

Broadridge Fund Communication Solutions has been actively supporting clients with their regulatory reporting for decades as they navigate through the developments in a constantly changing regulatory landscape. We are actively engaged in industry working groups and forums and are here to help clients to remain up to date and to guide them as the investment industry prepare to comply.

To register your interest in EET Working Groups please send us an email by clicking below.

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