INVESTMENT SERVICES & CAPITAL MARKETS
MiFID/MiFIR
ESMA common supervisory action on MIFID II costs and charges
On 8 February 2022, ESMA launched a common supervisory action (CSA) with national competent authorities (NCAs) on the application of MIFID II costs and charges disclosure rules across the European Union. The CSA will be conducted during 2022.
This action will allow ESMA and the NCAs to assess the application by firms of the MIFID II requirements on costs and charges. The focus of the CSA will be on information provided to retail clients. NCAs, in particular, will review how firms ensure that these disclosures:
- are provided to clients in a timely manner;
- are fair, clear and not misleading;
- are based on accurate data reflecting all explicit and implicit costs and charges; and
- adequately disclose inducements.
ESMA believes this initiative and the related sharing of practices across NCAs, will help ensure consistent implementation and application of EU rules and enhance the protection of investors in line with ESMA’s objectives.
ESMA has published a series of Q&As on this subject, and these will serve as input to this CSA.
European Commission initiative on fees, fines & penalties for data reporting services
On 17 February 2022, the European Commission published an updated initiative under MIFIR on the fines or penalties for data reporting services providers under ESMA supervision. The initiative sets out the administrative procedure that ESMA needs to follow for imposing fines or penalties on the data reporting services providers it supervises.
European Commission consults on enhancement of suitability and appropriateness assessments
On 21 February 2022, the European Commission began consulting on options to enhance suitability and appropriateness assessments. Following the 2020 capital markets union (CMU) action plan, the Commission is preparing a retail investment strategy, which aims to take a holistic view of investor protection rules.
In the answers received to the 2021 public consultation on the Commission’s retail investment strategy, many stakeholders, called to simplify, improve, automate and standardise the way investors’ profiles are currently assessed. Some have also expressed support for more focus on the overall investor portfolio composition rather than on individual products. Respondents also highlighted the need to adjust the different investor assessments to make them better adapted to the online environment, as well as the importance of improving data quality of the suitability and appropriateness assessments. Some also recommended anticipating the evolution of robot-assisted advice or fully automated advice. Finally, some also requested more independence in the suitability assessment process.
Taking stock of these results, the Commission’s Services are currently exploring different ways to improve the suitability and appropriateness regimes to address the above-mentioned issues. The Commission’ services are assessing, inter alia, the idea of whether and how all retail investors, and not only wealth management clients, might benefit from a new suitability assessment that could provide them with more support along their investment journey to better achieve their investment objectives and to enhance their participation in the capital markets.
By means of this targeted consultation, the Commission Services intend to complement the 2021 public consultation exploring the feasibility of a new retail investor-centric assessment to improve the current suitability and appropriateness tests. Not only might such an approach modify the current MIFID suitability and appropriateness tests with the view to no longer differentiate among the various investment services offered to retail investors, but it might rather replace the current “per product” approach with a new element, a personalised asset allocation strategy. The new retail client suitability rules, together with the personalised asset allocation strategy, would represent a personal investment plan intended to help retail investors achieve their defined investment objectives.
The deadline for comment is 21 March 2022.
Foreign exchange
European Central Bank statement of commitment to the FX Global Code
On 15 February 2022, the ECB issued renewed it statement of commitment to the FX Global Code. The Code was updated mid-2021 to keep it relevant and aligned with the ongoing evolution of the foreign exchange market and continues to set the standard for good market practice.
To fully achieve the objective of the Code, the EU central banks also encourage foreign exchange market participants in their jurisdictions to review the updated Code and renew their Statements of Commitment.
Digital finance
The ESAs recommend actions to ensure the European Union’s regulatory and supervisory framework remains fit-for-purpose in the digital age
On 7 February 2022, the European Supervisory Authorities (ESAs: EBA, EIOPA and ESMA) published a joint report in response to the European Commission’s February 2021 Call for Advice on Digital Finance.
The proposals put forward aim at maintaining a high level of consumer protection and addressing risks arising from the transformation of value chains, platformisation and the emergence of new ‘mixed-activity groups’ i.e. groups combining financial and non-financial activities.
The ESAs note that the use of innovative technologies in the European Union financial sector is facilitating changes to value chains, that dependencies on digital platforms are increasing rapidly, and that new mixed-activity groups are emerging. These trends open up a range of opportunities for both EU consumers and financial institutions, but also pose new risks.
Therefore, the ESAs recommend rapid action to ensure that the European Union’s financial services regulatory and supervisory framework remains fit-for-purpose in the digital age.
The ESAs’ proposals include:
- the need for a holistic approach to the regulation and supervision of the financial services value chain
- strengthening consumer protection in a digital context, including through enhanced disclosures, complaints handling mechanisms, mitigants to prevent mis-selling of tied/bundled products, and improved digital and financial literacy
- promoting further convergence in the classification of cross-border services
- promoting further convergence in addressing AML/CFT risks in a digital context
- ensuring effective regulation and supervision of mixed activity groups, including a review of prudential consolidation requirements
- strengthening supervisory resources and cooperation between financial and other relevant authorities, including on a cross-border and multi-disciplinary basis
- the need for the active monitoring of the use of social media in financial services.
FINANCIAL CRIME
Anti-money laundering and countering the financing of terrorism
European Central Bank (ECB) Opinion on a proposal for AML regulations
On 17 February 2022, the Council of the European Union published an opinion of the ECB on a proposal for a regulation establishing the Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLAR), as well as a second opinion of the ECB on a proposal for a directive and a regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
Overall, the ECB welcomes the package of four legislative proposals, including AMLAR, published by the Commission on 20 July 2021, with the aim of strengthening the European Union’s rules concerning anti-money laundering and countering the financing of terrorism.
Delegated Regulation amending list of high-risk third countries published in the Official Journal
On 21 February 2022, Commission Delegated Regulation (EU) 2022/229, which amends Delegated Regulation (EU) 2016/1675 on the list of high-risk third countries with strategic anti-money laundering and countering the financing of terrorism deficiencies under Fourth Money Laundering Directive, was published in the Official Journal.
The Delegated Regulation: (i) adds Burkina Faso, Cayman Islands, Haiti, Jordan, Mali, Morocco, the Philippines, Senegal and South Sudan to the list; and (ii) removes the Bahamas, Botswana, Ghana, Iraq and Mauritius from the list.
The Delegated Regulation will enter into force on 13 March 2022 (20 days after its publication in the Official Journal).
FUND REGULATION
EU investment funds
The European Court of Auditors makes recommendations on improvements to EU investment funds framework
On 21 February 2022, the European Court of Auditors (ECA) published a report on the EU investment funds framework, which sets out a series of recommendations to improve the framework by 2024.
Issues highlighted include:
- despite efforts to develop the single market, almost 70% of the EU funds market is still concentrated in just four Member States: Luxembourg, Ireland, Germany and France;
- while EU actions have enabled a single market for investment funds to be established, notably through the passporting regime, true cross-border activities and benefits for investors remain limited. The legal framework mainly consists of directives, which require Member States to implement national rules leading to significant regulatory differences. Therefore, minor revisions of the legal framework will not be sufficient to achieve a true single market;
- ESMA has strived to promote supervisory convergence, resulting in slightly improved quality of supervision and fewer divergences. However, ESMA cannot measure this progress, and has limited knowledge of whether an equivalent level of supervision is performed across Member States;
- EU actions have increased investor protection. For instance, they enhance transparency for investors, in particular on investment risks, performance and costs. However, investors are still not sufficiently protected from undue costs or against biased advice from financial intermediaries; and
- no inventory of existing practices in Member States to monitor systemic risk has been carried out. ESMA has not carried out supervisory stress tests as required, but has simulated stress based on market data and, therefore, the effective monitoring of systemic risks and risks to investors depends on the availability of suitable data. However, there is no harmonised reporting regime for UCITS, and reporting on AIFs lacks details. So far, ESMA and the European Systemic Risk Board have not fully explored the possibility of using existing data collected by central banks, relying instead on less reliable data from commercial providers.
Money market funds
ESMA final report on guidelines on stress test scenarios under the MMF Regulation
On 15 February 2022, the ESMA published its final report, dated 14 February 2022, on the guidelines on stress test scenarios under Article 28 of the Money Market Funds (MMF) Regulation.
These guidelines are updated at least every year taking into account the latest market developments. The Annex contains the full text of the updated guidelines and the calibration of the scenarios for 2021 (“2021 Guidelines”) – updates are in red in the text of the guidelines.
MMFs and their managers are expected to measure the impact of the common reference stress test scenarios specified in the Guidelines. On the basis of these measurements, they are expected to fill in the reporting template referred to in Article 37 of the MMF Regulation and send the results to NCAs with their quarterly reports required by Article 37.
The new 2021 parameters set out in the updated guidelines included in this final report will have to be used for the purpose of the first period to be reported following the start of the application of the updated guidelines, which is 2 months after the publication of their translations. Until then, managers should use the parameters set in the 2020 Guidelines and report the results accordingly. In addition to the annual review of the Guidelines, ESMA intends to consult stakeholders on the revision of section 4.8 of the guidelines by Q2 2022.
ESMA final report on review of MMF Regulation
On 16 February 2022, ESMA published a final report, dated 14 February 2022, containing its Opinion on the review of the Money Market Fund (MMF) Regulation.
This Opinion, found in Annex I to the report, sets out proposed reforms to the regulatory framework for EU MMFs under the MMF Regulation. The proposals seek to improve the resilience of MMFs by addressing in particular liquidity issues and the threshold effects for constant net asset value (CNAV) MMFs. The proposed reforms result from the lessons learnt from the significant liquidity difficulties faced by MMFs during the initial outbreak of the COVID-19 pandemic in March 2020.
ESMA has sent its Opinion to the Commission and will work closely with it throughout the review of the MMF Regulation. The Guidelines on MMF Stress tests will be further reviewed this year to take in particular into account the interdependencies between the different risk factors under certain market situations (see update below). ESMA will be consulting on this review in 2022 and the outcome will be published by the end of the year.
SUSTAINABLE FINANCE
ESMA sustainable finance roadmap
On 11 February 2022, ESMA published its 2022-24 sustainable finance roadmap.
ESMA identifies three priorities for its sustainable finance work:
- tackling greenwashing and promoting transparency;
- building the National Competent Authorities’ (NCAs) and ESMA’s capacities in the sustainable finance field; and
- monitoring, assessing and analysing ESG markets and risks.
Within each of the three priorities, ESMA also identifies sectors where ESG-related risks and problems are currently perceived as having the highest potential impact on investor protection, orderly markets and financial stability. As well as dealing with cross-sectoral issues, the Sustainable Finance Roadmap will primarily concern the following sectors:
- investment management. This includes contributing to the Commission’s work on minimum sustainability criteria for SFDR Article 8 products, reviewing SFDR RTS, contributing to consistent implementation of new requirements through supervisory convergence actions, and undertaking work on climate change scenario analysis;
- investment services. This includes, among other things, contributing to the consistent implementation of new/existing requirements related to the manufacturing and design of ESG products, information provided on ESG products as well as their marketing and distribution;
- issuers’ disclosure and governance, which comprises, among others, contributing to EU and international sustainability reporting standards;
- benchmarks. Work includes contributing to the Commission’s work on aligning Climate Transition Benchmarks and Paris-Aligned Benchmarks with EU Taxonomy;
- credit ratings and ESG ratings. ESMA will support the Commission in improving reliability and comparability of ESG ratings, and assess how credit rating agencies incorporate ESG factors in their methodologies;
- trading and post-trading. ESMA will undertake work to consider the impact of climate change in central counterparty (CCP) stress testing, build analytical tools for monitoring EU carbon markets, and contribute to the consistent implementation of new requirements; and
- financial innovation. This will include identifying use cases of innovative technologies that could help the transition to a greener economy (‘green FinTech’), and collecting evidence on recent trends and interactions in relation to green FinTech and sandboxes.
ESMA will shortly launch a call for stakeholder candidates to join a new Consultative Working Group supporting ESMA’s Coordination Network on Sustainability. ESMA will keep the Roadmap, including the identified priorities and the sectors of focus, under review during the entire implementation period.
CySEC DEVELOPMENTS
C485 ESMA Guidelines on Settlement Fails Reporting under Article 7 of CSDR data (ESMA70-156-4717)
On 8 February 2022, Circular C485 was issued by CySEC, to inform regulated entities that the European Securities and Markets Authority (ESMA) has published Guidelines on settlement fails reporting under article 7 of CSDR on December 8, 2021. According to Article 7(1) of CSDR for each securities settlement system it operates, a CSD shall establish a system that monitors settlement fails of transactions in financial instruments. These Guidelines apply to national competent authorities (NCAs) and to Central Securities Depositories (CSDs) and aim to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision (ESFS). CySEC adopted these Guidelines by incorporating them into its supervisory practices and regulatory approach. CSDs must take the necessary action in order to ensure their compliance with the Guidelines.
C486 Updated entry into force of Delegated Regulation (EU) 2018/1229 and ESMA Guidelines (ESMA70-151-2906) on standardised procedures and messaging protocols under Article 6(2) of Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories
On 8 February 2022, Circular C486 was issued by CySEC, to remind the Cyprus Investment Firms (CIFs) that following Circular C387, issued on May 21, 2020, CySEC adopted the Guidelines on standardised procedures and messaging protocols under Article 6(2) of Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories by incorporating them into its supervisory practices. CIFs must take the necessary action in order to ensure their compliance with the Delegated Regulation (EU) 2018/1229 as amended, which came into force on 1 February 2022.
C487 Redefining threshold criteria of ‘significant CIF’
On 11 February 2022, Circular C487 was issued by CySEC, to inform Regulated Entities, that the threshold criteria determining which CIFs are considered ‘Significant’ have been redefined so that they reflect the provisions of the Investment Services and Activities and Regulated Markets Law (L.87(I)/2017) (the Investment Services Law), as amended considering the new framework for investment firms (IFR/IFD). Specifically, the Circular clarifies that a CIF shall be considered as a ‘significant CIF’ for the purposes of the Investment Services Law when its on and off-balance sheet assets are on average greater than EUR 100 million over the four‐year period (or for the periods available if in business for less than four years) immediately preceding the given financial year. If a CIF meets the threshold criteria it should, within four months from the end of each of their financial year, take all necessary steps to comply with the requirements of the relevant laws as well as to inform CySEC accordingly and submit its new organisational structure through CySEC’s portal. Circular C487 repeals and replaces circular C228 issued by CySEC in July 2017.
C488 Procedures for the receipt of reports of infringement of Regulation (EU) No 596/2014 on market abuse
On 17 February 2022, Circular C488 was issued by CySEC, to inform persons wishing to report actual or potential infringement, about the updated procedures regarding the receipt of infringement reports on market abuse pursuant to article 32 of the Regulation (EU) No 596/2014. The Circular provides information on the submission of the infringement reports, which may be done orally (telephone lines/ physical meeting) or in writing, through the Whistleblowing External Disclosure Form (the Form) and explains the procedure that CySEC will follow after the receipt of an inquiry.
The Circular also clarifies that infringement reports may be submitted either by name or anonymously. In addition, through the Circular, CySEC notifies the reporting persons that their confidential information may need to be disclosed under specific circumstances such as in the context of a civil or criminal or other legal proceeding or in the context of arbitration or out of court settlement, where CySEC is requested to provide evidence or give testimony or during the provision of statements in criminal or disciplinary proceedings; and/or in the context that CySEC lodges complaints to any other competent authorities, associations, organizations or bodies in the Republic or abroad.
C489 EU Council’s Restrictive Measures and other sanctions against Russia in response to the crisis in Ukraine
On 17 February 2022, Circular C488 was issued by CySEC, to remind all Regulated Entities of their obligation to implement all relevant restrictive measures imposed by the Council of the European Union (EU) and competent organisations as part of the targeted restrictive measures against Russia in response to the crisis in Ukraine. CySEC expects all Regulated Entities to take the following actions
- follow the notifications outlined in the Section entitled ‘Sanctions/Restrictive Measures’ on CySEC’s website (https://www.cysec.gov.cy/en-GB/legislation/SANCTIONS/) and ensure that the Sanctions/Restrictive Measures contained therein are implemented;
- assess or reassess money laundering and financing of terrorism risks in all business relationships with persons subject to Sanctions/Restrictive Measures;
- avoid the commencement of any business relationship with persons subject to Sanctions/Restrictive Measures; and
- in the case of a person that is an existing customer/business relationship and is subject to Sanctions/Restrictive Measures, Regulated Entities must thoroughly examine the actions/measures that must be implemented, in accordance with the relevant EU Council’s Decisions and Regulations. According to the Circular, Regulated Entities must implement the aforementioned Restrictive Measures that are legally binding in their entirety for EU Member States and their citizens, with direct and immediate effect.
CySEC expects Cyprus Investment Firms (CIFs) to assess the risks arising from the targeted restrictive measures and where these significantly affect their operations, their capital adequacy and/or the funds they hold, either on their own or on behalf of their customers, to inform CySEC about the measures that have been taken to address the risks The CIFs are reminded of their obligation to assess risks on a continuous basis within the framework of the Internal Capital and Risk Assessment (ICARA).
C490 Financial impact, risks and uncertainties due to the crisis in Ukraine
On 17 February 2022, Circular C490 was issued by CySEC, to inform Issuers whose securities are admitted to trading on the regulated market or on the Emerging Companies Market of the Cyprus Stock Exchange concerning their obligation to inform the public as soon as possible of inside information which directly concerns them. CySEC expects that all Issuers will assess the financial impact, as well as any risks and uncertainties that may arise from the crisis in Ukraine on their businesses/operations and make a relevant announcement as soon as possible.