February 2023 Regulatory roundup

ESAs identify good practices for financial education initiatives on scams, fraud and cyber security

On 12 January 2023, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published a joint thematic Report on national financial education initiatives on digitalisation, with a focus on cybersecurity, scams, and fraud.

The Report identifies good practices that national competent authorities and other public entities can follow when designing and implementing their financial education initiatives.

Members of the European Parliament (MEPs) adopt rules to facilitate investigations into financial crime

On 12 January 2023, as part of the EU’s push to combat financial crime, MEPs adopted new rules facilitating access to centralised bank registries. The new proposal endorsed by the European Parliament’s Committee on Civil Liberties, Justice and Home Affairs has adopted its report on the proposed Directive amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the single access point.

It mandates EU Member States to ensure that the information from centralised registries is available through a single access point to be developed and operated by the European Commission. This would ensure more effective investigations into illicit finance by making it easier to retrieve data from centralised bank registries created by the fifth anti-money laundering directive. This way, competent authorities can quickly establish if an individual holds accounts in several EU countries without multiple time-consuming queries.

MEPs emphasise the importance of respecting an individual’s right to privacy, and the principle of data minimisation. They also highlight the need to gather bank account information proportionally to the needs of a specific ongoing investigation and emphasise that searches in the centralised bank registries should only be allowed in cases where the authorities would be allowed to conduct a similar search in national registries.

Next, the full house of the European Parliament will be asked to endorse the mandate for negotiations.

UCITS

ESMA updates Q&As on application of UCITS

On 3 February 2023, ESMA updated its Q&As on the application of the UCITS. There is an updated question on issuer concentration.

AIFs and UCITS

Costs of retail investment products continue slow decline

On 17 January 2023, ESMA published its fifth annual report on the costs and performance of European Union (EU) retail investment products.

In the report ESMA looks at the market between 2012 and 2021 and finds that the costs of investing in the most important retail financial products continued to decline, albeit at a very slow pace.

The key findings in the report are:

• Costs: Costs have declined somewhat, but investors should continue to consider fund fees carefully in their investment decisions. Active UCITS remained more expensive than passive funds and ETFs, such that their net performance was on average lower in comparison. Costs were higher for cross-border funds than those for domestic funds, mainly due to differences in distribution channels.
• Investment value and value-for-money Investors paid around 3,000€ in costs for an investment of 10,000€ over the ten years between 2012 and 2021. This led to a final net value of 18,500€ at the end of this period. Beyond performance and costs, the overall utility that investors can derive from investment products, i.e. their value-for-money, is gaining growing attention. Cost efficiency, as well as product design and quality, determine final investor outcomes.
• Inflation: After more than a decade of low inflation, the recent rise in price levels has started to weigh on investor returns. In addition to the average 3,000€ fund fees paid for a ten-year 10,000€ investment, investors typically lose 2,000€ due to inflation, reducing the net value of that investment to 16,500€. Inflation differences across Member States, measured at the level of the fund domicile, add to the persistent and high differences in fund costs across the EU.
• ESG: While equity, bond and mixed ESG funds outperformed on average their non-ESG equivalents in 2021, results differ across asset classes. In 2021, equity and mixed ESG funds outperformed their non-ESG peers but the performance of ESG bond funds was lower than the performance of non-ESG bond funds. ESG funds remained cheaper than their non-ESG peers, with the exception of equity ESG ETFs which are more expensive compared to non-ESG equity ETFs.
• Structured Retail Products: Total costs were largely attributable to entry costs and varied substantially by country and by pay-off type. Costs of products issued in 2021 increased for a majority of payoff types and issuers compared to products issued in the previous three years.

Cost and performance of retail investment products are key determinants of the benefits and risks for retail investors in the EU. Clear and comprehensive information on retail investment products can help investors assess the past performance and costs of products offered across the EU and foster retail investor participation in capital markets.

ESMA’s report helps to monitor progress in this regard by providing consistent EU-wide information on cost and performance of retail investment products. It also demonstrates the relevance of disclosure of costs to investors, as required by the MIFID II, UCITS and PRIIPs rules and the need for asset managers and investment firms to act in the best interest of investors especially considering their role in manufacturing and distributing investment products.

ECON adopts draft reports on proposed Directive amending AIFMD and UCITS Directive

On 24 January 2023, the European Economic and Monetary Affairs Committee (ECON) (a committee of the European Parliament) published a document (page 8) recording that it has voted to adopt draft reports on the proposed Directive amending AIFMD and the UCITS Directive relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by AIFs.

Money market funds

ESMA Guidelines on stress test scenarios under the MMF Regulation

On 27 January 2023, ESMA published the official translations of updated guidelines on stress test scenarios under the Money Market Fund (MMF) Regulation. These guidelines apply to competent authorities, MMFs and managers of MMFs as defined in the MMF Regulation. They relate to Article 28 of the MMF Regulation and establish common reference parameters for the stress test scenarios to be included in the stress tests conducted by MMFs or managers of MMFs.

The updated guidelines apply from 27 March 2023, two months after their publication. All other parts of the Guidelines already apply from the dates specified in Articles 44 and 47 of the MMF Regulation.

ESMA consults on the review of the methodology on stress test scenarios for Money Market Funds

On 31 January 2023, ESMA launched a consultation on the review of the methodology included in the Guidelines on stress test scenarios under the MMF Regulation.

In light of recent market developments and the COVID-19 related stress of March 2020, the proposed revision of the scenarios relates to the hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF and the hypothetical macro systemic shocks affecting the economy as a whole.

This Consultation Paper (CP) focuses on the following changes to the current methodology:

• the proposed revision of the liquidity scenario aims to better take into account the interaction between liquidity and redemption pressures, in light of the stress event experienced in March 2020; and
• the proposed revision of the macro scenario intends to better capture the macroprudential impact of the scenario, by including assumptions on the underlying markets and other market participants.

Finally, the CP also presents ESMA’s considerations on a potential climate risk scenario, seeking stakeholders’ feedback on this point.

The consultation closed on 28 April 2023. ESMA will then assess responses with the aim of finalising the Final Report by Q4 2023. The final guidelines on MMF stress tests will also include the calibration of the 2023 stress testing scenario for implementation.

European Long-Term Investment Funds (ELTIFs)

European Parliament to consider amendments to ELTIF Regulation

On 12 January 2023, the European Parliament updated its procedure file on the proposed Regulation amending the European Long-Term Investment Funds (ELTIF) Regulation to indicate that it intends to consider the proposed Regulation during its plenary session on 13 February. The procedure file previously indicated that the European Parliament intended to consider the proposed Regulation on 1-2 February 2023.

PRIIPs

Corrigendum to PRIIPs Delegated Regulation

On 12 January 2023, a Corrigendum to Delegated Regulation (EU) 2021/2268 amending the RTS laid down in Delegated Regulation (EU) 2017/653 as regards the underpinning methodology and presentation of performance scenarios, the presentation of costs and the methodology for the calculation of summary cost indicators, the presentation and content of information on past performance and the presentation of costs by packaged retail and insurance-based investment products (PRIIPs) offering a range of options for investment and alignment of the transitional arrangement for PRIIP manufacturers offering units of funds referred to in Article 32 the PRIIPs Regulation as underlying investment options with the prolonged transitional arrangement laid down in that Article, was published in the Official Journal.

The Corrigendum amends the wording of the title that previously omitted part of the reference number.

ESMA issues its first opinion on the draft European Sustainability Reporting Standards

On 26 January 2023, ESMA issued an opinion on the first set of draft European Sustainability Reporting Standards (ESRS Set 1) developed by the European Financial Reporting Advisory Group (EFRAG).

ESMA finds that ESRS Set 1 broadly meets the objective of being conducive to investor protection and of not undermining financial stability.

To bring Set 1 from broadly capable to fully capable of meeting that objective, ESMA advises the European Commission to address selected technical issues set out in the opinion. Most notably, these issues relate to possible improvements of the level of consistency vis-à-vis the requirements of the Corporate Sustainability Reporting Directive and other pieces of EU legislation, important clarifications of definitions and terminology and further guidance on the materiality assessment process. The European Commission will consider ESMA’s technical input as it finalises ESRS Set 1 and adopts it into delegated acts.

The Commission will now consider ESMA’s opinion alongside opinions submitted by the EBA, EIOPA and other public bodies and adopt ESRS Set 1 into delegated acts by 30 June 2023.