Welcome to this regulation roundup from FE fundinfo, I’m Mik Bates.I’m going to give a quick tour of what’s happening in the world of fund regulation, which will do little more than scratch the surface, so please get in touch if you want to go deeper into anything.
Starting with UCITS, since the start of the pandemic, market volatility has increased sharply. During June, funds started to hit their 4-month trigger to republish their KIIDs on the back of a higher SRRI level.
The rule is that if the published SRRI is different from every one calculated over a 4-month period, you need to republish.
Our monitoring tells us that almost half of KIIDs will need to be republished by around the end of July.
Moving onto developments at FinDatEx, the industry group that has developed templates for Solvency II, PRIIPs and MiFID II, they have set up a working group to look at incorporating ESG target market criteria on the European MiFID template, or EMT.
This group is not discussing wider ESG disclosure requirements beyond the EMT, so a European ESG template may or may not come further down the line.
FinDatEx also confirmed that, because of the coronavirus, versions 3 and 4 of the Solvency II template, which were due to be retired at the end of June and replaced by version 5, will remain valid for the time being.
No new deadline has been set, but they are likely to continue to around the end of the year.
There is lots going on in the world of ESG, as everyone knows, but here are some key updates. In June, the EU’s Taxonomy Regulation was passed and is on the statute books.
It sits alongside the ESG Disclosure Regulation and basically requires companies with over 500 staff, and investment funds that invest in them, to disclose the extent of their alignment with at least 1 of 6 environmental objectives, from January 2022, as well as confirming whether they do no significant harm in all of the other objectives.
The European Commission also published some Frequently Asked Questions on the taxonomy and the EU Green Bond Standard.
The FAQs cover how the taxonomy will develop over time, how the disclosures will be enforced and how to report certain issues.
They also raise the possibility of an EU-wide eco-label to help investors identify financial products that are taxonomy-aligned.
The Commission also launched a short consultation, which has just closed, on draft delegated acts to incorporate sustainability risks into UCITS, AIFMD and MiFID II product governance and include sustainability in MiFID II suitability considerations.
Finally, on European regulations, we are still waiting for an update
following the consultation earlier this year into changes to the performance scenarios and cost disclosures on PRIIPs KIDs, which will also affect UCITS funds once they need to produce the same type of KID from the end of next year.
Moving on to the UK, the FCA has extended the deadline for solo-regulated firms to assess the fitness of certified staff from 9 December this year to 31 March next year.
In the world of pensions, the Department for Work and Pensions has issued a call for evidence by 20 August on the question of extending the use of the Cost Transparency Initiative template to DC workplace pensions, which many have resisted on the basis that the template doesn’t work for fund-based schemes.
The call for evidence also asks about the possibility of including transaction costs in the charge cap for default funds. The paper includes sections on “why transaction costs were left out of scope in 2013” and “why including transaction costs in the charge cap remains a challenge”, so that may be a clue to which way they are leaning.
Finally, I couldn’t review the regulatory landscape without including Brexit, as we now have under 6 months to the end of the transition period.
In June, the Chancellor issued a written statement to the House of Commons on the future of financial services regulation in the UK, covering prudential requirements and a review of Solvency II
and he said he was relaxed about the possibility of moving away from the PRIIPs Regulation, ie making changes to the KID.
A policy statement on PRIIPs will be published in July, looking at “potential risks of consumer harm” from the current KIDs.
The FCA published Discussion Paper DP20/2 on the regime it expects to apply to MiFID investment firms in the UK, as they won’t be subject to the EU’s Investment Firm Directive or Regulation when they go live in June 2021.
Responses to the DP can be sent in up to 25 September
and the FCA intends to publish a Consultation Paper before the end of the year.
The UK has signed a co-operation agreement on financial services with Switzerland, which knows all about being located in the midst of the EU but not a member.
There have also been supporters of co-operation agreements with other countries, such as Australia, which may be just as well, as the EU negotiators have not sent out good signals about the chances of an equivalence regime between the EU and the UK.
Finally, City Minister John Glen said that, while the UK is committed to achieving globally consistent standards in sustainable finance, he “cannot comment at this stage on the extent to which we will align with the EU after the implementation period”.
This was interpreted as saying that the government is not committed to aligning with all of the EU’s ESG Taxonomy.
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