With the upheaval caused by the global pandemic, one of the greatest challenges has been scheduling events. Everyone has been impacted by cancellations, rearrangements, or deferrals to one degree or another. Best laid plans have been disrupted at late notice or sometimes with no notice at all. Vacation travel, meals in a restaurant and house calls to family and friends are some of the activities that have been subject to change at short notice. Some regulators have faced a similar fate and have had to delay their own plans.
Regardless of the reasons there have been some key deferrals of regulatory implementations in Europe which have afforded asset managers some welcome respite, at least for the time being. However, it’s important to remember that these have merely been deferred not canceled and as such there remains much preparatory work for each even if asset managers now have a little more time to get ready.
Let’s look at these three crucial regulatory delays in turn:
1. Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs)
On November 23, 2021, the European Parliament voted to formally delay certain requirements for Packaged Retail Investment and Insurance Products (PRIIPs) and UCITS. The changes confirmed that funds already producing a UCITS Key Investor Information Document (KIID) will now have until December 31, 2022 to produce a PRIIPs Key Information Document (KID), and also confirming that a UCITS KIID is no longer required as long as a PRIIPs KID is produced.
The progress of the latest PRIIPs revisions were much anticipated particularly because they were going to include UCITS funds in their latest roll out. The original plan was that UCITS would begin to provide PRIIPs key information documents (KIDs), a template investor disclosure document, from July 1 2022, following the end of a previously agreed exemption period.
However, on November 23, 2021 the European Parliament voted to extend the deadline once more, this time from the intended date of July 1, 2022 until December 31, 2022.1 This “quick fix” amendment has avoided the requirements for trilogue meetings between the EU parliament, EU Commission and EU Council. At the same time, it was confirmed that a UCITS KIID is no longer required so long as a PRIIPs KID is produced to avoid duplicative and confusing information being given to an investor.
The extension was universally welcomed by asset managers owing primarily to the inevitable upheaval which would have resulted from having to transition thousands of existing UCITS KIIDs to the new PRIIPs KID version.
In voting through the further delay, there was once more much commentary about the evident deficiencies of the PRIIPs and MEPs tabled an amendment to the regulation that would allow asset managers to continue to provide professional investors with a UCITS KIID (in the format they do currently) if they wished. The PRIIPs KID has proven to be unpopular with investors and asset managers alike due to primarily the inclusion of future performance scenarios and concerns around the calculation of fund costs particularly transaction costs.
Finally, the European Commission has already begun a wider review of the PRIIPs regulation as part of its Retail Investment Strategy which itself is a cornerstone of the wider Capital Markets Union initiative. This reviews findings are due to be published in Q2 of 2022. If the EU’s goal is to increase retail investor access and understanding of mutual funds, then the PRIIPs KID debate becomes extremely important. The goal should be creation of a template disclosure document that is useful and easily understood by investors, as the current UCITS KIID is.
2. Central Securities Depository Regulation: Settlement Discipline Mandatory Buy In
The Central Securities Depositories Regulation (CSDR) is one of the key regulations adopted in the aftermath of the 2008 Global Financial Crisis and focused on ensuring more efficient settlement of securities in Europe. For some asset managers, it was largely seen as a custodial issue but that’s only partially true. CSDR’s iterative roll out has been in train since 2014 However, the last and most contentious part is the Settlement Discipline Regime (SDR). SDR includes the provision of mandatory buy-ins and cash penalties for failed transactions.
The industry has long advocated for dropping the mandatory buy in (MBI) requirement, or at least deferring it so that it could be reconsidered as drafted in the legislation. The industry argued that MBI’s disruptive impact would lead to higher trading costs and spreads and heightened liquidity risks, which were born out in certain segments of the bond markets in the early stages of the Covid crisis. Following extensive engagement between the industry and public authorities, an agreement was reached in trilogue in November 2021 among the EU co-legislators that MBI should be delayed beyond February 1, 2022. ESMA followed up in December by publishing a recommendation to supervisory authorities not to prioritize MBI (despite taking effect under the legislation): some national supervisors responded with announcements confirming as much.
MBI is expected to be reviewed by the Commission before mid-2022: the industry hopes that any changes – if MBI is retained in some other form – would take effect with sufficient time for the industry to prepare.
3. Sustainable Finance Disclosure Regulation
No discussion on European or indeed global regulation would be complete without mentioning the Sustainable Finance Disclosure Regulation (SFDR). Initially introduced on March 10, 2021, SFDR’s goal is to make disclosure of financial products’ performance on ESG issues compulsory for EU asset managers, to help EU’s broader ambition to meet its emissions reduction targets. Its implementation is a hugely complex undertaking, and we have already seen a delay to the application of the regulatory technical standards (RTS) to July 1, 2022, also not its first deferral. Then in late November, the European Commission confirmed that, due to the “length and technical detail” of the directive, it would delay the application of the RTS six months until January 1, 2023.
The SFDR ‘level two’ obligations require funds to report on 18 mandatory principle adverse impacts statements (PAIS) as well as other voluntary areas of disclosure. While this delay is broadly welcomed, asset managers should know that they still provide disclosures under SFDR, and they are expected to comply with its requirements on a best-efforts basis until then. Asset managers continue to scramble to find solutions to gather all the necessary data to adhere to the very prescriptive and detailed disclosures contained in SFDR and the other ancillary ESG regulations which are cropping up across the global capital markets.