When it comes to EU financial regulation it won’t surprise anyone to hear that more is in store for the year ahead. Investment Officer looks ahead together with Vincent Ingham, director of regulatory policy at the European Fund and Asset Management Association in Brussels.
The Alternative Investment Fund Management Directive and Ucits regulation are being reviewed, as is the second Markets In Financial Instruments Directive, known as Mifid 2. Before Easter, the European Commission is due to present its retail investment strategy. And more building blocks for the EU’s sustainable finance framework are being put in place.
The coming months, Ingham said, will be particularly important because in 2024 voters in the EU’s 27 member states will choose a new European Parliament, and with that comes a new European Commission.
“The window of opportunity to complete ongoing legislative debates and to table new pieces of regulations is certainly closing in the next few months,” Ingham said.
As priority for the investment sector, he singled out the AIFMD and Ucits review. The European Parliament’s Economic Affairs Committee is due to vote on the review next week. That vote will then open the doors for trilogue, direct negotiations among the EU’s three co-legislators: the European parliament, the Commission and the Council, in which member states are directly represented.
AIFMD, Ucits ‘fit for purpose’
In general terms, Ingham said the EC views AIFMD and Ucits as “fit for purpose”. A number of targeted changes are being proposed. Worth noting in the Luxembourg context is that the review, once approved, makes it possible to use liquidity management tools for Ucits funds that face liquidity issues, such as funds that were invested in Russia when it invaded Ukraine last year.
Using liquidity tools such as side pockets was not possible in all Member States when Russia invaded Ukraine last year. A national solution in Luxembourg, developed jointly by CSSF and Alfi, provided inspiration for an update in EU regulation and will be available across the EU once the AIFMD review is approved. Ingham said the integration in the AIFMD review of a wide range of liquidity management tools is a welcome addition that will enhance an already resilient industry.
The AIFMD review will also increase transparency around delegation and outsourcing of services, preserving the ability for asset managers to access the best expertise available “wherever it may be located.” A discussion is still expected on loan originating funds, Ingham said, adding that the introduction of product rules for those funds “is an area of concern for the asset management industry”.
Loan origination
“We see no evidence for why product-specific rules are needed for loan funds, which currently operate in various EU countries without issues”, he said, adding that EFAMA “encourages the co-legislators to thoroughly scrutinise the rationale behind these rules” in order not to hinder the development of loan originating funds, which can play a very useful role in the transition towards a greener, more sustainable economic matter.”
Retail investment strategy
Come early April, the European Commission is due to present its long-awaited Retail Investment Strategy, which marks specific topics the EU needs to address during the coming years. The strategy is part of the EU’s Capital Markets Union, the plan to encourage market finance in Europe’s economy first launched in 2015.
“A striking observation in this context is that the European Union has one of the highest savings rates in the world, but comparatively low investment rate when it comes to retail participation in capital markets,” Ingham said. “This is bad, first and foremost for investors, particularly in this context of high inflation and pressure on public pension systems. Individuals cannot afford to let their savings sit on deposit accounts with pretty low returns at a time of high inflation. The European Commission is well aware of the importance of making progress in this context.”
An EU-wide ban on inducements that asset managers provide to investment advisors who distribute their funds could be one of the elements that the European Commission wants to propose. Ingham however, referring to the importance of professional advice, said Efama pleads for the continued co-existence of commission-based and fee-based models.
Advice gap
“Experience in the UK shows that a ban on inducements translates into an advice gap for the less affluent part of the population,” he said. “And if they don’t receive advice, it’s most likely retail citizens will not invest. They will keep their monies on their bank accounts because they often tend to be risk averse.”
When it comes to sustainable finance, the main building blocks of the EU framework have already been put in place. The last block was the entry into force of the Level 2 technical standards for the Sustainable Finance Disclosure Regulation.
Ingham said the industry still faces two major challenges. First, a lack of comparable and reliable data from companies that funds can invest in. Data availability is expected to improve over the coming years as the Corporate Sustainability Reporting Directive kicks into force between 2025 and 2029.
Secondly, there is the absence of a clear definition on what constitutes a sustainable investment. “This absence of clear definitions in turn creates greenwashing risks and associated reputational risks for the asset management industry,” Ingham said. “So one of our hopes for 2023 is that the relevant European institutions, so essentially the European Commission, will clarify those notions and, hence, reduce legal uncertainty.”