Asset management quarterly - Europe

Developments and market trends in Europe

Publication December 2016


Quarterly update

Author Richard Sheen

It would be true to say that this has been an "interesting" year for the funds management industry in the UK and Europe as a whole.

New fund IPOs on public markets have been few and far between. Civitas Social Housing, a REIT focussed on social housing, raised an impressive £350 million on its market debut. Earlier this month, BB Healthcare Trust raised £150 million on its IPO, but there have not been many new issuers seeking to float and a number of deals have been shelved or delayed.

That said, equity markets have generally been more resilient than expected against the backdrop of the Brexit vote in June and the recent US election results. We have seen relatively strong demand for secondary fundraisings with the year seeing substantive issues for well over thirty listed funds, including Starwood European Real Estate, 3i Infrastructure, John Laing Infrastructure, Bluefield Solar, The Renewable Infrastructure Group, Amedeo Air Four Plus, Next Energy Solar Fund and Greencoat UK Wind.

The majority of the secondaries continue to support the trend that investors are most interested in achieving a pre-determined level of yield. This has very much been the key theme of the closed-ended listed market for several years now.

Evidence suggests that fund managers are continuing to assess the likely impact of Brexit on their product manufacturing and distribution models with some planning for the "worst case" scenario. It was recently reported that Central Bank of Ireland has seen an increase in the number of authorisation enquiries and applications from UK firms preparing for the possibility of the loss of passporting rights.

Managers are also assessing what sort of solution could be afforded by post-Brexit UK regulatory equivalence in the absence of single market membership and, also, the extent to which UK asset managers will be able to delegate key activities back to their UK operations. Regarding the question of regulatory equivalence as a solution, this would require that UK regulation keeps more or less in step with that in the EU, which is something that may be difficult going forward or for the FCA to live with - its recent interim report on its investigation of the asset management industry, which identifies what it considers to be weak price competition among active asset managers, suggests that the FCA is keen to remain a very much independent regulator with a focus on the particular market dynamics of the UK industry. We cover this interim report in more detail in an article by Simon Lovegrove.

In terms of consolidation, it seems that further deals or ties ups are expected including potential transatlantic deals in the vein of Henderson Global Investors and Janus Capital. In Europe, Amundi entered into exclusive talks with UniCredit to acquire Pioneer Investments. We would not be surprised to see further deals announced in the new year. Fee pressures (both client driven and as a result of any future action originating from the FCA's interim report) will see even greater emphasis on the achievement of economies of scale and could lead to an acceleration in M&A activity. Asset managers are still considered to be good acquisitions for financial investors given their relatively robust financials and low capital requirements.

Looking ahead to 2017, in addition to the Brexit uncertainties and current and prospective European political developments and uncertainties, the macro economic environment will continue to present many challenges for fund managers. More visibility on the likely shape of Brexit planning by asset managers may be achieved as we go throughout the year and some changes in business models and further market consolidation may become apparent. Fund managers seeking to launch new funds or raise secondary money are keeping their fingers crossed that the markets remain open and receptive.

The final Autumn Statement

Author Andrew Roycroft

Although the Autumn Statement was perhaps most notable for the very limited number of new tax changes which were announced, there were some of interest to the asset management sector.

In delivering his first fiscal event, the UK’s new Chancellor Philip Hammond announced it would be his last. That did not signal his departure from the role, but rather that the Budget will be delivered in the Autumn in future years.  There will no longer be a Spring Budget, with a much reduced statement taking its place.

Although the Autumn Statement was perhaps most notable for the very limited number of new tax changes which were announced, there were some of interest to the asset management sector, and many of the proposals which had previously been consulted on will proceed; some of these (particularly the limit on the use of carried forward tax losses and the new cap on corporation tax relief for interest expense) could be significant for investee companies which are managed. Potentially more welcome news is that the UK’s participation exemption (substantial shareholding exemption) from corporation tax on the sale of trading companies/sub-groups is to be relaxed, by removing the requirement that the seller be part of a trading group (a requirement which can be difficult to confirm).  Other proposals, such as the penalties for ‘enablers’ of defeated tax avoidance schemes, have been modified to address concerns expressed to the Government.

In terms of new developments, much of this increases the tax burden of employing staff. The Government is lowering the threshold for employers’ national insurance contributions, to align it with the (lower) threshold for employees’ national insurance contributions.  This is in addition to removing the PAYE/NICs benefits of salary sacrifice (with certain notable exceptions, such as pensions, and a transitional period for others – school fees, cars and living accommodation provided under existing arrangements) and, from 2018, restrictions on the tax exemptions for termination payments.

The tax reliefs for “employee shareholder shares” (shares worth between £2,000 and £50,000, awarded in return for giving up certain employment rights) are to be removed, but not retrospectively. As such arrangements have been used for executives, there has been concern that it was not achieving its original objective.  The previous Chancellor responded by limiting the capital gains tax exemption to £100,000 but Chancellor Hammond has gone further by removing it entirely for shares issued after 1 December 2016.  However, those who received their employee shareholder shares before then will continue to qualify for the tax exemption, even if they dispose of the shares in the future.

There were several announcements specific to certain types of fund, including a denial of the income tax relief for performance fees incurred by offshore reporting funds (instead, those fees will be taken into account in the capital gains tax payable when an interest in the fund is disposed of). A more positive development is the announcement that tax-exempt investors in alternative investment funds (AIFs) (such as pension funds) will qualify for tax credits in respect of distributions paid to them by the AIF; the tax credit will be for income tax paid by the AIF in respect of its income.  This is described as modernisation, and draft legislation is expected in early 2017.  Following a consultation earlier this year, the Government also announced changes to clarify the entitlement to capital allowances, and certain other aspects of the tax treatment of, investors in co-ownership authorised contractual schemes (ACSs) in offshore funds

The property sector is subject to yet more change, with a consultation on changing the basis on which all non-resident companies are subject to UK tax on their UK income – moving from income tax to corporation tax might result in a lower tax rate, but also brings them within the scope of the cap on relief for interest expense. This will be particularly significant for investors which are highly geared.

FCA Asset Management Market Study

Author Simon Lovegrove

On November 18, 2016 the FCA published its much anticipated interim report on its asset management market study. The FCA’s main finding was that the evidence it had collated suggested that there was weak price competition in a number of areas of the asset management industry.


In the FCA’s Business Plan 2015/16 the regulator announced its intention to undertake a market study into the asset management market. The aim of the market study would be to understand whether competition was working effectively to enable both institutional and retail investors to get value for money when purchasing asset management services. The announcement in the Business Plan followed the FCA’s wholesale sector competition review where questions had been raised about the asset management value chain.

In November 2015 the FCA published its terms of reference for its market study into the asset management market. To allow the FCA to understand how asset managers compete on value, the market study would focus on the following questions:

  • How do asset managers compete to deliver value?
  • Are asset managers willing and able to control costs and quality along the value chain?
  • How do investment consultants affect competition for institutional asset management?
  • How do investors choose between asset managers?
  • How does the current market structure affect competition between asset managers?
  • How do charges and costs differ along the value chain?
  • Are there barriers to innovation and technological advances?

The deadline for comment on the FCA’s terms of reference was 18 December 2015. Following this date the FCA began work on its market study.

Meeting investors’ expectations

An indication as to the FCA’s views on the market were brought to light in April 2016 when the regulator published a reminder to asset managers regarding the importance of meeting investors’ expectations. The FCA had considered whether UK authorised investment funds and segregated mandates were operating in line with investors’ expectations as set by marketing and disclosure material, and investment mandates. The assessment was made against FCA rules and did not focus on fund performance. In the sample of funds reviewed the FCA found that some were not providing a clear enough explanation of how they were managed. The FCA gave the example that some had failed to disclose a constrained investment strategy and one included jargon that ordinary investors were unlikely to understand.

The FCA reminded asset managers that they must have appropriate oversight to ensure that the fund is being managed in accordance with the stated investment policy. The FCA also reminded asset managers that they have a responsibility to ensure that their funds are sold appropriately through third parties. The FCA gave as an example two funds that were available on execution-only platforms despite the asset manager having planned for them to be available only with advice.

All asset managers were asked to consider these matters and review their arrangements.

FCA interim report delayed

When the FCA’s terms of reference were finalised the regulator stated that it would produce an interim report during the summer of 2016. However, in August the regulator announced that the interim report would be delayed until Q4 2016. Some in the media speculated that the delay was due to the regulator’s investigation into absolute return funds which had proven to be popular with investors despite having posted negative returns in 2016. This, it was said, had led to concerns about how the funds were being marketed to investors.

The interim report published

The FCA’s interim report was published on 18 November 2016.

The FCA’s main finding was that the evidence it had collated suggested that there was weak price competition in a number of areas of the asset management industry. This had a material impact on the investment returns of investors through their payments for asset management services.

FCA findings

Competition between asset managers

  • Mainstream actively managed fund charges have stayed broadly the same for the last 10 years whilst charges for passive funds have fallen over the last 5 years.

  • There has been considerable price clustering for active equity funds, with many funds priced at 1% and 0.75% particularly once assets under management are greater than around £100m. The FCA reports that “this is consistent with firms’ reluctance to undercut each other by offering lower charges.” The FCA also notes that as fund size increases, price does not fall, suggesting the economies of scale are captured by the fund manager rather than being passed onto investors in these funds.

  • Cost control was mixed with asset managers tending to be good at managing charges which are straightforward and inexpensive to control (for example negotiating fees down for services such as safekeeping of assets and other ancillary services) but less good where it is more expensive to monitor value for money, such as how well executed trades and foreign exchange transactions are. Fund governance bodies were also not exerting significant pricing pressure by scrutinising asset managers’ own costs.

Investor outcomes

  • Actively managed funds do not outperform their benchmark after costs.
  • Funds which are available to retail investors underperform their benchmarks after costs while products available to pension schemes and other institutional investors achieve returns that are not significantly above the benchmark.
  • There is no clear relationship between price and performance – the most expensive funds do not appear to perform better than other funds before or after costs.

Transparency and clarity of objectives and investment outcomes

  • There had been some progress made on transparency of charges including the introduction of the Ongoing Charges Figure, the current FCA consultation to introduce a standardised methodology to calculate transaction cost for defined contribution workplace pensions and work to unbundle research and dealing commission.
  • Ancillary services bought by managers, such as administration and services to safeguard assets, were usually clear to investors but some investors were not given information on transaction costs in advance meaning that they cannot take the full cost of investing into account before making their initial investment decision.
  • Some fund managers do not adequately explain their fund’s investment strategy and charges.
  • Many absolute return funds do not report their performance against the relevant returns target. Also, some charge a performance fee when returns are lower than the performance objective the fund is aiming to achieve.

Investor behaviour

  • There was broad agreement that value for money for asset management products is seen as a combination of the: (i) return achieved; (ii) price paid; (iii) risk taken; and (iv) quality of any additional services provided by the asset manager. This means that most investors generally think of value for money as risk-adjusted net returns.
  • A key focus for retail investors and, to some extent, institutional investors when choosing between asset managers is past performance. However, the FCA believes that past performance is not a good indicator of future risk-adjusted net returns.
  • Whilst there is increasing attention among institutional investors to the level of charges that they pay, many retail investors are unaware that they are paying these.


  • It is often difficult for investors to know whether they would be better off switching providers and in some instances retail investors were remaining in persistently poor performing funds.
  • Asset management firms found it difficult to move investors into newly created share classes even if it was in the best interests of the investors. This was generally because investor consent is needed to transfer to an alternative share class, and many investors do not respond to communications.

Ability to negotiate

  • Fund governance bodies acting on behalf of retail investors do not typically focus on value for money.
  • There were a large number of small pension schemes and trustees which vary in how effective they are at negotiating price.

Retail intermediaries

  • Retail investors did not appear to benefit from economies of scale by pooling their money together through direct to consumer platforms. The FCA has concerns about the value provided by platforms and advisers and is proposing further work in this area.

Investment consultants

  • Investment consultants’ ratings influence which asset managers institutional investors choose. However, these ratings did not appear to help institutional investors identify better performing managers or funds.
  • Whilst larger institutional investors are able to negotiate effectively with asset managers, investment consultants do not appear to help smaller institutional investors negotiate or otherwise drive significant price competition between asset managers.
  • The investment consultancy market is relatively concentrated and levels of switching in the market are low. Moreover, many institutional investors struggle to monitor and assess the performance of the advice they receive and whether investment consultants are acting in their best interests.
  • Investment consultants are expanding into fiduciary management combining advice, governance and carrying out investor instructions which means that they are both distributors for – and competitors to – asset managers, posing a conflict of interest. The FCA believes that further investigation is needed in this area and is consulting on making a market investigation reference to the Competition and Markets Authority (CMA).

Proposed remedies

Unsurprisingly, the FCA believes that there is room for improved outcomes in both the institutional and retail parts of the asset management market. It therefore proposes a package of remedies:

  • A strengthened duty on asset managers to act in the best interests of investors, including reforms that will hold asset managers accountable for how they deliver value for money, and introduce independence on fund oversight committees.
  • The introduction of an all-in fee approach to quoting charges so that investors in funds can easily see what is being taken from the fund.
  • To help retail investors identify the best fund for them by: (i) requiring asset managers to be clear about the objectives of the fund and report against these on an on-going basis; (ii) clarifying and strengthening the appropriate use of benchmarks; and (iii) providing tools for investors to identify persistent underperformance.
  • Making it easier for retail investors to move into better value share classes.
  • Requiring clearer communication of fund charges and their impact at the point of sale and in communication to retail investors.
  • Requiring increased transparency and standardisation of costs and charges information for institutional investors.
  • Exploring with Government the potential benefits of greater pooling of pension scheme assets.
  • Requiring greater and clearer disclosure of fiduciary management fees and performance.
  • Consulting on whether to make a market investigation reference to the CMA on the institutional investment advice market.
  • Recommending that HM Treasury considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.
  • Further FCA work on the retail distribution of funds, particularly on the impact that financial advisers and platforms have on value for money.

The deadline for responding to the interim report is 20 February 2017. A final report and proposed amendments to the FCA’s rules are expected in Q2 2017.

Market reaction

In light of the FCA interim report, some active managers may find themselves under more pressure as to how they market their funds to investors and may receive more questions on the real substance of their strategies.

The proposed “all-in fee” approach taking in all costs is intended to improve transparency and competition among asset managers but has been criticised by some in the market on the basis that it would be tougher than anywhere else in the world. The FCA has invited comments on four possible different models, including a proposal for asset managers to be forced to pay any costs incurred above the explicit fee charged to investors. With each possible approach there are advantages and disadvantages and some in the market have suggested that the best course of action would be to set a high level principle and let the consumer decide on the approach they prefer.

For investment consultants, the prospect of a market investigation reference to the CMA will require careful consideration and positive engagement with the FCA during the consultation period.

Arguably, the publication of the interim report is an important moment for the fund management industry and may challenge the fundamentals of the investment management model. Whether the interim report becomes a defining moment for the industry remains to be seen.


Luxembourg update

Author Florence Stainier, Partner at Arendt & Medermach

In this latest update we briefly look at Luxemburg UCITS accessing CIBM, the VAT treatment of director’s fees, Brexit, RAIFs and the depositary regime.

Access to the China Interbank Bond Market (CIBM) for UCITS

Luxembourg UCITS have now access to the CIBM and can invest in RMB fixed income securities dealt on the CIBM, without recourse to QFII or RQFII licenses and quotas, under the revised rules issued by the People’s Bank of China (PBoC) this summer.

As a result, in addition to investing in RMB fixed income securities through their existing licenses and quotas, UCITS managers will now have direct access to onshore RMB fixed income securities dealt on the CIBM, irrespective of their licenses and quotas, in order to build or supplement their portfolios.

In addition to the formalities to be fulfilled by the relevant managers in China with their bonds settlement agents and the PBoC, recourse to CIBM “direct access” by UCITS managers is subject, among other conditions, to prior approval by the CSSF (the Luxembourg supervisory authority of the financial sector) and the requirement to include a reference to CIBM “direct access” as well as particular risk disclosures in the prospectus of the relevant UCITS.

Clarification of the VAT treatment of director’s fee

On 30 September 2016, the Luxembourg VAT authorities (Administration de l’Enregistrement et des Domaines) published a new circular (the “Circular”) concerning the VAT status of directors of companies and the VAT treatment of their activities which will be applicable from 1 January 2017.

The Circular confirms that independent directors have the status of taxable persons and that their activities are normally subject to VAT at the standard rate, currently 17%. In the case of foreign directors of Luxembourg-based companies, VAT on directors’ fees has to be self-assessed by the company under the ‘reverse charge’ mechanism, except if that company is not engaged in any economic activities.

Exemptions apply notably for mandates in eligible investment funds (such as SIFs, SICAVs, FCPs, SICARs, AIFs, etc.). These are VAT exempt to the extent that the services are specific to and essential for the management of the funds.

Update on the Depositary regime

The CSSF published a new circular on 12th October 2016 addressed to Luxembourg depositary banks of UCITS, Luxembourg UCITS and Luxembourg UCITS management companies.

The majority of the rules set out by the new circular are complementary to the amended UCI Law and the UCITS V level 2 measures. They clarify the organizational requirements as regards notably the chain of custody with a clear description of the duties and responsibilities for both the UCITS depositary and the sub-custodian.

For the sake of clarity, undertakings in collective investment (UCI) established in Luxembourg and governed by Part II of the UCI Law are subject to the new and more stringent depositary regime applicable to UCITS, despite being AIFs.

A legislative amendment was submitted this summer to the Luxembourg Parliament to clarify the scope of the UCITS and the AIFMD depositary regimes in Luxembourg. Under this amendment, it is proposed that only Part II UCIs which are distributed to retail investors in Luxembourg fall within the scope of the more stringent UCITS depositary regime. This proposal still needs to be approved.

Brexit update

The Luxembourg authorities are discussing with some foreign investment firms on the potential use that the latter may make of Luxembourg for the establishment of their operations.

At that occasion, the regulator is reconfirming its flexible approach on delegation and outsourcing models. Although key functions need to be present in Luxembourg, the regulator recognizes the merit of the proportionality principle.

This approach is specifically important for UCITS management companies and alternative investment fund managers (AIFM) which carry ancillary activities such as managing individual managed accounts or providing investment advice or safekeeping and administration services for funds as well as receiving and transmitting orders in financial instruments (for AIFM only).

Indeed, this may allow firms to combine collective portfolio management of their EU range of funds as well as individual portfolio management even on a cross border basis via free provision of services or establishment of branches of the Luxembourg management company or AIFM.

Update on Reserved Alternative Investment Fund (RAIF)

Since the implementation of the law on RAIF on August 1, 2016, this new flexible type of fund has had significant success with already about 20 vehicles having been created in Luxembourg.

It is worth mentioning that amongst these RAIF there is a variety of different types and initiators of investment policies.


The SFTR: Impact on the buy-side

Authors Imogen Garner and Iona Wright

Buy-side entities, in particular, Alternative Investment Funds, Undertakings for Collective Investment in Transferable Securities, their managers and delegates pursuing strategies that involve securities financing transactions, Total Return Swaps or the re-use of collateral are all either directly or indirectly impacted by the EU Securities Financing Transactions Regulation.


The EU Securities Financing Transactions Regulation (the SFTR) came into force on 12 January 2016 and forms part of the suite of EU measures aimed at providing greater transparency on “shadow banking” activities. The SFTR seeks to correct the lack of transparency around securities financing transactions (SFTs), which has historically made it difficult for competent authorities to monitor risk concentration in the market. Buy-side entities, in particular, Alternative Investment Funds (AIFs), Undertakings for Collective Investment in Transferable Securities (UCITS), their managers and delegates pursuing strategies that involve SFTs, Total Return Swaps (TRSs) or the re-use of collateral are all either directly or indirectly impacted by the SFTR.

SFTs are defined as any of the following:

  • a repo or reverse repo;

  • a buy-sell-back or sell-buy-back transaction;

  • a securities or commodities borrowing or lending transaction; or

  • a margin lending transaction (this is broadly defined in the SFTR).

Note, however, that the SFTR is not just restricted to SFTs. It also applies (depending on the relevant requirement) to commodities financing transactions, TRSs and to any transaction where collateral is received under securities or title transfer collateral arrangements. In-scope entities therefore need to carefully consider the scope of the requirements when determining their applicability.

The SFTR imposes three main requirements:

  • investor disclosures for EU authorised managers of UCITS and AIFs with respect to SFTs and TRSs (Investor Disclosures);

  • conditions on the re-use of collateral received through a security or title transfer collateral arrangement applicable to all EU counterparties (even if acting through a non-EU branch) and non-EU counterparties acting through an EU branch or receiving collateral from EU counterparties (Re-use of Collateral); and

  • trade repository reporting requirements on both parties to a trade where those counterparties are established in the EU (including their branches outside the EU) or are EU branches of third country counterparties (Trade Reporting).

Delegated portfolio managers (EU or non-EU) will also need to be alert to these requirements, as managers may seek to require delegates to provide the relevant information required by the Investor Disclosures or comply with the Re-use of Collateral or Trade Reporting requirements on their behalf by way of relevant contractual representations.

Investor Disclosures

Compliance with the Investor Disclosures requires managers to disclose certain information (see further sections A and B of the Annex to the SFTR) on a:

  • pre-contractual basis with effect from 12 January 2016 in respect of UCITS or AIFs constituted after that date. UCITS and AIFs already in existence as of that date do not have to comply until 13 July 2017. Disclosures will need to be included in the UCITS’ prospectus and, for AIFs, as part of the Article 23 of the EU Alternative Investment Fund Managers Directive pre-investment disclosures. Competent authorities have already been considering whether new sub-funds in an existing umbrella structure would be able to take advantage of the grandfathering provisions. Currently, the UK Financial Conduct Authority (FCA) has indicated that new sub-funds will need to comply immediately, while the Luxembourg Commission de Surveillance du Secteur Financier and the Central Bank of Ireland have stated that such sub-funds would be able to take the benefit of the transitional period; and

  • periodic basis with effect from 13 January 2017 in respect of both new and existing UCITS or AIFs. Disclosures are to be made in UCITS’ semi-annual and annual reports and the AIF’s annual report.

These Investor Disclosure requirements will further increase the existing disclosure burden on managers of UCITS and AIFs. Although market practice has not yet developed around the exact granularity of these disclosures, the periodic reports will be of particular concern, as the data required is particularly granular and will likely require time and effort to compile and report.

Re-use of Collateral

From 13 July 2016, counterparties within scope of the Re-use of Collateral requirement can only re-use financial instruments received as collateral if the disclosure and consent provisions in Article 15 of the SFTR are satisfied. There are also additional conditions which apply to the exercise of any right of re-use. These requirements have retroactive effect; applying to collateral arrangements existing on 13 July 2016.

The extraterritorial scope of these requirements is broad and captures the re-use of securities and other financial instruments provided as collateral under all security and title transfer collateral arrangements in any context (not just in the context of SFTs).

Hedge funds in particular will be impacted by the Re-use of Collateral requirements through their repo activity or prime brokerage arrangements. Industry bodies have already collaborated in the preparation of a standard form information statement disclosure to be sent to in-scope counterparties.

Trade Reporting

The SFTR requires in-scope counterparties to a trade to report new, modified or terminated SFTs to a registered or recognised trade repository by T+1 and maintain records of SFTs for at least five years following the termination of the transaction. Managers of UCITS and AIFs will need to report on behalf of their funds (although delegation of reporting is allowed).

The timeframe for the reporting requirement is dependent on when the detailed regulatory technical standards come into force (not expected until Q2/3 2017), after which UCITS and AIFs will have a transitional period of 18 months. However, in-scope counterparties had to comply with the record-keeping obligation from 12 January 2016 (although the SFTR does not specify particular form or content requirements for these records).

The Trade Reporting requirements are likely to be challenging from an implementation perspective, particularly for those managers that do their own reporting under parallel regimes such as the EU Market Infrastructure Regulation (EMIR). In particular, there are a number of overlapping reporting requirements between the two regimes. Further work is therefore required at an industry and competent authority level to avoid as much duplication as possible.


Although the SFTR is directly applicable in all EU Member States, enforcement will take place at a local level. The UK implemented Regulations which came into force on 13 July 2016 and confer powers on the FCA (and Bank of England) to:

  • direct or require a counterparty to cease conduct resulting in a breach of an SFTR;

  • impose financial penalties;

  • publicly censure a counterparty for breach of an SFTR requirement;

  • temporarily prohibit a person responsible for breach of an SFTR requirement from being concerned in the management of a counterparty; and/or

  • impose criminal penalties for misleading the regulator.


To date, a large proportion of AIFs, UCITS, their managers and delegates that pursue relevant strategies may not have fallen within scope of the SFTR. However, these entities could be subject to a heavy lift in 2017, as the transitional period expires for pre-contractual Investor Disclosures and periodic reports take effect. The Trade Reporting requirements will be the focus for those entities compliant to date with the SFTR. With respect to all SFTR requirements, it is important that in-scope entities and transactions are identified before the relevant effective date with sufficient time to allow the build-out and testing of internal systems and procedures.

EU/UK Quarterly Roundup

Author Simon Lovegrove

A Quarterly Roundup of regulatory developments in the EU and UK. To receive daily updates on regulatory developments subscribe to our blog,


ESMA updates AIFMD Q&As

06.10.16  The European Securities and Markets Authority (ESMA) publishes updated Q&As on the application of the Alternative Investment Fund Managers Directive (AIFMD).  The Q&As includes one new question and answer on the commencement of periodical reporting for alternative investment fund managers pursuant to Article 13 of the Securities Financing Transactions Regulation. 
Commission publishes G7 cybersecurity elements 11.10.16 

The European Commission (Commission) publishes the text of the G7 fundamental elements of cybersecurity in the financial sector together with an accompanying supporting statement.

ESMA Q&As on CFDs  11.10.16  ESMA publishes updated Q&As on the application of MiFID to the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients (such as binary options and rolling spot forex). The Q&A includes new questions and answers, which address the following topics: (i) the use of trading benefits when offering CFDs or other speculative products; (ii) the withdrawal of funds from trading accounts; (iii) the use of leverage when offering CFDs or other leveraged products to retail clients; and (iv) best execution obligations for firms offering CFDs or other speculative products to retail clients.
ESMA Q&As on UCITS Directive  12.10.16  ESMA updates Q&As on the application of the UCITS Directive. The updated Q&As include new questions and answers on: (i) regulated markets in Member States under the UCITS Directive; (ii) translation requirements in relation to remuneration disclosure; (iii) reinvestment of cash collateral; and (iv) the commencement of periodical reporting pursuant to Article 13 of the Securities Financing Transactions Regulation. 
MAR guidelines translated  20.10.16  ESMA translates the following Market Abuse Regulation (MAR) guidelines into the 22 official languages of the EU: (i) guidelines on persons receiving market soundings; and (ii) guidelines on delay in the disclosure of inside information. Both guidelines apply from 20 December 2016. 

ESMA prepares for MiFID II SI Regime

04.11.16 ESMA updates its Q&A on the application of the Markets in Financial Instruments Directive (recast) (MiFID II) / Markets in Financial Instruments Regulation (MiFIR) clarifying when it will publish the first set of data needed to implement the Systematic Internaliser (SI) regime and the date by which firms must comply with the SI regime for the first time. 

ESMA consults on transparency rules for package orders under MiFID II

10.11.16  ESMA publishes a consultation paper seeking views on the draft regulatory technical standards (RTS) that it is required to draft under Article 9(6) of MiFIR establishing a methodology for determining whether there is a liquid market for a package order as a whole. The deadline for comments on the consultation is 3 January 2017.
Commission adopts CSDR level 2 legislative acts  11.11.16  The Commission adopts level 2 legislative acts that implement specific provisions of the Regulation on settlement and central securities depositories. 
ESMA further updates AIFMD Q&As  16.11.16  ESMA further updates Q&As on the application of the AIFMD by adding new questions and answers on: (i) notifications of alternative investment funds; and (ii) delegation.
New ESMA Q&A on MiFID II and MiFIR market structures topics 18.11.16  ESMA publishes a new Q&A on market structure topics under MiFID II and MiFIR. The Q&A contains questions and answers on: (i) data disaggregation; and (ii) the mandatory tick size regime. 
MiFIR Delegated Regulations published in OJ  21.11.16 

There is published in the Official Journal of the EU:

  • Commission Delegated Regulation (EU) 2016/2020 of 26 May 2016 supplementing Regulation (EU) No. 600/2014 of the European

    Parliament and of the Council on markets in financial instruments with regard to RTS) on criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation;

  • Commission Delegated Regulation (EU) 2016/2020 of 2 June 2016 supplementing Regulation (EU) No. 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to RTS on access in respect of benchmarks; and

  • Commission Delegated Regulation (EU) 2016/2022 of 14 July 2016 supplementing Regulation (EU) No. 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to RTS concerning the information for registration of third-country firms and the format of information to be provided to the clients.

ESMA further updates Q&As on UCITS Directive  21.11.16  ESMA updates Q&As on the application of the UCITS Directive. The updated Q&As include two new questions and answers on how investment limits should be applied where a UCITS wants to invest in an umbrella fund.  
Commission publishes package of banking reforms  23.11.16  The Commission publishes proposals that are intended to implement some outstanding elements that have recently been finalised by the Basel Committee on Banking Supervision and the Financial Stability Board. The Commission’s proposals consist of draft legislative proposals that amend the Capital Requirements Regulation, the Capital Requirements Directive IV (CRD IV), the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation. The key elements of the proposals include: (i) a binding 3% leverage ratio; (ii) a binding detailed net stable funding ratio; (iii) a requirement to have more risk-sensitive own funds for institutions that trade in securities and derivatives, following the Basel Committee’s work on the fundamental review of the trading book; (iv) a requirement for global systemically important institutions to hold minimum levels of capital and other instruments which bear losses in resolution. The requirement, known as total loss absorbing capacity or TLAC, is to be integrated into the existing minimum requirement for own funds and eligible liabilities (MREL) system, which is applicable to all banks; (v) a new requirement in the CRD IV for establishing an intermediate EU parent undertaking where two or more institutions established in the EU have the same ultimate parent undertaking in a third country; (vi) revising the bail-in rule contained in Article 55 of the BRRD so that it can be applied by Member State resolution authorities in a proportionate manner; (vii) an EU harmonised approach on subordination that would enable banks to issue debt in a new statutory category of unsecured debt available in all Member States which would rank just below the most senior debt and other senior liabilities for the purposes of resolution, while still being part of the senior unsecured debt category; and (viii) amendments to the CRD IV that will exempt small and non-complex institutions and staff receiving low variable remuneration from the rules. 
Commission proposes new rules for CCP recovery and resolution  28.11.16  The Commission publishes a proposal for a Regulation on the framework for the recovery and resolution of central counterparties (CCPs). The provisions within the draft Regulation are comparable to those in the BRRD which sets out a recovery and resolution framework applicable to banks and investment firms. However, the draft Regulation adapts the BRRD’s provisions to the specific features of CCPs’ business models and the risks they incur.
Commission adopts RTS on ancillary exemption and position limits for commodity derivatives 01.12.16 The Commission adopts the two outstanding RTS for Articles 2(4), 57(3) and 57(12) of MiFID II: (i) RTS 20 on the ancillary activity exemption; and (ii) RTS 21 on position limits for commodity derivatives. 
MMF Regulation finalised  02.12.16  The General Secretariat of the Council of the EU publishes the final compromise text of the Money Market Funds Regulation.  
UK industry associations develop new fund structure  12.10.16  An industry working group that includes the Investment Association, the Charity Investors Group and the Charity Law Association develop a new fund structure, the Charity Authorised Investment Fund. The new fund structure offers certain benefits to charities including: (i) it is authorised and regulated by the FCA, offering protection for investor charities, the majority of whom would be classed as retail investors; and (ii) the ability to enjoy certain tax benefits available to charities while benefiting from the management-fee VAT exemption available to FCA authorised funds. 
Responses to HM Treasury consultation on UCITS V Directive  31.10.16  HM Treasury publishes a summary of the responses it received to its October 2015 consultation on the UK’s implementation of the UCITS V Directive. The document notes that in light of the consultation responses no significant changes were made to the Undertakings for Collective Investment in Transferable Securities Regulations 2016 which came into force on 18 March 2016.  
FCA announces second cohort window for sandbox application  07.11.16  The FCA announces that it has identified the firms that have succeeded in their application to begin testing in the first cohort of its regulatory sandbox. The FCA also confirms details of the application window for the second cohort. Firms can apply to be part of the second cohort from 21.11.16 to 19.01.17. 
The Financial Services and Markets (Disclosure of Information to the European Securities and Markets Authority etc. and Other Provisions) Regulations 2016  17.11.16  The Financial Services and Markets (Disclosure of Information to the European Securities and Markets Authority etc. and Other Provisions) Regulations 2016 were published on the website. The Regulations are mainly concerned with the implementation of certain obligations laid down in the Settlement Finality Directive, the Prospectus Directive, MiFID, the Transparency Directive and the UCITS IV Directive in respect of the powers of the European Supervisory Authorities. The Regulations also insert a definition of “ELTIF Regulation” into regulation 1(2) of the Financial Services and Markets Act 2000 (Compensation Scheme: Electing Participants) Regulations 2001. The definition was inadvertently omitted when regulation 1(2) was amended by regulation 7(2) of the European Long-Term Investment Funds Regulations 2015. 
FCA interim report on asset management market study 18.11.16  FCA publishes its interim report on the asset management market study which sets views on how well competition is working and what is the resulting outcome for investors. The FCA finds that price competition is weak in a number of areas of the industry. The FCA proposes a significant package of remedies that seek to make competition work better and protect those least able to actively engage with their asset manager. In terms of next steps, the FCA welcomes views on the potential remedies by 20.02.17.  
FCA update on UCITS Remuneration Code 18.11.16  The FCA updates its webpage on the UCITS Remuneration Code (SYSC 19E) stating that it does not plan to issue guidance on how to apply this code. 

FCA consultation on amendments to DTR 2.5 (delaying disclosure of inside information)

28.11.16  The FCA publishes Consultation Paper 16/38: DTR 2.5 changes: delay in the disclosure of inside information. In the consultation the FCA proposes certain amendments to its Handbook in order to comply with ESMA’s guidelines on the delay in the disclosure of inside information, specifically DTR 2.5. The deadline for comments is 6 January 2017.
FCA consults on proposals to further regulate CFDs 06.12.16  The FCA publishes Consultation Paper 16/40: Enhancing conduct of business rules for firms providing contract for difference products to retail clients. The FCA sets out proposals to further regulate the provision of CFD products to retail investors. In particular, the FCA proposes to introduce: (i) standardised risk warnings on client accounts by all providers; (ii) mandatory disclosure of profit-loss ratios on client accounts by all providers; (iii) limiting leverage for retail clients; and (iv) a ban on providers using bonuses to promote CFD products. The FCA also proposes to regulate binary bets once these fall within the regulatory perimeter. The deadline for comments on the consultation is 7 March 2017.


BaFin-consultation on its new draft of KAMaRisk

The BaFin is consulting on its new practice regarding minimum risk management requirements for capital investment companies. The long established InvMaRisk (BaFin Circular 5/2010) is to be replaced by the KAMaRisk which will take into account regulatory developments including the AIFMD.

The German Federal Financial Services Supervisory Authority (Bundesanstalt für FinanzdienstleistungsaufdsichtBaFin) has published a consultation paper on its new practice regarding minimum risk management requirements for capital investment companies (Mindestanforderungen an das Risikomanagement von KapitalverwaltungsgesellschaftenKAMaRisk). The consultation was published on 8 November 2016; the investment fund industry was invited to comment until 23 November 2016.

KAMaRisk is intended to replace the current InvMaRisk (BaFin-Circular 5/2010) which had been introduced on 30 June 2010 to document BaFin’s practice on minimum requirements for capital investment companies on organization, risk management and outsourcing.

Following the introduction of the InvMaRisk there have been a number of important developments in the asset management space. In particular the Alternative Investment Fund Managers Directive (AIFMD) and Delegated Regulation (EU) No. 231/2013 supplementing the AIFMD (the Delegated Regulation) came into force in July 2013 and the Capital Investment Code (Kapitalanlagegesetzbuch – KAGB) was enacted to incorporate the AIFMD into German law (collectively the “New Law”). With the introduction of the New Law, BaFin’s practice on minimum requirements for capital investment companies on organization, risk management and outsourcing continues to be documented, mutatis mutandis, in the InvMaRisk.

Unfortunately this approach has resulted in some uncertainty and the investment fund industry has therefore generally welcomed the envisaged introduction of KAMaRisk which shall replace the InvMaRisk by updating and adjusting it to the New Law and to further relevant developments since the New Law came into effect.

The InvMaRisk was designed to apply to managers of open ended funds only. Importantly, KAMaRisk will have a wider scope and BaFin’s new practice on organization, risk management and outsourcing will apply to both UCITS managers and managers of Alternative Investment Funds (AIFs) that were unregulated until the introduction of the New Law. Several rules set out in the InvMaRisk will be deleted and the KAMaRisk will instead refer to the directly applicable Delegated Regulation which contains detailed provisions on the organization, risk management and outsourcing by capital investment companies (namely articles 38 to 66 and 75 to 82).

KAMaRisk will also contain a new chapter setting out BaFin’s practice on money loans and investments in non-securitized loan receivables. The legal background for the new chapter is the new law that was introduced by amendments to the KAGB based on the UCITS-V Implementation Act of 18 March 2016 which permits investment funds, namely special closed-ended AIFs, to grant money loans and to invest in non-securitized loan receivables provided their management company complies with certain risk management requirements. The reasoning behind the UCITS-V-Implementation Act suggests that BaFin should provide concrete guidance in this respect and that it would be reasonable for such guidance to be orientated by BaFin’s practice regarding minimum requirements for risk management (Circular 10/2012 – MaRisK (BA). The aforementioned Circular 10/2012 applies to the granting of loans by credit institutions and was the subject of a consultation in February 2016, with an update in June 2016. Given this background, the new chapter of the KAMaRisk provides for concrete requirements as to the structure and procedures of risk management and early risk screening, as well as on procedures for loan management and on the administration of problematic loans.

The KAMaRisk will not only apply to German capital investment companies but also to their foreign branches. German branches of EU-UCITS managers or EU-alternative investment fund managers exercising inbound passport rights under the UCITS-Directive or the AIFMD respectively are in principle not affected, except for the requirements concerning risk management which have to be complied with by the EU capital investment company in case of management of a domestic fund, i.e. Germany based, UCITS or AIF respectively.

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