An Alfi conference panel on Wednesday 20 September covered a long list of EU and Luxembourg regulatory developments that included the latest updates on the Sustainable Finance Disclosure Regulation (SFDR), the Retail Investment Strategy (RIS), the Digital Operational Resilience Act (Dora), the measures to modernise the Luxembourg investment fund toolbox and the status of the Alternative Investment Fund Managers Directive/Undertakings for collective investment in transferable securities (AIFMD/Ucits) review.
SFDR: More precise labelling may be on the drawing board
Olivia Moessner, partner at Elvinger Hoss Prussen, reminded the audience that an SFDR consultation was launched by the European Commission last week. The comprehensive review has two main parts. The first one is a public consultation assessing the current situation and reviewing the relevance of the regulation, its effectiveness in terms of cost, disclosure and support toward a climate neutral economy.
She noted that the “second document is a target consultation document.” It is a forward looking document that aims at creating a label regime. Moessner said: “the EC proposes two different approaches, either to reinforce the article eight and nine that we know today and add additional criteria, or alternatively to create a brand-new categorisation focusing on the type of investment, for instance, with a positive contribution, transition, exclusion, etc.”
“It [SFDR] was never really meant to be a labelling regime, and it has almost become a de facto labelling regime,” said Adam Henley, head of European product development at J.P. Morgan Asset Management. “We’ve ended up with a level of disclosure that may be incredibly complex for our clients to understand.” He thinks that process must be simplified, and, importantly it should result in a “diversity of products as different clients have different needs and preferences.”
RIS: a new regulation overly focusing on cost
Florent Denys, counsel at Arendt & Medernach, noted that the Retail Investment Strategy, or RIS, is a proposal published by the European Commission in May 2023, and is at a very early stage. It aims “to promote greater participation of retail investors into financial markets within the EU, but at the same time, giving them the right protection, they need.” Given the current election cycle, he does not expect the regulation to be applicable before the end of 2025 or early 2026.
Defining the concept of value for money
Amongst other provisions, Denys explained that asset managers will be required to set a pricing process where they have “to identify all the costs or charges that will be applicable […] to their investors.” He added: “they will have the duty to act in a way to prevent undue cost from being charged to the fund and the investors […] and Esma to publish benchmarks to compare those costs.”
“I think, with the legislation, as it’s currently proposed is that it focuses solely on cost. And I think that in terms of value, value is about more than just cost,” said Henley. He noted that the broad and diverse product offering in Europe may be a challenge to operationalise the benchmarks. Consequently, he is concerned that the regulation may “unfairly or inadvertently favour some products or another.” Besides, he warns that it may even inadvertently raise costs or close off different avenues for distribution.
Management of data in a broader sense
The Digital Operational Resilience Act, or Dora, is “essentially about […] how the industry needs to address […] resilience and cyber risk management,” said Raoul Mulheims, co-founder and CEO at Finologee. He noted that the regulation is already in force and the whole financial industry will have to comply with it by the beginning 2025.
Mulheims explained that the challenge with this regulation will be sharing certain information with the regulators, a process that he sees as relatively easy to handle as “there’s lots of suppliers and partners that you can refer to that are going to help you in this area.”
Mulheims also compared the Dora regulation to the European Banking Authority guidelines on outsourcing, which only applies to some players and “where you need to manage third party risks […] and your own outsourcing and supply chain.” In addition, Dora requires financial firms to check “whether your software providers, for instance, comply with basic security commitments and so on and you need to monitor what’s happening.”
Furthermore, Mulheims said that “data needs to be become available in order to be shared based on consumer consent with third parties.” He sees the proposal as a “huge IT burden” but also an opportunity as “you can also leverage this data, for instance, from your competitors” and integrate this data from a consumer, based on their permission, of course, into your product.”
Luxembourg toolbox to be further enhanced
To keep the Luxembourg financial centre attractive and competitive, Denys explained that he expects amendments to the regulations on undertakings for collective investment (UCI), specialised investment funds (SIF), the investment company in risk capital (Sicar) and the reserved alternative investment fund (Raif). He understands that the goal is to harmonise and apply consistent approach across the various regimes.
Updates on AIFMD II / Ucits VI reviews
Denys sees no impact on marketing activities. However, liquidity management, the delegation framework and the concept of loan origin standard will be affected. In particular, he commented that the outcome regarding the delegation framework is “positive because the scope of delegation remains broad […] and also [because of] powers given to the European Securities and Markets Authority, or Esma, to review the delegation relevance as a whole and on a case-by-case basis, which was the initial proposal.”
Moessner added that the final text must be drafted and validated by the European Parliament and the European Council.