Looking ahead to 2023

Content

• ELTIF reform
• AIFMD and UCITS Directive review
• Democratisation of alternative assets through retailisation
• Focus on greenwashing
• DLT Pilot Regime
• CSSF feedback report on ESMA CSA on the Supervision of Costs and Fees of UCITS
• MiCAR
• Periodic disclosure requirements under SFDR RTS
• ATAD III
• DORA
• CSDDD
• CSRD
• EU Taxonomy
• Development of an Ecolabel for retail products
• The European Green Bond Standard

ELTIF reform

Introduced in 2015, the European Long-Term Investment Fund (ELTIF) framework has never met the intended success, driven by restrictive features making it difficult for retail investors to access ELTIFs. On 25 November 2021, the EC presented a proposal to amend the Regulation on ELTIFs (ELTIFR – Regulation (EU) 2015/760). A provisional agreement on the reform of the ELTIFR was reached on 19 October 2022, which inter alia introduced (i) more flexible investment rules, including a wider range of eligible assets and revised concentration rules; (ii) detailed rules on the use of LMTs and the possibility to have early redemptions; (iii) the broadening of the scope of eligible investors; and (iv) enhanced transparency rules. 

The EP is expected to consider a finalised legislative text in plenary session in the course of February 2023. Once the Council and EP formally adopt this text, it will be published in the Official Journal of the EU and will enter force 20 days after. The revised ELTIFR shall start applying 9 months after its entry into force. A grandfathering period and opt-in regime are available for ELTIFs authorised in accordance and complying with the provisions of the ELTIFR applicable before the date of application of the revised version.

The modernisation of the ELTIF framework may boost the effectiveness and attractiveness of ELTIFs and make them the new sought-after investment vehicle. 

If you want to discover more on the reform, please consult our dedicated page to discover our comparative table highlighting the most relevant amendments, and get prepared for the revival of the ELTIF.

AIFMD and UCITS Directive review

On November 25, 2021, the EC put forward the long-awaited proposal for amendments to the Alternative Investment Fund Managers Directive (AIFMD - Directive 2011/61/EU) and to the relevant extent, to the UCITS Directive, with a view to harmonising the two frameworks. Key provisions include inter alia (i) specific rules on loan-originating funds; (ii) harmonised rules on the use of LMTs and on delegation arrangements; (iii) the expansion of the AIFM’s permitted ancillary services;(iv) enhanced substance requirements; (v) more flexible rules on the provision of depositary and custody services; and (vi) improved supervisory reporting requirements.

Discover our latest publication on this topic by clicking here.

While the Council adopted its general approach in June 2022, the EP released in May 2022 a draft report on the proposal but has, at the time of this publication, not yet adopted a final position. A vote by the EP is currently scheduled for end of January 2023, after which trilogue negotiations shall begin. 

Democratisation of alternative assets through retailisation

More than 10 years after the entry into force of the AIFMD and in view of the expected reform of both the AIFMD and the ELTIFR (see above), it is now widely accepted that the market has become mature enough to attract retail investors into alternative strategies such as private equity, real estate or debt, and we have seen major players in the market develop pan-European products dedicated to a retail client base. 
Under the current EU framework, 

• marketing of alternative investment funds in the EEA under the AIFMD marketing passport marketing is only open to so-called “professional investors”, hence restricting access to certain high net worth individuals (HNWI) and other retail investors. Only a limited number of EEA countries extend the AIFMD marketing passport to certain non-professional investors under specific conditions (e.g. Austria, Denmark, Germany); and
• the ELTIFR only allows distribution to retail investors who either (i) have a portfolio of financial instruments in excess of EUR 500,000 or (ii) have a portfolio of financial instruments below EUR 500,000 but in excess of EUR 100,000 with a minimum investment EUR 10,000 and a maximum of 10% of such investor’s financial instruments investors in ELTIFs.

The provisional agreement on the reform of the ELTIFR envisages to notably remove the above-mentioned requirements of minimum EUR 10,000 and 10% of the investor’s financial instruments, hence considerably broadening the scope of eligible investors under the ELTIFR.

While we are still awaiting the outcome of the trilogue negotiations, the reform of the AIFMD seems to be heading towards a broadening of the definition of “professional investor” to notably include investors investing at least EUR 100,000 and providing a written statement of awareness of the associated risks.

As we are witnessing a progressive expansion of the investor base of alternative investment funds, originally reserved to institutional and professional investors, to include retail investors, our funds team keeps closely monitoring this latest trend in the fund industry and we are there to assist our clients and successfully respond to new challenges ahead. 

If you want to get more information on this topic, please watch our webinar by clicking here.

Focus on greenwashing

Concurrently to the growth of ESG-focused investments and sustainability disclosure regulations in the European market, the risk of greenwashing increases and threatens the soundness and trust of the sustainable finance market. In that context, the ESAs were individually mandated by the EC on 23 May 2022 to give their input on the trend of greenwashing practices within the EU and develop recommendations to address related issues.

On 15 November 2022, the ESAs launched a “call for evidence” requesting input from relevant stakeholders in the context of their mandate. Financial institutions, retail investors, consumers associations, NGOs or also academia may submit their input to the ESAs by 10 January 2023. 

For more information on this topic, please click here.

In the context of avoiding misleading ESG claims, the ESMA published, on 18 November 2022, a consultation paper aiming at developing guidelines on fund’s names with ESG or sustainability-related terms with more specific guidance compared to the supervisory briefing on the same topic, published on 31 May 2022, on which ESMA is seeking the views of external stakeholders. ESMA will consider all comments received by 20 February 2023 and final guidelines are expected to be issued by Q2/Q3 2023. 

For more information, please click here. 

DLT Pilot Regime

On 2 June 2022, Regulation (EU) 2022/858 of the EP and of the Council on a pilot regime for market infrastructures based on DLT was published in the Official Journal (the DLT Pilot Regime Regulation). The Regulation aims to provide entities which operate securities trading and settlement systems based on DLT (DLT Market Infrastructures) with a set of rules suited to crypto assets that qualify as financial instruments within the meaning of Directive 2014/65/EU (MiFID II), and further enables such entities to be exempted from a number of requirements that would normally be applicable to them under existing EU directives or regulations. Most of the DLT Pilot Regime Regulation provisions shall apply as from 23 March 2023. 

For more information on the key requirements, please click here.

On 27 September 2022, ESMA published a report on the DLT Pilot Regime Regulation providing guidance on certain technical elements and making recommendations on compensatory measures on supervisory data to ensure a consistent application by DLT Market Infrastructures from the start of the regime. 

If you want to read more on this, please click here

CSSF feedback report on ESMA 

CSA on the Supervision of Costs and Fees of UCITS

In 2021, ESMA performed a Common Supervisory Action (CSA) with NCAs across the EU/EEA on the supervision of costs and fees of UCITS and published, on 31 May 2022, the results of its CSA. The CSSF presented its main observations and related recommendations for improvement in view of the applicable regulatory requirements, but also engaged on a bilateral basis with certain investment fund managers to implementer necessary corrective measures for the observed shortcomings. The CSSF also requested investment fund managers to conduct a comprehensive assessment, to be submitted by the end of Q1 2023, regarding the compliance of their policy, approach and arrangements related to costs, in relation to the observations of ESMA and of the CSSF and to take, if applicable, the necessary corrective measures. 

For more information on this topic, please click here

MiCAR

On 24 September 2020, the EC put forward its proposal for a Markets in Crypto-Assets Regulation (MiCAR), which aims at providing a legal framework to regulate crypto-assets which are not yet covered by other EU legislation (e.g. financial instruments under MiFID II). A Union framework should provide for proportionate treatment of issuers of crypto-assets and crypto-asset service providers, thus allowing equal opportunities for market entry and ongoing and future development. Following the adoption of the final version of MiCAR by the Council on 5 October 2022 and the EP’s ECON Committee on 9 October 2022, a final vote by the EP is expected in Q1 2023.

MiCAR shall enter into force on the twentieth day following that of its publication in the Official Journal of the EU and shall apply 18 months after the date of entry into force, except for the provisions related to asset-reference tokens and electronic money tokens after 12 months only. Crypto-asset providers (CASP) that provide their services in accordance with their applicable law before MiCAR, will be able to keep doing so without a CASP license until 18 months after the application of MiCAR or until they are granted their license, whichever is sooner.

Please click below to discover our dedicated MiCAR videos.

Periodic disclosure requirements under SFDR RTS

In its Q&A dated 2 December 2022, the CSSF reminded that annual reports of UCITS and AIFs (independently of their financial year-end), issued as from 1 January 2023, with fund(s) disclosing under Article 8 and/or Article 9 SFDR, shall comply in accordance with the guidance given in the document “Updated Joint ESA Supervisory Statement on the application of the Sustainable Finance Disclosure Regulation” dated 24 March 2022 (JC 2022 12) with the product disclosure requirements in periodic reports laid down in Article 11 SFDR and further clarified by the SFDR RTS, including the information to be presented in an annex to the annual reports by using the mandatory templates.

For more information, please click here.

ATAD III

On 21 December 2021, the EC published the proposal for a Council directive laying down rules to prevent the misuse of shell entities for tax purposes (the ATAD 3 Proposal). The ATAD 3 Proposal has been subject to several amendments proposed by the EP’s ECON Committee, with the latest proposed on 9 December 2022.

On 17 January 2023, the EP approved the ATAD 3 Proposal as amended. In a nutshell, the new proposal provides for the following:

• a lowering of the threshold of the gateways (cumulative conditions to be met by entity to be considered as at risk and subject to reporting obligations) ;
• a reduction of the number of excluded entities (i.e., exemption for entities with at least five own full time equivalent employees has been removed) even if it is worth to note that the carve out for regulated financial undertakings has been maintained ;
• a relaxation and in some cases precision of the minimum substance indicators to be reported by an “at risk” entity (among others, (i) the undertaking can now evidence the use of own premises, premises for their exclusive use but also premises shared with entities of the same group, (ii) the condition linked to the existence of a bank account in the Union has been extended to include e-money account in the Union and (iii) the limitation according to which a director must not be an employee / director of a non-associated enterprises has been deleted). However, the list of documentary evidence has been expanded ;
• a timeframe for the rebuttal and exemption for absence tax motives procedures has been specified given that the competent authority will have 9 months as from the date of receipt of the request to analyse it. A failure to provide an answer after the expiry of the period will be considered as an approval. 

It is worth noting that the implementation deadline remains unchanged (i.e., 1 January 2024) meaning that the look-back period has already started since 1 January 2022.

To be definitively adopted, the ATAD 3 Proposal will still need to be approved by the Council of the EU.

DORA

On 10 November 2022, the EP adopted in plenary the text of the Digital Operational Resilience Act (DORA), aiming at harmonising national rules around operational resilience and cybersecurity regulation across the EU, introducing harmonised rules related inter alia to (i) internal governance and information communication technologies (ICT) risk management; (ii) digital operational resilience testing; (iii) ICT-related incidents; and (iv) information sharing; and (v) ICT third-party service providers. 

DORA will enter into force 20 days after its publication in the Official Journal of the EU and start applying 24 months after its entry into force.

CSDDD

On 23 February 2022, the EC published its proposal for a Directive on Corporate Sustainability Due Diligence (the CSDDD), which aims at imposing obligations on companies, their subsidiaries and their value chains to identify and tackle adverse human rights and environmental impacts. he proposals are wide reaching as they cover obligations throughout the value chain and also attach to non-EU companies which meet specific criteria. In a nutshell, the CSDDD establishes a corporate sustainability due diligence duty requiring specific companies to identify and, where necessary, prevent, end or mitigate the potential or actual adverse impacts of their activities on human rights and the environment. 

In December 2022, the Council has adopted its general approach, but the EP’s position is still pending. The text will still go through trilogue negotiations to reach a common compromise. The CSDDD will then need to be formally adopted by the co-legislators and published in the Official Journal of the EU, and will enter into force 20 days thereafter. Following its entry into force, Member States have two years to transpose the CSDDD into their respective national laws. 

For more detailed information on this key features, please click here.

CSRD

The Corporate Sustainability Reporting Directive (CSRD) was published in the Official Journal of the European Union on 16 December 2022. Large companies and listed SMEs will soon be required to publish detailed information on sustainability matters, such as environmental rights, social rights, human rights and governance factors. The CSRD will inter alia (i) strengthen the existing rules on non-financial reporting introduced by the non-financial reporting directive; and (ii) significantly increase the number of companies subject to sustainability reporting. 

The application of CSRD will take place in four stages from 2025 to 2029. Member states will have 18 months to transpose the CSRD into national law after its entry into force. 

For more information on this topic, please click here. 

EU Taxonomy

The Taxonomy Regulation provides six environmental objectives. Whereas the disclosure requirements related to the first two objectives (climate change mitigation and climate change adaptation) entered into force on 1 January 2022, the other four objectives (sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems) are applicable as of 1 January 2023. The technical screening criteria, which are necessary to assess the alignment of an economic activity with any of the four remaining objectives, are therefore expected to be published in Q1 of 2023 by way of EC’ Delegated Regulation(s). 

In addition, the provisions of Article 8 of the Taxonomy Regulation, requiring the entities in scope to disclose the alignment of their activities with the EU Taxonomy, are applicable as of 1 January 2023. 

Development of an Ecolabel for  retail products

A voluntary Ecolabel, that will apply to all PRIIPs, is currently under development as part of the EC’s Action Plan on Financing Sustainable Growth. Although the draft Ecolabel regulation is not yet published, the Joint Research Committee of the EC made available a Technical Report that has been tested by ESMA at the end of 2022 on existing UCITS. The Ecolabel for retail products is still under discussion and will certainly evolved in 2023. 

For more information on this topic, please click here.

The European Green Bond Standard 

In 2022, discussions were ongoing on the proposal of the EC for a voluntary European Green Bond Standard (EU GBS) amongst the EP and the Council. The EU GBS will be open to any issuer of green bonds, included outside of the EU, complying with specific requirements such as (i) allocation of the funds to projects aligned with the EU Taxonomy, (ii) transparency and reporting regime, (iii) mandatory review by an external party and (iv) specific conditions pertaining to such reviewer.

On 16 May 2022, the ECON Committee at the EP decided to open interinstitutional negotiations which we expect to lead to the approval of the final text of the EU GBS in 2023. 

For more information on this topic, please click here.