European Union Update

Sustainable Finance Disclosure Regulation (SFDR)

On 24^th July, the European Securities and Markets Authority (ESMA) outlined its long-term vision for enhancing the “EU's sustainable finance framework” in an opinion piece published on their website. The key recommendations proposed include: 

• Establishment of a product categorization system that incorporates both sustainable and transition investments.
• Implementation of minimum sustainability disclosure requirements for all financial products.
• Adoption of the EU Taxonomy as the universal benchmark for evaluating sustainability.
• A focus on improving the quality and metrics of Environmental, Social and Governance (ESG) data.

Subsequently, on 25^th July, the ESMA published an updated Q&A on the Sustainable Finance Disclosures Regulation (SFDR), providing updated guidance on sixteen questions.

Markets in Financial Instruments Directive (MiFID)

EMT v4.2 went live across the industry on 30^th June 2024 replacing v4.1. This new version integrates seven new fields required for UK firms (product manufacturers or distributors) in relation to costs, charges, and Sustainability Disclosure Requirements (SDR) Client Facing Disclosures.

 Broadridge fully supports the new version across our client base along with v4.0 which remains valid in the EU while v4.2 is mandatory for the UK.

Packaged Retail and Insurance-based Investment Products (PRIIPs)

There is a change to transaction cost methodology coming into effect in 2025 which you can read more about on the EU Union Website, the key changes are:

• Noted in Annex VI of EU 2017/653in December 2021, implicit transaction costs (TC) can be calculated using the methodology laid down in Annex VI (pt21) until 31^st Dec 2024. This means that Arrival Pricing (AP) must be included in TC calculations from January 2025.
• While most global asset managers have already adopted the AP standard, many market participants have not yet transitioned from the old methodology to AP.
• Arrival Price methodology tends to capture TCs more effectively, particularly in scenarios with more liquid instruments.
• Further guidance can be found in the ESMA Q&A for PRIIPs Key Information Documents (KID).

Alternative Investment Fund Managers Directive (AIFMD 2.0) 

The final legislative text was published on 26^th March and entered into force on 15^th April 2024 .

Member States have twenty four months to transpose the provisions into national law, meaning that AIFMD 2.0 will take effect from 16^th April 2026. 

On 8^th July, ESMA released draft guidelines and Regulatory Technical Standards (RTS) on Liquidity Management Tools under the AIFMD and Undertaking for Collective Investment in Transferable Securities UCITS directives. Responses are due by 8^th October 2024.

European Long-Term Investment Funds (ELTIF 2.0) 

On 19^th July, the European Commission adopted its final ELTIF Level 2 RTS. The legislative process now advances to a “three-month scrutiny period” by the co-legislators, namely the European Parliament and the Council, before the RTS can come into effect. You can view the full file here or follow the ‘scrutiny’ progress here.

Retail Investment Strategy (RIS)

 On 12^th June, EU member states confirmed their position on the RIS following months of intensive negotiations under the Belgian Council Presidency. While this is a crucial step forward, there is still much to be discussed and clarified in the upcoming trilogue debates with the European Parliament. You can read the full press statement here or read the EU Council announcement here. 

Artificial Intelligence (AI)

On 18^th June, the EU launched a consultation on AI in the financial sector. They wanted to find out how AI is already being used, and what the benefits and risks are in practice. The consultation runs until 13^th Sept and there will also be three workshops in the autumn to feed into the EU’s final thoughts. 

On 11^th June, the Irish Government released a series of reports on AI and its potential impacts on the Irish Economy. The reports on “Artificial Intelligence: Friend or Foe” can be accessed here.

Additional Updates

On 14^th May, ESMA published its Final Report on Fund Names. This stated that to be able to use terms such as ‘ESG’ or ‘sustainability related terms’, a minimum threshold of 80% of investments should be used to meet environmental, social characteristics or sustainable investment objectives. 

• Timeline: the Guidelines will be translated into all EU languages and published on ESMA’s website; they will start to be applied three months after that publication.
• Impact to clients: they may or may not have to change the name of their funds. Clients should be advised to assess the new ESMA guidance to ensure adherence to the regulations.

United Kingdom Update

Sustainability Disclosure Requirements (SDR)

In May, the UK Government published the next steps for implementation in which it outlined the expected work in 2024 and 2025, including consultations, dates of entry into force of new files and phase-ins, focusing on:

• Sustainability reporting: The UK government plans to adopt UK-endorsed ISSB standards ("UK Sustainability Reporting Standards)” in Q1 of 2025.
• Transition Plan Disclosures: the Financial Conduct Authority (FCA) will consult on strengthening its expectations for transition plan disclosures and the UK government will also consult to assess how the largest UK companies can effectively disclose their transition plans.
• SDR and Investment Labels: the SDR labels now apply as of the 31^st July 2024. The UK government will issue a consultation on whether to include overseas funds marketed within the UK in the SDR regime in Q3 2024.
• UK Green Taxonomy: work on the this is still underway, and a consultation on the framework and the activity level criteria will be published “in due course”.
• Nature-related disclosures: the UK government welcomes the recommendations of the Task-Force on Nature-related Financial Disclosures (TNFD) and supports their consideration in potential upcoming developments of the ISSB standards to nature-related risks.

For further information on this you can read the full update here or find the latest Investment Association (IA) guidance here.

In April, the FCA published a new consultation around extending the existing labelling regime, which covers asset managers, to also cover portfolio managers. The new proposal contains several changes to the previous consultation:

Overseas Fund Regime (OFR)

On 17^th July, the FCA published a Policy Statement detailing the final rules and guidance for funds that apply for and receive recognition under the OFR. PS24/07 sets out feedback they received to CP23/26. This month the FCA is expected to publish the OFR application form and further guides covering the application process.

Key Dates

On 1^st May, His Majesty’s Treasury (HMT) and the FCA released their Roadmap for the Overseas Funds Regime.

Consumer Duty

On 29^th July, the FCA have launched a “Call for input” following the introduction of consumer duty last year. They invited comments on issues including:

• which detailed rules or guidance could be simplified to rely on high-level rules, or have interactions with other rules which could be clarified.
• how any steps to simplify their rules and guidance affect their statutory objectives.
• the appropriate balance between high-level and more detailed rules.
• the potential benefits and costs from simplifying their rules.

 The consultation period is open until 31^st October. You can read the full details of the “Call for input” here.