Against the backdrop of a full agenda set out by the incoming Commission President (see our latest insights), together with scheduled legislative reviews and implementation of new requirements, ESMA's work programme for 2020 is long and wide-ranging. Most of the items on its agenda will impact asset managers and investment funds in some way, many directly.
There is a particular focus (or impact) on investment funds across the piece, in relation to financial stability and investor protection matters, and on issues arising from technological innovations, sustainable finance and Brexit.
The national regulators, too, are under pressure. They are expected to come fully into line with common supervisory and enforcement processes, with ESMA's use of its enhanced supervisory convergence powers well-signalled. Specific supervisory reviews are planned, which may lead to increased demands from the NCAs to firms for data.
ESMA is delivering a clear message for asset and fund managers of all types – the way in which the industry operates is under continued and deepening regulatory scrutiny, across all aspects of the business.
Implementing new mandates: including technological innovation, sustainable finance, equivalence assessments and implementing the new prudential rules for investment firms.
Promoting supervisory convergence: including in relation to:
Assessing risks to investors, markets and financial stability: financial innovation and product risk analysis; reports on financial market risks; data management and systems, including interface with NCAs
Completing the single rulebook: technical standards under EMIR and CSDR, and on reporting to trade repositories; assessing the need for amendments to MiFID II requirements on investor protection and intermediaries, and on secondary markets; technical advice to the Commission on MAR application; contributing to the PRIIP KID, UCITS and AIFMD reviews
Directly supervising certain financial entities: credit rating agencies, trade repositories and securitisation depositaries, plus recognition of CCPs and third country CSDs
ESMA is consulting (PDF 1 MB) on the inclusion of investment funds in the market abuse (MAR) provisions. At present there is a lack of clarity as to whether, and if so which type of, collective investment undertakings are in scope. ESMA thinks it is not appropriate for some funds to be caught and some not, simply due to legal structure and listing. Moreover, MAR was written with ordinary trading companies in mind and the application of some of the provisions to funds is not clear.
A consultation by the Joint Committee of the ESAs is expected imminently on amendments to the PRIIP KID Level 2 rules and potential issues requiring amendment of the Level 1 Regulation. It is especially important that the industry and other stakeholders respond to this consultation to ensure that identified flaws in the current document and underlying methodologies are addressed, to the benefit of investors.
ESMA will assist the European Commission in the review of MiFID II/MiFIR. It will also continue its focus on the consistent application of the rules, including in relation to conduct of business and organisational requirements, suitability (including sustainable finance aspects), costs and charges, and product governance. In particular, it will facilitate common supervisory activity by the NCAs on suitability. The purpose will be for NCAs to learn from each other's experiences and to compare results. ESMA will also facilitate “real case” discussions, and NCA training and workshops.
ESMA will continue monitoring financial activities and retail investor trends, with a particular focus on financial innovation, to ensure that it does not undermine the core objectives of investor protection, financial stability and orderly markets. To prioritise which financial innovations require deeper analysis and potential responses, ESMA has developed the financial innovation scoreboard: a methodology based on quantitative and qualitative assessment. Key analytical areas are fintech, crypto-assets, tokenisation, crowdfunding, artificial intelligence, machine learning, ESG indicators and technology risk, including outsourcing to cloud providers and cyber resilience.
The monitoring also helps ESMA to gather market intelligence, develop retail risk metrics and analyse trends (e.g. in the cost and performance of retail investment products). This, in turn, supports supervisory convergence activities and enables the timely identification of potential causes of consumer and investor harm, which will inform ESMA's identification of product risks and determination of when and where it will employ its product intervention powers.
ESMA will contribute to the reviews of the UCITS Directive and AIFMD, and will seek to achieve greater convergence and consistency of NCAs' supervisory approaches and practices, with a particular focus on cost and performance.
It will carry out follow-up work on the findings in its first Annual Statistical Report (PDF 3.4 MB) on the cost and performance of retail investment product, with the goal of consistency in NCAs' supervision and enforcement activities. This will include continuing co-ordination of NCAs' work in the area of “closet indexing” and ensuring supervisory convergence regarding performance fee structures and the circumstances in which performance fees can be paid.
ESMA will continue to use its fund stress simulation framework to assess the resilience of the EU fund industry and identify potential vulnerabilities in funds. In particular, it will update the July 2019 guidelines on establishing common reference parameters that MMF managers should include in their stress test scenarios. These cover potential changes in a fund's liquidity levels, credit and interest rate risks, redemption levels, widening/narrowing of spreads among indexes to which interest rates of portfolio securities are tied, and macro-economic shocks.
A specific area of focus will be liquidity management in UCITS in order to assess whether there might be a mismatch between the redemption policies and liquidity profiles of some UCITS. ESMA will facilitate common supervisory action by the NCAs in 2020. (See the September edition.)
ESMA maintains and operates more than 20 IT systems to meet legislative mandates stemming from e.g. MiFIR, UCITS, MAR, CSDR, EMIR, AIFMD, SFTS, Prospectus Regulation, STS Securitisation Regulation and MMFR, as well as prospectus, sanctions, and short selling exempted shares registers.
The EBA's work programme includes specific reference to a feasibility study on an integrated EU reporting framework for banks. There is no such mention in ESMA's programme, or of an assessment of the duplication and overlaps in the data to be reported under the various regulations. This is an issue for fund managers, as highlighted in KPMG's report to the Commission on the operation of AIFMD.
The agreed legislative amendments on facilitating cross-border distribution of investment funds foresee various empowerments for technical standards and central databases to be developed by ESMA, including in relation to cross-border marketing activities by funds.
ESMA will also work to improve supervisory co-ordination on entities/groups with cross-border activities (i.e. cross-border provision of investment services/distribution of consumer products). It will establish ad-hoc groups to deal with concrete cases with a cross-border dimension involving more than two NCAs and raising investor protection concerns.
ESMA will facilitate co-operation in cross-border enforcement investigations. The objective is to share and develop best practices in key areas, including the determination of financial penalties, as well as to share practical enforcement investigation skills and techniques.
New prudential rules for asset managers
ESMA will develop, or will co-operate with the EBA on the development, of technical standards and other legal acts required under the new prudential framework for investment firms – the Investment Firms Directive and Regulation (IFD/IFR). There are new rules and requirements on capital, liquidity, regulatory reporting, internal governance and remuneration (see the April edition for more details).
Third countries and Brexit
IFD/IFR also require ESMA to work on changes to the third-country regime for the provision of investment services by third-country firms. It plays a key role in the implementation of the MiFIR third-country regime for the provision of investment services, both directly (e.g. co-operation agreements with supervisors of equivalent third countries; exercise of powers in relation to third-country firms registered in the relevant ESMA register) and indirectly (e.g. equivalence assessments).
In the context of Brexit, ESMA will undertake a review of NCAs' handling of relocations to the EU27. It will consider NCAs' authorisation of relocating firms and supervisory steps to address any shortcomings identified at the authorisation stage. It will continue to monitor relocations to the EU27 until six months after Brexit. Because individual NCAs alone may not be able fully to monitor the activities of major relocating financial entities, it will encourage closer co-operation by facilitating the setting-up of voluntary NCA colleges. It will also maintain regular communication with market participants and other stakeholders, and close co-ordination and co-operation with relevant EU institutions and bodies.