to the point: financial regulation | 05/2024

The ESMA has published final report Guidelines on the use of ESG and sustainability-related terms in fund names to protect investors from unsubstantiated claims and provide clear criteria for asset managers. To use these terms, funds must have at least 80 % of investments meeting environmental, social or sustainable objectives. Specific exclusion criteria apply to terms like "Environmental", "Impact", "Transition", "Social" and "Governance", aligned with Paris-aligned (PAB) and Climate Transition (CTB) Benchmarks. The Guidelines will be published in all EU languages and take effect three months later. Competent authorities must notify the ESMA of their compliance within two months of publication. Existing funds have a six-month transition period, while new funds must comply immediately.

• On 30 April 2024, the Financial Conduct Authority (FCA) released a policy statement (PS24/4) on Rules Relating to Securitisation, incorporating feedback from the LMA's October 2023 response to the prior consultation paper (CP23/17). The LMA's input influenced several key decisions:
  • The final provisions will be implemented on 1 November 2024, providing ample notice to market participants, instead of the initially expected Q2 2024.
  • The FCA and PRA have aligned their drafting to prevent unnecessary inconsistencies.
  • A principles-based approach to due diligence for institutional investors was adopted, moving away from template-based reporting requirements for non-UK entities, which the LMA supported.
• Cadwalader, Wickersham & Taft (CWT) prepared a memo comparing due diligence requirements and transparency mandates across EU, PRA and FCA regulations, as well as reporting requirements based on the originator's location.

• The ESMA has updated the following Q&As:
  • Alternative Investment Fund Managers Directive (AIFMD)
    • Performance fees(2174)
    • Performance fees(2176)
  • European crowdfunding service providers for business (ECSPR)
    • Default rate disclosure (2198)
    • Risk Management Framework(2199)
    • Prudential requirements(2200) 
    • Prudential requirements(2201)
  • European Market Infrastructure Regulation (EMIR)
    • Reporting of accumulator contracts(2202)
    • Reporting of price field at position level(2203)
  • Markets in Crypto-Assets Regulation (MiCA)
    • Publication of information by CASPs providing the service of exchange of crypto-assets for funds or other crypto-assets(2181)
  • Markets in Financial Instruments Regulation (MiFIR)
    • Reporting of accumulator contracts(2204)
  • Undertakings for Collective Investment in Transferable Securities Directive (UCITS)
    • Performance fees(2173)
    • Performance fees(2175)

The ESMA has issued initial Guidance for firms using Artificial Intelligence (AI) in providing investment services to retail clients, emphasising compliance with MiFID II While AI offers benefits, it also presents risks such as algorithmic biases, opaque decision-making, overreliance on AI and privacy concerns. Firms must address these risks, particularly in customer support, fraud detection, risk management, compliance and investment advice. The ESMA and national competent authorities will continue monitoring AI use in investment services to decide if further regulatory actions are necessary.

The EBA has issued final Guidelines on simplicity, standardisation and transparency (STS) criteria for on-balance-sheet securitisations (OBS). These Guidelines aim to ensure a harmonised interpretation and application of the STS criteria across the EU, in line with existing guidelines for asset-backed commercial paper (ABCP) and non-ABCP securitisations. They clarify ambiguous aspects of the STS criteria to facilitate a common understanding and consistent implementation. The Guidelines also include amendments to the non-ABCP and ABCP guidelines to ensure consistency across all guidelines. The STS criteria help qualify OBS securitisations for preferential risk weight treatment under the Capital Requirements Regulation (CRR), supporting further lending and contributing to the Capital Markets Union's objectives. These Guidelines were developed under Article 26e(2) of the Securitisation Regulation, as amended by the Capital Markets Recovery Package, and in cooperation with the ESMA and the EIOPA.

• The EBA has published three final draft regulatory technical standards (RTS) and one final draft implementing technical standard (ITS) for the authorisation of issuers of asset-referenced tokens (ARTs), assessment of acquisitions of qualifying holdings in ART issuers and the approval process for white papers by credit institutions under the Markets in Crypto-assets Regulation (MiCAR). These standards regulate access to the EU market for ART issuers and those acquiring significant holdings in these entities.
• The RTS on authorisation specify the information required for public offerings or trading admissions of ARTs, with applications limited to legal entities in the EU. The ITS on authorisation detail the application process and template. Credit institutions need only approval for white papers, not full authorisation.
• The RTS for acquisition assessments outline the necessary information for evaluating proposed acquisitions, covering criteria such as the acquirer's reputation, financial soundness and potential for money laundering risks.
• The RTS on white paper approval procedures for credit institutions establish timelines for approval by competent authorities and central banks.
• These RTS and ITS were developed in cooperation with the ESMA and the ECB, as mandated by MiCAR, which came into force on 29 June 2023, with provisions for ARTs applicable from 30 June 2024.

The European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA) and the Federation of European Securities Exchanges (FESE) have jointly released a report addressing the development and competitiveness of European capital markets. The report reflects insights from 37 senior industry stakeholders and provides a "collective voice" on the challenges and opportunities for enhancing Europe's market competitiveness. The report notes a decline in the competitiveness of European capital markets compared to the United States, threatening the continent's economic growth and its ability to finance innovation, support green and digital transformation, and meet the needs of an aging population. It emphasises the need to fully leverage Europe's capital markets infrastructure, increase capital pools and improve investor outcomes. Key recommendations include enhancing retail investor access to attractive products, improving financial literacy, incentivising retirement savings and creating tax structures that encourage long-term investments. The report serves as a roadmap for policymakers, regulators and industry stakeholders, suggesting deliberate demand-side and supply-side actions over the next five years to build momentum, attract more investors and create more investment opportunities, ultimately benefiting Europe's economic landscape.

The Council has adopted new rules to enhance the resilience of EU banks against economic shocks by updating the capital requirements regulation and directive to incorporate Basel III standards (refer to the Council's position on Basel III here). These reforms aim to strengthen banks' risk management, supervision and sustainability, particularly in addressing the green and digital transitions. A key feature is the introduction of an "output floor" that ensures banks' capital requirements are not excessively reduced by internal models, setting a minimum at 72.5 % of standardised measurements. The rules also harmonise the authorisation and supervision of third-country bank branches and introduce a transitional regime for crypto-assets, along with enhancements in managing ESG risks. These new rules will be published in the EU's Official Journal and come into force 20 days later, with Member States having 18 months to transpose the directive into national law. The regulation will apply from 1 January 2025. The reforms follow proposals from the European Commission on 27 October 2021 and a political agreement reached on 27 June 2023.

The Council has adopted a comprehensive package of anti-money laundering (AML) rules to protect EU citizens and the financial system from money laundering and terrorist financing. This includes the creation of a new supervisory agency in Frankfurt, which will oversee compliance. The new regulations standardise AML rules across the EU, covering sectors like the crypto industry, luxury goods traders and football clubs, and impose stricter due diligence and beneficial ownership requirements, including a EUR 10,000 limit on cash payments. A new directive will enhance national AML systems and the operation of financial intelligence units (FIUs). The European Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA) will have supervisory powers over high-risk entities and the ability to impose sanctions. The AML package also ensures access to centralised bank account registers for FIUs and law enforcement through a single access point, aiding in the fight against financial crime. The regulations will be published in the EU's Official Journal and take effect three years after publication, with the AMLA beginning operations in mid-2025. This legislative package was initially proposed by the Commission on 20 July 2021.

The Financial Analytical Office (FAO) published a correction on its website regarding the notification of the written system of internal policies (SIP) in relation to investment intermediaries. The FAO published an opinion on the newly introduced obligation for certain obliged persons to copy identity cards. In the contact person section, information is added that the obligation to designate a contact person also applies to obliged persons under Section 2(2)(a) of the AML Act. (All the links in Czech only)

The FAO published on its website changes to the notification of the written system of internal policies (SIP) and changes to the FAO's procedures for monitoring SIP deficiencies. (Link in Czech only)

In response to the amendment to the AML Act and the amendment to the AML Decree, the FAO publishes a revised general interpretative opinion on the issue of inclusion of Member States on FATF lists. With effect from 2 May 2024, the general opinion is amended in point 4, which deletes the exception in relation to obliged persons supervised by the Czech National Bank. Furthermore, the opinion deals with the new concept of "country of origin" under the AML Act and provides for a situation where a jurisdiction on the FATF grey list that is not an EU Member State may be classified as a high-risk third country in view of the requirements of practice with reference to another reason presumed by the AML Act. (Link in Czech only)

The FAO published a consolidated version with highlated changes of Act No. 253/2008 Coll., on Certain Measures Against the Legalisation of the Proceeds of Crime and the Financing of Terrorism (AML Act), which came into force on 1 May 2024. This reflects the changes made by Act No. 107/2024 Coll. (Link in Czech only)