Agefi Luxembourg - décembre 2024

AGEFI Luxembourg 28 Décembre 2024 Fonds d’investissement By Arnd H ESSELER (portrait), Maciej M EDER and DorotaA DAMUS , zeb consulting* O nMarch 28th 2024major amendments to theMarkets in Financial InstrumentsDi- rective (MiFIDII) and theMarkets in Financial Instruments Regulation (MiFIR) came into effect, aiming to enhance transparency andmarket data accesswhile boosting the competitiveness of EU financialmarkets. These changes, alongside the proposed retail invest- ment package, strive to protect investors, reduce conflicts of interest, and adapt to digital advancements, paving theway for amore integrated and transpa- rent EuropeanCapitalMarketsUnion. However, the roadmap for the upcoming years should not be limited to the adoption of new provi- sions.Despitebeing in force since 2018,many institu- tions still struggle to fully complywithMiFID II and MiFIR regulations. Recent supervisory actions con- ducted at EU level have highlighted significant areas for improvement and led tomore detailed audits by national regulators, indicating that capital markets teams at banks andother investment firmshave sub- stantialwork ahead. Recent changes toMiFIDII andMiFIR On Thursday March 28 th 2024 the amendments to MiFID II andMiFIR came into force. The main goal oftheintroducedchangesistoincreasetransparency, facilitate investors’ access tomarket dataonfinancial instruments,aswellastostrengthenthecompetitive- nessofEUfinancialmarketswhiledeepening the in- tegratedEuropeanCapitalMarketsUnion (CMU). The key amendments toMiFID II relate to best ex- ecution requirements as well as the rules for the classification of investment firms as ‘Systematic In- ternalizers’, while themain changes toMiFIR con- cern the transparency and availability of market information. Investment firmswill have to comply with the newMiFIDprovisions by the end of Sep- tember 2025, while the changes in MiFIR took ef- fect immediately after their publication in the EU Official Journal. Upcoming regulatory amendments enhancing retail investor protection Butthesearenottheonlychangesawaiting the capital markets. In May 2023, the Eu- ropean Commission submitted its pro- posal for a retail investment packageaimed at deepening the CMU. The package consists of two legislative propos- als: one for an omnibus directive amending MiFID, the Insurance Distribution Direc- tive (IDD), Solvency II, the Under- takingsforCollectiveInvestmentin TransferableSecurities(UCITS)di- rectiveandtheAlternativeInvest- ment Fund Managers directive (AIFMD); anda secondone for an amendmenttothePackagedRetail and Insurance-based Investment Products regulation (PRIIPs). As the rules for investor protection and information currently spread acrossmultiple sector-specific laws, thepackageaimstostandardizetransparencyandin- formation requirements across EU legislation to pre- vent overlaps while also adapting to the digital environment andnewconsumer preferences. Key aspects include updating disclosure rules, en- suring investment products offer real value to retail investors, addressing conflicts of interest from in- ducements,preventingmisleadingmarketing,main- taining high professional standards and enhancing supervisory cooperation for consistent rule applica- tion across the EU. Additionally, the package will introduce changes to suitability and appropriateness assessments, revise regulatory disclosures and make specific changes to KeyInformationDocuments(KIDs)toprovideclearer detailsoninvestmentproductsandtheirperformance. InJune2024,theEUCouncilhasagreedonitsposition regardingthepackage.Amongthemainchangespro- posedbytheCouncilistheremovalofthepreviously announcedbanon ‘inducements’ received for execu- tion-only services. However, the Council agreed to strengthenthesafeguardsaccompanyingtheinduce- ments in order to limit potential conflicts of interest. EventhoughtherewillbenobanatEUlevel,member states will be allowed to introduce (or maintain) in- ducementbanslocally.Thispositionwillbereviewed againfive years after it comes into force. Another point on the agendawill be the introduction ofanew‘valueformoney’concept.Withthisnewre- quirement,manufacturersanddistributorswillbere- quired to determine if the costs and fees related to a product are reasonableandalignedwith itsperform- ance, benefits, features, goals, and, where relevant, their strategy. The National Competent Authorities (NCAs)willbeabletoreviewanddetectanypotential investment products failing to offer value for money through a new supervisory benchmarking tool to be developed by the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational PensionsAuthority (EIOPA). Manufacturers and distributors, in turn, will have to evaluate their investment products against a peer group of similar investment products within the EU to determine if they provide value for money. The benchmarkwillbebasedoninformationcontainedin databasesmanagedbyESMAandEIOPA.Thevalue for money framework will be reviewed seven years after the start of its application. With the previously reached agreement within the European Parliament, the interinstitutional negotia- tions can start soon. Based on the timeline of the sec- ond-level legislative process, the Retail Investment Strategy is likely to become applicable in 2026. There are newrequirements on the horizon, but arewe compliant with the already applicable ones? Even though MiFID II and MiFIR have been in force since 2018, many institutions are still far from being fully compliant. Common Supervisory Ac- tions (CSAs) and mystery shopping exercises con- ducted by ESMAover the last couple of years have highlighted potential areas for improvement. In 2022, the exercise focused on MiFID II require- ments on ex-ante and ex-post information on costs and charges. ESMA concluded that despite an overall adequate level of compliance with ex-post costs and charges requirements, the level of com- pliance differs across the countries, and several shortcomings were identified, such as cost alloca- tion between service and product costs, induce- ment disclosures, cost presentation as a percentage, or illustrations showing the cumulative effect of costs on return. Ingeneral, the exercise revealed that the format and content of ex-post disclosures differwidelybothbe- tween themember states, aswell as betweendiffer- ent firms within the same member state. The need for a standardized format for the disclosures was once again stressed by the NCAs. In terms of ex- ante information, only in half of the cases was proper MiFID II ex-ante information on costs and charges provided. In other cases, the information was either incomplete, presented too late in the de- cision-making process, or was not presented in a durable medium. In 2023, a similar mystery shopping exercise was conducted on the application of MiFID II disclo- sure rules with regard to marketing communica- tions. In its final report, ESMAhighlighted a list of observations divided into two sections: one on the organization and procedures related tomarketing and one on the content of marketing communica- tions, including advertisements, to clients and po- tential clients. The identified areas of non-compliance included, among others, a lack of adequate review and ap- proval processes for the use of third parties for ac- tivities related tomarketing communications, a lack of specificprocesses andprocedures inplace for sus- tainability-relatedclaims inmarketing communica- tions, marketing communications that are not clearly identifiable as such, marketing communica- tions that donot present the risks andbenefits of the products or services in a balancedmanner, or mar- keting communications that do not provide clear and accurate information on costs and charges, or that use misleading claims such as “zero costs” without specifying the exceptions or conditions. With intensified scrutiny from the European regu- lator, the NCAs in some member states have re- cently launchedbroadMiFID II compliance audits. We are currently supporting our clients – mainly large universal banks – from various European countries in closing gaps related to best execution, costs and charges disclosures and policies, appro- priateness assessments, product governance strat- egy, and cross-selling requirements, among others. Regulatory changes: next steps We believe capital markets teams still have a lot of work ahead of them. While waiting for the amended regulatory requirements to enter into force, banks and other investment firms should start identifying any potential gaps they might have. Thesemay refer to the newprovisions, aswell as to the existing ones. While defining a roadmap to close the gaps, the main challenge will be to de- velop compliant solutions that fit into the overall business strategy. *zebconsultingisastrategy,management&ITconsultancyspecializinginfi- nancialservicesinEurope.Formoreinformation ,visitourwebsitewww.zeb.lu MiFID III? Navigating through the upcoming regulatory changes on the capital markets G rahamRoche (portrait), Director, Ireland at IQ- EQdelves into the intro- duction of theAlternative Investment FundManagers Di- rective 2 (AIFMD 2), which marks a significant shift in the re- gulatory landscape for private cre- dit funds in Europe. Effective from 15 th April 2024, the newAIFMD 2 framework har- monises loan origination rules across EU member states, im- pacting all EU-domiciled funds engaged in this activity – but will it be abottleneckor ablessing for private credit managers? The new regulation is most likely to impact Luxembourg and Ireland, as the second and third largest global fund domiciles respectively, and the two main centres for investment funds in Europe. For Luxembourg, whichhistoricallyhas hadno specific rules for loan origination funds,AIFMD2 introduces regulations for the first time. Meanwhile, Ireland’s historically conservative loan framework will ease under the regulation, levelling the playingfieldbetween these jurisdictions anddriving the broader integration of Europe’s private credit market. Building regulatory consistency across Europe With Europe’s direct lending assets expected to double over the next five years, the introduction of AIFMD2 couldn’t come at amore pivotal time. The directive is a cornerstone of the Capital Markets Union (CMU): an EU initiative to create a single market for capital. Currently, Europe operates as a regulatory patchwork quilt, with different rules for non-bank lenders in individual EUmember states. These barriers hinder the cross-border flowof capital within the EU– a challenge the CMU aims to overcome. The CMU hopes to facilitate investment and savings across all member states for the benefit of citizens, busi- nesses and investors. Its primary goals are to build an integrated European capital market withharmonised rules for loan origination, aiming to provide companies with better access to diverse financing options beyond tradi- tional bank lending. Private credit is at the heart of the CMU. Initia- tives like ELTIF 2.0 and AIFMD 2 are designed to make private credit more accessible, transparent, and impactful, therefore acting as key enablers for the asset class. By introducing consistent rules, AIFMD 2 pro- motes greater regulatory consistency across Eu- rope, levelling the playing field for funds domiciled in financial hubs like Luxembourg and Ireland. The directive brings regulatory clarity by defining “loan origination” and introduces sys- temic risk management measures such as limits on leverage and concentration limits, as well as risk retention requirements. Furthermore, asset- level reporting (via Annex IV) will be required, though the reporting burdenwill primarily fall on the fundAIFM. A game-changer or a burden for private credit managers? AIFMD 2 is poised to reshape Europe’s private credit landscape. It aims to promote growth in di- rect lending by European-domiciled investment funds, while ensuring there are adequate systemic risk measures in place to protect the integrity of the financial system. For private credit managers, the directive introduces both challenges and op- portunities, but many see it as key to the indus- try’s expansion. Early on, in advance of theAIFMD2 rules being fi- nalised, some private credit managers raised con- cerns about the level of leverage restrictions the new European regulation would introduce. However, with a cap of 300% for closed-ended loan origina- tion funds, it is unlikely to affectmost private credit managers. Around 90% of European loan origina- tion funds employ leverage of up to 250% – which has largely reassured the market. The lower 175% leverage limit for open-ended fundsmay pose a challenge for some private credit managers. However, this is unlikely to disrupt the broader market, given that c.84% of private credit funds are closed-ended. Furthermore,AIFMD2provides several carve-outs andexemptions to certain requirements suchas risk retention and concentration limits. It is anticipated that overall,AIFMD2will have a limited impact on most European direct lending funds while simpli- fyingoperations for loanorigination funds inmany EUmember states. The silver lining for private credit managers The benefits of AIFMD 2 extend far beyond risk management for private credit managers. AIFMD 2 anticipates the introduction of a pan-European loan origination passport, aimed at eliminating cross-border lending barriers. For example, this would allow a Luxembourg- domiciled fund to lend to a French corporate, thus avoiding complex workarounds to avoid falling foul of French banking monopoly rules. The har- monised loanorigination rules alsobroaden the op- tions for fund domicile, enabling managers to implement uniform lending strategies across the EU. This unlocks significant growth potential across thewider European funds industry, and Ire- land in particular, to underpin the predicted growth of European direct lending funds. The directive also offers greater liquidity options for private creditmanagers.WhileAIFMD2makes it clear that closed-ended funds are themost appro- priate structure for direct lending strategies, the new regulations will allow direct lending through open-ended funds subject to appropriate liquidity management tools being in place. Currently, most EU member states only permit loan origination through closed-ended funds. Ultimately, these changes are expected to boost competition across the European fundsmarket. By making fund domicile more accessible and har- monising operational requirements, AIFMD 2 em- powers managers to scale their strategies more effectively while driving value for investors. A seismic impact on direct lending AIFMD 2 is likely to have a significant impact on direct lending inEurope, soprivate creditmanagers must understand the newregulatory requirements for loan origination funds. Although EU member states haveuntil 16 th April 2026 to transposeAIFMD 2 into national law, managers shouldbe aware that its provisions apply to all loanorigination funds es- tablished in Europe since 15 th April 2024. AIFMD 2 will provide opportunities and chal- lenges for private credit managers, but is expected to be a positive new chapter for the industry. The industry is gearing up to embrace this regulatory change, building a more unified and dynamic fu- ture for private credit in Europe. AIFMD 2: Will it help fix Europe’s regulatory patchwork?