As the second month of 2020 begins, regulatory enhancements across the asset management industry show no sign of slowing down. The investment management space faced a huge amount of regulatory change in 2019, not only with regards to fund regulation, but also following a global surge in data protection regulation.
2020 looks set to be the year of environmental regulation. With the World Economic Forum in Davos being dominated by environmental concerns over the past few days, it is clear that there will be a keen focus on this in 2020. Not surprisingly, the EU has already started to take action with an Action Plan.
In response to growing concerns around climate change and Macro impacts, sustainability and Environmental, Social and Governance (“ESG”) investing has risen to the forefront of the asset management space. The European Commission’s ‘Action Plan’ on Sustainable Finance was published as far back as 2018 and stated,
“To achieve more sustainable growth, everyone in society must play a role. The financial system is no exception. Re-orienting private capital to more sustainable investments requires a comprehensive rethinking of how our financial system works. This is necessary if the EU is to develop more sustainable economic growth, ensure the stability of the financial system, and foster more transparency and long-termism in the economy.” (The EU Commission)
This mean that investors will be required to:
The next step in enforcement came on December 9, 2019 where a regulation was published in the Official Journal (Regulation EU 2019/2088) requiring sustainability‐related disclosures in the financial services sector. This regulation requires transparency with regards to sustainability-related information with respect to MiFID firms, AIFMs and UCITS management companies. It requires that pre-contractual sustainability disclosures are made to investors, such as explaining how sustainability risks are integrated into investment decisions.
New EU transparency requirements explained:
The requirements can be split into three key areas:
In terms of financial services products, firms will be expected to explain the following:
When will this be applicable?
The regulation will come in to force on March 10, 2021 with product rules being implemented the following year (December, 2022). Yet some regulators are already investigating conduct within their jurisdictions to ensure that strategies being launched under the guise of sustainability can actually stand up to pressure and scrutiny, therefore it is important that managers build these transparent procedures in sooner rather than later.
2020 will likely see the adoption of the ‘ESG Taxonomy Regulation’ (“ESG TR”) which aims to establish a framework for a unified criteria for deeming economic activity as environmentally sustainable.
The goal is to clarify and define the criteria that EU Member States must apply when developing systems for environmentally sustainable financial or ESG related products. They will be required to disclose ‘how’ and ‘to what extent’ the criteria set out in the ESG TR have been used to determine the environmental sustainability of those products.
More recently, on January 14, 2020, the EU presented the Sustainable European Investment Plan which is announced following the release of the European Green Deal in December 2019 which delivered the EU’s ambition to become the first climate-neutral bloc in the world by 2050. Based on this, it is safe to assume we can expect additional ESG and sustainability focused regulation in 2020 and firms must ensure they are ready to respond to this by taking transparency action now.
Contact us to enquire about Apex ESG Rating and Scoring product to support your ESG evolution.
AIFMD and UCITS Update
In April 2019, the European Parliament released amends to the existing regimes and improvements to cross-border distribution for AIFs and UCITS funds within the EU.
The key changes to the AIFMD and UCITS frameworks were in relation to the safekeeping of assets by depositaries and any sub-delegates to whom safekeeping functions have been delegated to (i.e. custodians or prime brokers acting as custodians).
The key enhancements include:
Depositaries of UCITS funds and AIFs have until April 1, 2020 to comply with the new common rules and are revisiting any delegation arrangements with their Custodian Banks to include the required changes.
In October 2019, the European Parliament adopted the new Whistleblowing Directive to protect individuals reporting breaches of EU law. The directive aims to implement a set of minimum standards for whistleblowing protection across the region. EU member states must implement the Directive into national law by December 17, 2021. Only after being implemented will its content be binding.
The Directive covers actual or potential violations of EU Laws in areas such as (amongst others):
The scope of the Directive is extended to existing and former employees, members of management or the supervisory board, contractors, subcontractors, suppliers, legal entities (directly owned or in any way connected to the reporting person) and/or to any third parties related to the reporting person.
Whistle-blowers are granted immunity from any liability for reporting information or submitting documents that they lawfully acquired or obtained access to. They also have the right to publicly disclose information on breaches if appropriate action is not taken.
In conjunction with the GDPR requirements, the Directive defines that:
Balancing Rights with Obligations
The Whistleblowing Directive asks member states to take measures to protect or sanction whistle-blowers, depending on the validity of the information reported.
In any case, internal and external investigations must always be handled with the greatest care, confidentiality and referring to the principle of “innocent until proven guilty”.
Outsourcing Requirements – Bermuda
In June 2019, the BMA published Guidance Notes on Outsourcing for all “Relevant Licensed Entities” (“RLE”), including Banks, Deposit Companies, the Bermuda Stock Exchange, Corporate Service Providers, Trust Companies, Money Service Businesses, Investment Businesses, Fund Administrators and the Credit Union.
The Guidance Notes require these entities to have adequate policies and procedures in place (by May 2020) in order to manage and monitor existing activities that have been outsourced, as well as to assess the risks arising from outsourcing new activities.
Although it applies to all outsourcing arrangements, the BMA is mainly interested in regulating the outsourcing defined as “material”, as any failure in provision or performance of the outsourced activity would have a material impact on business operations, financial performance, risk management, compliance risk.
The BMA has provided the RLEs seven months for the transposition of the new requirements.
Phase 1 – review of all existing outsourcing arrangements
During the first phase the RLE will need to review all existing outsourcing agreements and ensure they either (i) seek BMA approval for all of them or (ii) provide BMA with an attestation from CEO, declaring that each material outsourcing arrangement fully complies with the Guidance Notes.
Phase 2 – new outsourcing arrangements
During phase 2 (from January till May 2020) the RLEs that wish to enter into a new material outsourcing arrangement can still use either the pre-approval or attestation method.
From Live Date onwards
From May 1, 2020, the RLEs that wish entering into new material outsourcing arrangements will be required to:
Investment Funds Amendment Act
Bermuda is enhancing its regulatory framework by extending the scope of the Bermuda Investment Fund Amendment Act to categories of investment funds that previously did not require any registration or regulation; such as closed-ended investment funds and overseas investment funds.
The Bermuda Investment Fund Amendment Act (2019) came into force this month (January 2020), replacing the existing Investment Fund Act 2006.
If an investment fund qualifies as a Professional Closed Fund, it must comply with defined criteria, such as:
The new requirements for designation and obligation of overseas funds are:
Notification to BMA
At the time of filing, the overseas fund should also provide:
The notification should be submitted before June 2020.
Cayman Islands Government Bills – Private Funds Bill
Similar to Bermuda, the Cayman Islands is also introducing legislative changes to enhance oversight of open and closed-ended funds in order to provide additional transparency for investors – aligning with best practices, enhanced anti-money laundering and other key regulatory requirements.
The two key Government Bills are:
Who is in scope?
Closed-ended funds with more than one investor are expected to fall within the scope of the bill. A fund is considered to be a “private fund” if it has been structured as a Cayman Islands company, unit trust or partnership including if;
There are exemptions to fulfilling all of the obligations set out in the bill. For instance, it is expected that Alternative Investment Vehicles will be required to register with CIMA but will be exempt from the other requirements of private funds.
The bill provides a description of entities that are excluded from registering with CIMA. The full list can be found in the Bill (http://www.gov.ky/portal/pls/portal/docs/1/12910545.PDF ).
An implementation date has not been yet disclosed by the Cayman Government.
For other regulatory updates and information on directives around the globe, please visit our regulatoty corner.
Please contact us if you have any questions.
 The CEO attestation can take the form of a short statement that says, for example, “I attest that as of this date the material outsourcing listed below that the RLE entered into on 01/01/2020 is in full compliance with all aspects of the Authority’s new Outsourcing guidance. Where the RLE has a number of material outsourcings the CEO attestation can take the form of statement that says, “I attest that as of this date the material outsourcings listed below that the RLE entered in to on the various dates listed below are all in full compliance with all aspects of the Authority’s new Outsourcing guidance.” (Source: https://www.bma.bm/viewPDF/documents/2019-06-28-10-38-02-Outsourcing-Guidance-Note.pdf)
 Amongst the qualified participant, the IFA introduced the “high net worth private investors” (more than $1 mn). The change introduced by the IFA Amendments is to specify that the net worth amount must exclude the value and any benefits or rights under a contract of insurance.
By clicking the button you confirming that you’re agree with our following Terms and Conditions