Duff & Phelps’ Compliance and Regulatory Consulting practice provides update for asset managers from the French financial regulator Autorité des marchés financiers (AMF) and Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) during the fourth quarter of 2020.
The European Commission’s Plan of Action on Capital Markets Union (CMU)
On September 24, the first plan of action for CMU was announced in 2015. Five years later, this new plan will set out several priorities: a green and digital economic recovery, long-term savings and integration of national markets.
The plan includes 16 concrete objectives that aim for more harmonization in supervision and convergence in the application of the European regulatory body while encouraging banks and insurance companies to invest within the EU.
The CMU project has been delayed due to both the omnipresence of Brexit in European debates and the COVID-19 crisis. It seems that this crisis finally pushed the Commission to concentrate on the CMU and a Europe-wide economic recovery plan. Read the full article here.
Sanctions Against a Portfolio Management Firm for Insufficient Procedures
On September 28, the AMF Commission of Sanctions dated September 24, 2020 issued sanction SAN-2020-09 sanctioned an asset management company for implementing insufficient procedures for the investment process and in particular the use of investment committees for which no formal report was put in place. . In addition, this firm is accused of investing in a company that does not respect shareholder interest.
The firm received a €10,000 financial penalty and a reprimand. The managers are subject to a financial penalty of €100,000 as well as a five-year ban from taking on any roles as a manager or director of a portfolio management company. This decision is published by the AMF on its website on a non-anonymous basis for five years.
French 2021 Finance Bill
On September 28, the Finance Bill 2021 underwent examination by the National Assembly.
This Finance Bill also creates the "Label Relaunch" for investment funds to support and invest in French small and medium-sized enterprises (SMEs). This label may be obtained by funds invested in listed securities or private equity funds. The labelled funds will have to comply with environmental, social and governance (ESG) commitment criteria.
ESMA Updated Regulatory Technical Standards (RTS) Under the Benchmark Regulation (BMR)
On September 29, ESMA updated its RTS to outline behaviors and standards expected of benchmark administrators. In particular, these administrators are expected to implement a robust internal governance. This RTS then adds rules to the methodology of calculation and controls of indices. Finally, the RTS provides common criteria for assessing the most critical benchmarks.
This RTS shows the willingness to ensure the integrity and reliability of the benchmarks across the EU. Read the full article here.
AMF SPOT Controls on Valuation of Complex Financial Instruments
On September 29, the AMF conducted a SPOT inspection on five alternative investment fund (AIFs to determine their valuation of complex financial instruments. Here are the key recommendations resulting from the inspection:
- Ensure that the responsibility for valuation is assigned to a specific person and that same person does not hold a risk management position.
- Make a distinction between the valuation policy (which gives a general overview of the methods and those used by the firm) and valuation procedure (which defines the roles and responsibilities). The AMF also recommends that AIFs update their valuation policies and procedures at least annually.
- Summarize in a table the reference price sources used and their order of priority for each complex financial instrument.
- Document the retained methodology used and have it approved by a person who did not participate in its construction.
- Ensure a second-level control over all financial instruments held.
Impacts of Brexit on MiFID2 and Benchmark According to ESMA
October 1 marked the end of the transition period and with the growing prospect of no equivalence regime between the EU and the UK, ESMA presented changes to MiFID2 and the Benchmark Regulation (BMR).
The impacts of a no-deal Brexit on MiFID2 cover Section C(6) of Annex 1 on energy-related instruments, transparency of over-the-counter (OTC) transactions and the list of exchanges recognized by the CRR Regulation.
The BMR provides a transition period until December 31, 2021, during which supervised entities within the EU will still be able to use British benchmarks. If no equivalence regime is granted to the UK, benchmark administrators will have to apply for an EU recognition scheme for their index to be registered with ESMA.
ESMA Announces Changes in Money Market Funds Reporting
On October 2 monetary funds are subject to the Money Market Funds Regulation (MMFR) and are required in accordance with Article 37 to submit reports to national competent l authorities who will send them to ESMA.
The changes add new warning type validations and provide clarifications on existing validation rules to fix inconsistencies and the understanding of the rules.
The submission date for quarterly reports remains unchanged for the first and second quarters of 2020.
ESMA 2021 Programme
On October 2, in 2021, ESMA will have to face an environment marked by COVID-19 recovery and the withdrawal of the UK from the EU.
Firstly, ESMA aims to achieve a greater convergence of fund liquidity through Europe. ESMA will also continue its work on costs and performance of retail investment products, data quality and use, ESG supervision and the implementation of the European Market Infrastructure Regulation (EMIR).
Thereon, ESMA also considers conducting peer reviews in 2021 focused on: central securities depositaries, prospectus approval, central counterparties (EMIR), STS criteria, depositaries obligations and trading venues.
During 2021, ESMA will also review the AIFMD and MiFID2 directives.
Finally, in 2021 ESMA will focus on third-party central counterparties and prepare the first benchmark and data service providers supervision mandates.
European Consultation on European Green Bonds – The AMF and ESMA Positions
On October 9, in the wake of the Green Deal, the EU wants to set up a European standard on green bonds. The Commission has launched a public consultation on the matter to which the AMF and ESMA have responded.
The AMF is in favour of harmonizing reporting standards for green bonds. It also supports that, in order to obtain the EU Green Bond Standard label, the issuer must guarantee that 100% of its product is allocated to projects or assets financing the activities contained in the European taxonomy.
Finally, the AMF and ESMA are both supporting of the mandatory use of certified organizations to verify bonds issuers' commitments. The two agencies recommend ESMA as the supervisor of these organizations and are against the use of private verification/validation bodies. Read the full article here.
Brexit: Equivalence Between AMF Examination and FCA Requirements Extended for Two Years
On October 26, the AMF board extended the equivalence regime, regarding minimal regulatory/industry knowledge, to qualifications approved and recognized by the British regulator until December 12, 2022.
The relevant individuals must be able to prove that they have passed an exam which is recognized by the FCA. Read the full article here.
AMF Updates its Position on Professional Certification Examination
On October 27, the option for the professional certification exam to be taken remotely required updating Instruction DOC-2010-09 on the AMF certification conditions of those establishments authorized to conduct the examination.
This update increases the flexibility in both the process for taking and supervising the exams and the four-month period from receipt of the complete file after which the AMF’s silence is deemed as an acceptance. Read the full article here.
New Observatory on Sustainable Finance
On October 29, the sustainable finance observatory was unveiled on Climate Finance Day. Its objective is to promote transparency and the progressive transformation of the financial sector. This observatory will monitor the transformation towards carbon neutrality by 2050.
Members of the observatory include the following professional associations: AFG, France Invest, the French banking federation and the French insurance federation.
The observatory will gather data in free access to foster a greater transparency and to report the actions implemented in the different financial sectors according to four themes: responsible management, transition towards a low carbon economy, coal transition and responsible products supply.
Two New RTS for the Review of the Market Abuse Directive
On October 29, ESMA proposes two amendments on liquidity contracts and the promotion of SMEs as part of its review of the Market Abuse Regulation.
The objective of the amendments is to create a template for liquidity contracts for those who wish to issue AND for those who are allowed in SME growth markets. As a reminder, the SME growth market stems from MiFID 2 and its primary objective is to reduce SMEs’ dependency on bank loans through the diversification of financing sources.
With this new piece of legislation, it is necessary to update the Market Abuse Regulation to provide a new insider list to be used by SMEs and which sets out the minimum field for control purposes.
Diversity and Gender Equality: the European Banking Authority (EBA) Targets Remuneration Policies
On October 29, the EBA launched a consultation to review its guidelines on sound remuneration to take into account the amendments in the fifth Capital Requirements Directive (CRD V).
These guidelines specify that institutions must demonstrate a gender-neutral remuneration policy. For variable remuneration, the requirements will depend on each company’s balance sheet.
Investment firms subject to AIFMD, UCITS and MiFID are granted a specific remuneration scheme where they are no longer subject to the bonus cap.
A new remuneration regime will be applied for investment firms and funds part of a banking group and applying CRD V on a consolidated basis.
The review process will occur in 2021.
EBA Discussion Paper on Management and Supervision of ESG Risks
On October 30, the EBA launched a consultation on ESG risk management and supervision for credit institutions and investment firms.
This report sets out specific considerations for investment firms to incorporate ESG risk evaluation into their internal governance and risk management framework. The EBA raises the following question, specifically for investment firms: “What are the most relevant characteristics of your business strategies, internal governance and risk management that should be taken into consideration for the management of the ESG risks?”
The consultation closes on February 3, 2021.
Taxonomy Regulation – Clarifications on Extra-Financial Reporting
On November 5, with the Taxonomy Regulation 2020/852/EU coming into force in 2020, ESMA launched a consultation to answer the following questions: “How can the required key performance indicators (KPIs) be more detailed? What information must asset managers provide on how their activities contribute to financing sustainable activities? “
The results of this consultation will provide more information about three KPIs that asset managers have to report (turnover, capital and operating expenses). For asset managers, ESMA suggests a calculation method based on eligible investments. Read the full article here.
ESMA will deliver its results to the Commission in February 2021.
New Government Ordinance on the Freeze of Assets
On November 5, the Ordinance #2020-1342 extends the obligation to apply national asset freezing measures to any legal entity or person in accordance with European regulations. It specifies the obligations for groups in the banking sector and extends the supervisory authorities’ rights. Finally, it provides more detail on the transposition of the fifth European anti-money laundering directive. Read the full article here.
Report on the Implementation of Central Securities Depositories Regulation (CSDR) Raises Concern on Internalized Settlement
On November 5, to support the Commission’s revision of CSDR, the ESMA published two reports on the implementation of CSDR covering central securities depositories and internalized settlement.
There was no major variation in the provision of cross-border services since the entry into the force of CSDR, although respondents foresee a potential increase in transactions in the coming years. The main challenge is on internalized settlement (Article 9 of CSDR): national authorities fear an operational risk.
European Consultation on Funds Marketing Communication
On November 9, ESMA launched a consultation on future guidelines for funds’ marketing communications (UCITS, AIFs including EuSEF, EuVECA and ELTIF) to provide a general framework to reiterate the principle of fair, clear and not misleading information. These guidelines will, for example, help to identify marketing efforts. Read the full article here.
The consultation is open until February 8, 2021.
Brexit: Some Clarifications on EMIR, SFTR and the Use of ESMA’s Databases
On November 10, ESMA updated its three declarations on the impacts of reporting under EMIR, SFTR and any operation involving ESMA databases after December 31, 2020.
For reporting under EMIR and SFTR, while EU counterparties must still report and keep records, this is no longer the case for UK counterparties. Data reported by the EU counterparties and UK counterparties will be divided.
The FCA will no longer have access to ESMA’s database and will stop sharing information. Some information will still be disclosed for technical reasons (i.e. mainly calculations taking into account 2020 UK data) but UK-related data will be gradually phased out from all ESMA calculations. Read the full article here.
Overview of Sanctions Given to European AIFs and UCTIS
On November 12, ESMA publishes two reports highlighting trends in sanctions across Europe in 2018 and 2019 and gives an overview of the different uses of sanctions in the region.
For those sanctions relevant to AIFMD, Hungary, Portugal and the Czech Republic enacted the most sanctions. The number of jurisdictions that do not impose sanctions increased from 14 in 2018 to 17 in 2019.
For sanctions under the UCITS Directive, Hungary and Bulgaria stand out with the highest number of sanctions. France remains within the average with a total of five sanctions. We note that 16 national authorities have not imposed any sanctions. Read the full article here.
ESMA’s objective is to ensure convergence in the application of these directives throughout Europe.
ESMA Asks Fund Manager to Improve Readiness to Negative Shocks
On November 13, ESMA submitted a report in response to the European Systemic Risk Board (ESRB) recommendations. The objective of this report was to coordinate national competent authorities (NCAs) on the supervision of investment funds that have significant exposure to corporate debt and real estate assets.
ESMA collected data on NCAs regarding corporate debt and real estate funds. According to ESMA, the impacts of COVID-19 have been cushioned by government intervention to support the markets in which these funds invest. However, the ESMA raised some concerns about real estate funds for which the crisis could have a significant impact in the long term.
Five priority areas have been identified to enhance the preparedness of the funds and relate to the following topics:
- Ongoing supervision of the alignment of the funds’ investment strategy, liquidity profile and redemption policy
- Ongoing supervision of liquidity risk assessment
- Fund liquidity profile reporting
- Increase of the availability and use of liquidity management tools (LMTs)
- Supervision of valuation processes in a context of valuation uncertainty
On the basis of a potential negative impact of the COVID-19 crisis, ESMA reiterates that it stands ready to play its role of coordination and risk supervisor, particularly for liquidity risks.
Financial Investment Advisers: 2019 Key Data
On November 23, the AMF published 2019 data related to financial investment advisers (CIFs).
The AMF note an increase in total revenue, reaching 2.9 billion euros for 2019. The AMF highlights a high concentration of CIF activity. There are 50 CIFs out of the 4946 declared which account for 50% of the total revenue.
As of 2020, new CIF professionals must get their knowledge verified through an AMF-approved certification. For the others, CIFs must do continuous training to keep it up with the new regulation.
This continuing learning obligation leads to an update of the AMF Instruction 2020-04. Two subjects have been added to the scope of what should be covered during trainings: sustainable finance to raise awareness and protect investors from the growing number of CIF phishing incidents. Read the full article here.
AMF’s SPOT Controls on the Outsourcing of Internal Control
On November 26, the results of the AMF’s SPOT controls showed an uneven efficiency of the internal control frameworks among the inspected firms. The AMF published best practices to be implemented with regards to specific topics such as the contractual relationship with a service provider, the scope of the mission and the quality of deliverables expected.
We note in particular the following best practices:
- Monitor the relationship between the firm and its provider by a procedure surrounding the providers’ selection and assessment
- Ensure resources are trustworthy, have a significant experience and abides by the firm’s code of ethics
- Ensure reporting to principals are enhanced with a formal report every six months that includes a summary of the risk encountered
- Implement specific tools such as control notes, plans and reports and efficient procedures
- Define a control which distinguishes between periodic and permanent controls and in line with regulatory requirements and the specific risks of the firm.
The AMF considers it necessary to ensure these practices are implemented by 2021.
French “Loi Pacte” to Reinforce the Framework of Freeze of Assets
On December 3, in accordance with the “Loi Pacte,” the government is strengthening the asset freeze system through the publication of an ordinance, which will be supplemented by a decree, to ensure that these measures apply to all without delay.
The objective is to simplify and accelerate the asset freezing measures taken by the UN Security Council so that they become applicable as soon as the identification details of the persons subject to a freezing measure are published in the national register.
The ordinance also aims to harmonize the different asset freezing regimes. Going forward, freezing measures are to be implemented by all individuals and corporate entities, rather than only by those individuals holding funds on behalf of a client.
Thus, it is now mandatory for all companies subject to anti-money laundering – combating the financing of terrorism (AML-CFT) to have an effective framework to screen individuals subject to a freezing measure among clients and beneficial owners. XX are also required to analyse potential alerts in order to apply the measure without delay and immediately alert the French Treasury. Read the full article here.
ROSA Intranet and Update of the Program of Operations
On December 7, following the update of the AMF Instruction DOC-2008-03, a new platform called ROSA has been created to allow direct communication between the AMF and professionals.
This update triggers a new format for firms’ program of activities. This template is divided into thematic sections, according to the plan set out in Appendix II. This new template makes it possible to edit and update the targeted section rather than the whole document.
Asset managers have until March 7, 2021 to submit their standing data and update their program of activities.
TRACFIN Publishes a Report on Money Laundering and Terrorism Financing Trends in 2019 and 2020
This report, published on December 10, gives an analysis of the reported declarations in 2019 and 2020.
Regarding reporting flows, the sectors associated with the greatest number of suspicions are those connected with building works, the trade and the distribution sectors. The real estate, art, hospitality, transportation, logistics, IT and telecom sectors are frequently associated with the highest numbers of suspicious activities reported.
In addition, this report highlights the emergence of new AML-CT risks stemming from crypto assets. Since their creation, crypto assets have been a vector of money laundering closely monitored by TRACFIN. TRACFIN notes specific risks related to foreign exchange transactions (physical currency against cryptocurrencies and cryptocurrencies against cryptocurrencies), asset management on storage portfolios and the issuance of digital tokens that can be converted into crypto assets (Initial Coin Offering). Read the full article here.
Liquidity Contracts Authorized for Six More Months
On December 18, according to Article 13 of the Market Abuse Regulation, national competent authorities conduct a review of market practices at least every two years. This is the case for liquidity contracts in France. However, due to COVID-19, the AMF had to postpone its review of liquidity contracts. Therefore, its review is rescheduled for the first quarter of 2021 which delays the use of liquidity contracts until 30 June 2021. Read the full article here.
Leverage Risk in the AIF Sector – ESMA Provides Guidance
On December 17, ESMA followed up on the recommendations by the European Systemic Risk Board (ESRB) published in 2018 on how to address liquidity and leverage risk in investment funds. The ESRB then asked ESMA to provide guidelines on Article 25 of AIFMD for national competent authorities.
These guidelines provide information on how to address leverage risk and how to calibrate and implement limitations.
These guidelines are for national competent authorities. They will become applicable two months after their translation and publication which is expected in mid-2021.
AMF Publishes a Study on Climate Reporting According to TCFD Reporting Framework
On December 18, the AMF published its study setting out insights into the reporting practices of 10 French financial institutions according to the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
Even if the AMF encourages climate reporting, it also highlights some weaknesses as a result of the complexity of the reporting process.
Significant Increase of the Use of Sanctions in Europe Linked to Market Abuse
On December 21, ESMA published its annual report on administrative and criminal sanctions and other administrative measures imposed under the Market Abuse Regulation in 2019. This report shows that national competent authorities (and equivalent) have imposed a total of €88 million of financial sanctions, resulting in a total of 339 administrative and criminal cases.
National authorities have counted 279 administrative sanctions and 60 criminal sanctions. These numbers are lower than those of 2018 (a total of 472 sanctions), but fines are significantly higher: passing from €10 million in 2018 to €88 million in 2019.
In France, the total aggregated amount of financial penalties is €46 million (in comparison to €32,00 in Germany and €0 in 17 of the European countries).
AMF Guidance for Asset Management Companies Following Brexit on January 1 2021
On December 28, following the withdrawal of the UK from the EU on January 1, 2021 which changed the status of the UK to a “third country,” the AMF published guidelines to help asset management companies face the consequences of Brexit.
- Peronal equity savings plan (PEA) and as well as securities eligible for inclusion in the assets of collective investment undertakings (CIU) that may be registered in these plans benefit from a nine-month transition period (up to September 30, 2021).
- Retail private equity investment funds (FCPR) have a transition period of 12 months, i.e. until December 31, 2021, during which securities admitted for trading on a UK market and issued by companies with a market capitalization of under €150 million, subscribed or acquired before December 31, 2020, remain eligible for inclusion in the assets of these funds within the limit of 20% of the 50% quota of unlisted securities.
- Retail venture capital and retail local investment funds (FCPI) benefit from a grandfather clause for securities issued by UK companies held, directly or indirectly, by the above funds as at December 31, 2020.
Digital Finance – First Consultation for EU Project DORA
On December 31, the European Commission published in September 2020 a proposal for the Digital Operational Resilience Act (DORA) in the financial sector (COM/2020/595).
This proposal would apply to all regulated financial actors in the EU (credit institutions, crypto assets providers, intermediaries, investment funds and firms, depositaries, etc). Its aim is to ensure that all the actors within the financial system implement a robust framework to reduce cyber threats and any other ICT-related risk.
Among the DORA amendment, we note changes at the risk management level, reporting obligations of IT related incidents, the implementation of resilience tests and the responsibility of the financial actor over its IT provider.
This proposal in currently being consulted on until February 10, 2021 and will then be discussed by Parliament and the Council. We can expect a final version by the end of the year.