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 third quarter of 2020.
The AMF and the French Anticorruption Agency Sign a Cooperative Protocol
On September 17, the two regulators expressed their desire to strengthen their relationship by exchanging information and sharing their experiences, in signing this agreement.
As a reminder, the French Anti-Corruption Agency was founded in 2016 to help any public or private person prevent and detect corruption, illegal interest taking, embezzlement of public funds and favoritism.
The protocol signed with the AMF will enable joint meetings and the implementation of common detection and prevention mechanisms. Read the full article here.
Competent Authorities on Monetary Funds – The AMF Updates Its Position
On September 9, the AMF now complies with the European Securities and Markets Authority (ESMA) guidance on reporting to competent authorities on monetary funds. The AMF has updated its position DOC-2018-05 to incorporate ESMA requirements published in a final report in 2019 which provided details on Regulation 2018/708.
The amendments incorporated by the AMF involve companies which manage authorized monetary funds and include adding precisions on stress test scenarios to take into account factors such as changes in liquidity, credit risk, rates and macro systemic shocks.
However, the AMF highlighted that, given the operational and IT difficulties due to COVID-19, the first remittances would be effective in December 2020. Read the full article here.
Sustainable Finance – All AMF Publications Now Online
On September 7, sustainable finance is confirmed as the cornerstone of the AMF strategic plan #Supervision2022 and is now apparent in many of its missions and activities. To highlight its initiatives, the AMF has a webpage listing its priority actions and provide an understanding of recent actions carried out in various areas such as: listed companies, responsible management, investor awareness and contribution to European and international work.
There are surveys, reports, guides and regulatory references available related to these AMF’s actions in the field of sustainable finance.
ESMA Renews its Decision Requiring Net Short Position Holders to Report Positions of 0.1% and Above
On September 17, the European supervisor decided to renew its decision initially taken on June 10, 2020 which required holders of net short positions traded in the EU to notify their national authority if the position reached or exceeded 0.1% of the issued share capital before 15:30 CET the day after.
This temporary transparency obligation applies to all natural or legal persons, irrespective of their country of residence and until December 18, 2020.
ESMA continues to cooperate with national regulators to moderate the effects of COVID-19 on financial markets in order to promote stability and to keep protecting investors. Read the full article here.
Luxembourg – The CSSF Publishes New Indicators for Tax Fraud Laundering
On September 14, the CSSF published a new circular on the laundering of tax fraud which supplements a former circular providing new indicators for consideration regarding collective investment activities.
Professionals subject to its supervision must consider these indicators when assessing their risks and drafting risk mitigation measures.
These indicators are listed in Circular CSSF 20/744 which aims at providing guidance on the extension of the offence of money laundering to tax fraud.
ELTIF Regulation on Long-Term Investment Funds – The European Commission Releases an Inception Impact Assessment
In the wake of the revision of the European long-term investment funds (ELTIF) regulation, the Commission has published an inception impact assessment to review ELTIF.
As a reminder, when a new European law or policy may potentially have an adverse effect on society, the Commission conducts a more thorough impact assessment.
This review of ELTIF aims to promote the capital markets union project and foster smart, sustainable and inclusive European economic growth. This is expressed by concrete objectives such as the increase in ELTIFs number to enable investment in the real economy (especially in SMEs). This initial assessment will answer issues of fund structure and eligibility, investment barriers and state incentives. A public consultation will occur in Q4 2020, opening the path for a first draft of regulation in Q3 2021.
AIFMD Review – ESMA’s Letter to the European Commission
On August 19, following the European Commission’s report on the EU Alternative Investment Fund Managers Directive (AIFMD) published in June 2020, ESMA wrote a letter to the Commission entitled “Review of the AIFMD”.
ESMA’s letter includes recommendations in 19 areas, the harmonization between the AIFM and UCITS regimes and requires clarifications on concepts such as reverse solicitation. ESMA also pledges for a better framework to regulate the increasing delegation to third parties.
This review of AIFMD is clearly influenced by the perspective of a post-Brexit EU and the preparation of an AIFMD II that would strengthen capital markets.
COVID-19 – Postponement of the Regulation of Technical Standards on Settlement Discipline to 2022
On August 28, ESMA published a report on Regulatory Technical Standards (RTS) which definitively postpones the coming into force of the Commission Delegated Regulation (EU) 2018/1229.
The initial date was set to September 2020 but due to the impact of the COVID-19 pandemic, ESMA proposed to postpone its entry to February 1, 2021.
This RTS on settlement discipline aims to prevent and address settlement fails. It includes the rules for the trade allocation, cash penalties on failed transactions, mandatory buy-ins and monitoring and reporting settlement fails.
Finally, once endorsed by the European Community (EC), the amendments will be subject to non-objection of the European Parliament and the Council.
COVID-19 – Banque de France Changes Rating and Asks Companies to Cooperate
On July 3, the Banque de France rates more than 270,000 companies each year based on their accounting and qualitative documentation provided by managers.
Due to the extraordinary context marked by the pandemic, the Banque de France decided to change its rating process to provide more reliable results.
Therefore, gathering all qualitative elements is a tremendous effort in order to ensure the quotation is precise and true bearing in mind the current environment. For instance, companies that have taken specific measures such has financial support will be able to mention it and have it considered for their ranking. Read the full article here.
The French Anti-Corruption Association Publishes its 2019 Annual Report
On July 9, the French Anti-Corruption Association (AFA) reflect on one of the most demanding years as France was being scrutinized by two international evaluations. The UN and the GRECO (EU anti-corruption taskforce) led a range of examinations to asses and gauge the level of corruption in France.
The year was also marked by the first time the AFA referred to the sanction commission. Moreover, for the first time in its history the French government adopted a national plan against corruption.
This report opens the path for more change in the field of anti-corruption in 2020 and the years to come.
The Green Label ISR Reinvigorated and Now Available for Real-Estate Funds
On July 28, the French Ministry of the Economy launches the new version of the ISR label (Socially Responsible Investment). This new version enforces the pre-requirements to obtain the label. For example, funds must prove that their sustainable investments are better than their other investments on at least two environmental, social and governance (ESG) indicators. This new version also opens the label for real-estate funds.
Disclosure Regulation – the AMF Aspires to Go Further
On July 28, in the wake of the disclosure regulation published in November 2019, European supervisory agencies have launched a consultation on the technical norms. The AMF intends to raise awareness on specific regulatory angles.
The latter aims to increase the transparency of financial players with regards to sustainable finance issues regarding both their entities and the products they market. For example, the AMF would like to ensure that pre-contractual transparency investment contracts clauses are included around either strategies with ESG objectives, or a distinction between products that incorporate ESG characteristics and those that have a genuine sustainable investment project.
In a nutshell, the AMF strongly supports this European initiative, which marks a first step towards a supranational debate on redirecting capital flows towards sustainable activities.
The AMF Updates its Doctrine to Avoid Greenwashing of Some Offers
On July 27, the growing number of asset management infrastructures that include non-financial criteria (such as ESG objectives) in recent years has been a source of concern for the AMF as it increases the risk of disproportionate disclosure to investors. The French authority wants to ensure that non-financial criteria are appropriately communicated.
Portfolio management companies that have extra financial criteria and wish to mention them in their marketing communications or investor’s documentation are now allowed to do so only if their products with extra financial criteria represent a “significant commitment”. Conversely, if a company’s approach does not show a “significant commitment”, then its communication on the use of extra financial criteria must be “brief and proportionate”.
In addition, the AMF now requires a form to be completed if the extra financial criteria becomes a central management point in external documentation.
This change can be interpreted as a way of limiting the disproportionate use of ESG criteria in communications but also highlighting those funds with the stronger commitments.
ESMA to Strengthen European Convergence on Costs
On June 4, following its 2019 report which emphasized the levying of costs having negative consequences on investors, ESMA led a joint taskforce alongside national agencies to determine the supervisory practices to be adopted in order to avoid the levying of undue costs. ESMA suggests requiring asset managers to limit undue costs being charged to investors. Read the press release here.
The outcome of this collaboration also highlights the risk of regulatory arbitrage resulting from the degree of application of these measures by member states and therefore reiterates the need for convergence on European financial markets.
This position echoes the agency 2020-2022 Strategic Outlook which aims to promote trust towards financial markets coupled with a better spread and access to markets for Europeans. Read the full article here.
Digital Finance – Is the EU Ready?
On July 7, digital finance is confirmed as the heart of the new Commission’s digital strategy alongside data and AI. The EU’s digital finance strategy aims to boost innovation whilst ensuring rigorous regulation. This balance is difficult to reach, but it is necessary in order to compete on the international technology market.
The AMF raised some points on this continental digital finance project. For instance, it considers that the European regulation is suitable for innovation but will not be sufficient to supervise crypto assets.
Moreover, the AMF warns against cross country divergences in terms of regulation that could lead to a stronger regulatory arbitrage between member states. Conversely, the implementation of a common database of European companies could foster more convergence and a financial union favoring financial technology innovations. Read the full article here.
More Clarity on the Principle of Best Execution
Best execution is a principle stemming from MIFID II which calls for obtaining the best possible result for clients during the order execution process. The AMF has clarified these obligations by listing the entities concerned and confirming the practices and obligations arising from it.
These clarifications make the principle of best execution genuinely effective and thus increase the need for compliance in the field of order execution.
Obligations Falling Under the Freeze of Assets
The freeze of assets is a sanction towards entities suspected of money laundering or funding terrorism. It means that the funds of these persons or entities are frozen and that professionals need to make sure that no funds are made available to them.
The AMF has released guidelines for professionals to help them anticipate the freeze of some of their clients assets. These guidelines list the entities concerned and reiterate the obligation to comply with supranational and European asset freezing regimes and clarifies the conditions for implementing national level regimes.
Finally, these guidelines highlight the need for professionals to filter and detect the relevant persons or entities which are subject to these freezing measures and to implement the sanctions without delay.
Telephone Taping – The AMF Assesses the Obligations from MiFID II
Between November 2019 and February 2020, the AMF conducted five thematic inspections, known as SPOTs, on recordings of telephone conversations and electronic communications.
Among the identified best practices were the scoping of the covered activities together with informing employees of their rights with regard to such recordings.
However, the AMF condemns a poor use of recordings and irregularities in the methods used to store them. Finally, the AMF warns of shortcomings in the management of possible incidents and emphasizes the obligation to use monitoring sheets. Read the full article here.
Guidelines for French Funds on How to Manage Liquidity
Faced with the expectation around the liquidity management and risk imposed on investment funds, the AMF and the Banque de France have published a study listing the tools available to French funds to manage their liquidity.
The existing framework in France involves the following mechanisms: swing pricing (aimed at making the outgoing investor bear the cost of liquidity), advance notice, caps on redemptions and the isolation of certain less liquid assets.
The novelty lies in the AMF and Banque de France's automated analysis of French prospectuses. This analysis highlighted, for example, that 71% of prospectuses mention the possibility of suspending redemptions. Another example lies in the comparison between equity funds that prefer to use an adjustable-rights mechanism and bond funds that prefer to use swing pricing while the mechanism for capping redemptions is in full effect in real estate funds.
PACTE Law Restricts the Use of “Prudent” by Management Companies
The 2019 pension reform, or PACTE law, created individual retirement savings plans (plan d’epargne retraite individuel or PERI), which allows people to invest capital during their working life in order to receive a lump sum or a pension once they retire. The PERI offers several investment profiles to reduce financial risks as retirement approaches. One such profile is the prudent retirement horizon profile, which has strict conditions for early exit and provides for up to 70% investment in risky assets prior to retirement.
However, this terminology could be seen to be incompatible with the notion of "prudent", which is well known in collective management or portfolio management and is used for portfolios that expose less than 30% of their net assets to risky assets. To clarify the scope of the two concepts, the AMF adjusted its doctrine regarding the use of the term "prudent". Read the full article here.
Among its conditions, the managers of mandates concluded within the framework of PERI that they were not concerned by the 30% criteria if they use the terminology "prudent retirement horizon".