ISF Regulatory update – What’s happening this year?

As we commence a new year, our Investment Services and Funds Team are looking ahead at all the regulatory developments which will be happening this year. The team has put together the following overview and list of key dates to highlight the top priorities for this year, also to help you track the developments in the sector particularly in relation to [SFDR] with the Taxonomy Regulation taking effect early in the year, the [MiFID II ‘Quick-Fix’]which will bring about some welcome changes for investment firms, the [CBDF] Regulations taking effect, technical amendments in relation to [PRIIPs], developments in relation to [DORA], which will bring significant changes in the legal and regulatory requirements relating to operations and proposals to [review the AIFMD] including changes to depository arrangements and alignment with the UCITS Directive. The team will continue to track and update you on the upcoming changes throughout the year to ensure that the firm’s clients are always a step ahead.

When? Which area? What?
1 January 2022 SFDR / All financial services The first provisions of Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”) will come into effect.
2 February 2022 CBDF / AIFMD & UCITS Commission Delegated Regulation 2021/955 and ESMA Guidelines on marketing communications published on 2 August 2021 will come into effect.
28 February 2022 MiFID II MiFID II ‘Quick-fix’ comes into effect.
31 December 2022 PRIIPs / UCITS Expiry of the extension of the transitional arrangement set out in Article 32 of the current PRIIPs Regulation (applicable to UCITS management companies and for persons advising on or selling units of UCITS).
1 January 2023 PRIIPs / UCITS Effective date for updates to UCITS Directive in relation to producing a KID for a UCITS under the PRIIPs Regulation and discontinuance of the UCITS KIID.


MiFID II – ‘Quick fix’

EU Directive 2021/338 has introduced several amendments to MiFID II which will come into effect on the 28 February 2022. The amendments are not an overhaul of regulation, but a ‘quick-fix’ intended to alleviate some of the administrative burdens on investment firms particularly in light of the COVID-19 pandemic.

Locally, the ‘quick-fix’ changes have already been implemented through revisions to the Conduct of Business Rulebook as outlined in a circular published by the MFSA on the 16 November 2021. The amendments will apply as from 28 February 2022 and will affect all investment firms regulated by MIFID II.

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CBDF Framework

The cross-border distribution of funds framework came into force in the European Union on 2 August 2021, made up of two main EU legislative instruments: Directive (EU) 2019/1160 amending the UCITS and AIFMD Directives (the “CBDF Directive”) and Regulation (EU) 2019/1156 (the “CBDF Regulation”) supplemented by a Commission Delegated Regulation 2021/955 and ESMA Guidelines on marketing communications published on 2 August 2021 (“ESMA”) which will come into force on 2 February 2022. This is an EU legislative framework intended to facilitate the cross-border distribution of funds in the EU by removing barriers to create a more competitive EU investment landscape.

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PRIIPs Regulation

EU Regulation 1286/2014 on key information documents for packaged retail and insurance-based investment products (“PRIIPs”), commonly referred to as the PRIIPs Regulation, introduced a pan-European pre-contractual product disclosure document, the key information document (“KID”). This PRIIPs Regulation imposes obligations on entities that manufacture, advise on, or sell PRIIPs to retail investors in the European Economic Area (“EEA”). The main purpose of this Regulation is to require PRIIP manufacturers (such as a fund manager in the case of an investment fund) to prepare a KID to accompany all PRIIPs that are made available to retail investors in the EEA and PRIIP distributors to provide the KID to retail investors. The KID disclosure requirements are designed to strengthen investor protection by enabling retail investors to compare products and take more informed investment decisions.

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The increasing dependency of financial services operators on hardware, software and digital processes means that information technology (“IT”) risks are embedded within the financial system. Against this backdrop, on 24 September, 2020, that is a few months following the outbreak of the COVID-19 pandemic, which certainly put firms’ operational resilience to the test, the European Commission issued a ‘Digital Finance Package’ including, inter alia, legislative proposals for the implementation of an EU Regulation and Directive on the digital operational resilience of the financial sector (“DORA”).

The purpose of DORA is to ensure that firms are well-equipped to withstand IT-related disruptions and threats. Through this new legislative package, a wide array of market participants, including, without limitation, banks, stock exchanges, clearing houses and fintechs will become subject to strict standards to prevent and limit the impact of IT-related incidents. DORA will also establish an oversight framework on service providers which provide cloud computing services to financial services operators.

DORA is currently going through the ordinary legislative procedure at EU level, which will lead to the publication of the above-mentioned Regulation and Directive in the EU’s Official Journal and eventual transposition into national laws (where applicable). At this juncture, operators should ready themselves for the significant changes in the legal and regulatory requirements around operational resilience which will stem from DORA by assessing the extent to which DORA will impact their existing IT risk management framework, and taking appropriate steps to meet the novelties of this legislative package.

SFDR – Taxonomy Regulation

The first provisions of Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (the “Taxonomy Regulation”) will enter into force on 1 January 2022. The Taxonomy Regulation provides a definition of what is considered as an environmentally sustainable activity. It also sets out disclosure requirements to investors with a view to allow them to compare products.

The Taxonomy Regulation requires financial market participants to provide investors with additional pre-contractual disclosures – in respect of financial products subject to SFDR – on to the environmental objectives of climate change mitigation and climate change adaptation.

Most of the disclosures relate to products that fall under Article 8 and Article 9 of SFDR. Article 6 products are still be required to include certain pre-contractual disclosures, albeit these will probably be minimal.

Financial market participants will also be subject to more detailed reporting requirements once the final regulatory technical standards – issued based on the Taxonomy Regulation – are published.

The MFSA has issued circulars relating to SFDR setting out a “fast track” regime in order to help funds meet the deadline to update their offering documents. The MFSA has yet to issue any communications to financial market participants in respect of the Taxonomy Regulation. Financial market participants should, prior to the coming into force of the Taxonomy Regulation on the 1 January 2022, update the prospectus of their financial products to ensure full compliance with the Taxonomy Regulation.

Revisions to AIFMD

On the 25 November 2021, the European Commission released the AIFMD review legislative proposal which puts forward amendments to the AIFMD and the UCITS Directives, primarily to align the requirements of both Directives.

A consultation was launched by the Commission on 22 October 2020 which followed the Commission’s review of the topic earlier that year from which it emerged that although the provisions of the Directives targeting the functions and liability of depositories were effective in terms of promoting investor protection, some changes were required.

Depository derogation

One of the proposed amendments which is interesting for the Maltese market is the change to the rule requiring that AIFs and UCITS funds appoint a depository which has its registered office or a branch in the same country as the fund. In this respect, the Commission’s 2020 review had identified the issues surrounding the lack of a depository passport and particularly the impact it has on smaller depository markets, a point which has always been very relevant to the local market.

A depositary passport would allow for the cross-border provision of depositary services, based on a harmonisation of depositary obligations which at present sometimes differ across Member States. For this reason, the Commission concluded that this option is still not feasible given the absence of EU harmonisation of securities and insolvency laws. However, the proposal ‘re-introduces’ the derogation allowing the provision of cross-border depositary services (which was valid until 22 July 2017) until a time when the Commission deems it appropriate to introduce a depositary passport.

Central Securities Depository

Other changes which are being proposed involve the Central Securities Depository and their inclusion as delegates of the depository in the custody delegation chain of safekeeping. A proposal to subject the depository to carry out due diligence on the CSDs was rejected on the basis that it would be excessive, considering that CSDs are in themselves subject to stringent regulations. The changes to the Directives in this respect are designed to create a level playing field among custodians and ensure that depositories have access to the information which they need to fulfil their obligations.

Third country depositories

For depositaries established in a third country, proposed amendments would mean that they could not be established in jurisdictions identified as high-risk countries (pursuant to Directive (EU) 2015/849(AMLDIV)) rather than listed as a non-cooperative country and territory by FATF; or identified as non-cooperative for tax purposes by the EU Council.