What can we learn from the regulatory news of 2022?


Let's take advantage of the end of the year to look back at the 2022 regulatory developments. The year was marked by some progress, much debate and some delays. Let's take a closer look at this regulatory news with a major theme: ESG for all.

Environmental regulations

Since March 2021, the SFDR (Sustainable Finance Disclosure Regulation) has applied to all financial products, including UCIs (UCITS + FIAs). This is an important regulation for the Luxembourg investment fund industry. The figures speak for themselves: the country is Europe's leading financial centre for UCITS administration and depositary with 4,223 billion euros of assets, twice as much as Ireland, three times as much as the United Kingdom and four times as much as France. More than 14,000 UCIs (according to the Commission de Surveillance du Secteur Financier, or CSSF1) must and/or have had to detail in their prospectus the classification of the SFDR regulation: dark green, green or not green at all - respectively articles 9, 8 or 6 of SFDR.

Local regulations or Luxembourg news

The CSSF published two new circulars almost simultaneously: 22/806 and 22/811. The first one concerns the outsourcing of certain activities (ICT outsourcing) in Luxembourg, within the European Union (EU) and/or in a third country. It is no longer necessary to obtain the approval of the CSSF; a notification to the Luxembourg Authority is sufficient. However, an Exit Plan is required. The second circular concerns the authorisation as a central administration and the production of reporting from June 2023. Further clarifications may be provided in the form of a Q&A.

The new securitisation law published on 4 March 2022 is applicable since 8 March 2022. This modernisation of the 2004 law offers more possibilities to carry out securitisation transactions under Luxembourg law under clear conditions.

Evolution of European directives and regulations

AIFMD 2: the revision of the Alternative Investment Funds Manager 2 Directive is ongoing. There is an evolution without significant changes, concerning delegation, liquidity risk management and the regulatory treatment of custodians.

CSDR (Central Securities Depositories Regulation): the penalties are applicable since 1 February 2022, but the buy-in regime is postponed.

EMIR: as part of the REFIT programme (Regulatory Fitness and Performance programme), the European Commission has carried out a technical review of the European text (EMIR Refit) by changing the declaration to the Trade Repositories. In June 2022, it adopted six texts proposed by ESMA2. The aim here is to facilitate the processing of reports and to align with international guidelines with more data/fields to be completed. The new format should apply from 29 April 2024.

PRIIPS ("Packaged Retail Investment and Insurance-based Products"): from January 2023, all UCITS will have to produce a PRIIPS KIID, a key information document extended to UCITS investment funds for retail investors.

MiFID2 and sustainability

As part of its Sustainable Finance Action Plan and with the publication and entry into force of two major regulations (SFDR Regulation EU 2019/2088 and Framework Regulation EU 2020/852, the so-called Taxonomy Regulation), the European Commission has had to make amendments to other regulations to take into account sustainability elements.

Among these amended regulations, the MiFID23 and IDD4 regulations incorporate these new requirements for sustainable investment.

MiFID2 - ESG is applicable from 2 August 2022 and is based on the EU Markets in Financial Instruments Directive (MiFID2) and SFDR. Product governance requirements have been extended to include client sustainability preferences and sustainability factors and risks for financial instruments. Each Member State had to adopt and publish, by 21 August 2022, the provisions necessary to comply with additional amendments to the MiFID2 framework on sustainability, in accordance with Commission Delegated Directive (EU) 2021/1269 of 21 April 2021 (which amended Delegated Directive (EU) 2017/593 on the integration of sustainability factors into applicable product governance obligations).

The obligations relating to these additional amendments are applicable from 22 November 2022. They require producers/designers and distributors of financial instruments to act in the best interests of investor clients during all stages of the product and/or service life cycle.

ESMA's final guidance on these new product governance requirements will be published in the first quarter of 2023 and will follow the public consultation that closed on 7 October 2022. They concern:

  • MiFID2: Product governance requirements relating to sustainability apply in particular to financial instruments such as shares, bonds, UCITS, certain derivatives etc.

  • IDD: Insurance-based investment products (IBPs) designed and distributed by insurance companies and insurance intermediaries.

The Investor Profile Questionnaire (Suitability Test) has been enriched to take into account client preferences regarding sustainability.

SFDR's Regulatory Technical Standards (RTS), published in July 2022, provide details of the Principal Adverse Impact (PAI) report, to be produced on the basis of 18 mandatory and two optional indicators for a first reporting date of 30 June 2023 for the year 2022. A methodology for classifying assets and being transparent to clients about the actual contribution of their investments to the achievement of sustainable development objectives must be put in place.

This task appears complex, as there is a dual definition of sustainable investment and DNSH (Do Not Significantly Harm) introduced by SFDR - covering both environmental and social objectives - and by the European Taxonomy - focusing on environmental objectives.

Each producer/designer and distributor must establish its own definition of sustainable investment. But there will inevitably be disparities between those who might display much higher minimum proportions of sustainable investment in their pre-contractual documents than others (e.g. > 40% vs. >15%).

In addition, for these investments with an environmental objective, the publication of the percentage of alignment with the Taxonomy remains a real challenge in terms of available data at the present time. We are already anticipating so-called green products (art.8 or art.9) with a 0% alignment with the Taxonomy. In contrast to the regulation, these divergences may create confusion for investors on the concrete sustainability of their investments.

Finally, on the subject of "sustainable regulation", the European Commission has added gas and nuclear as economic activities eligible for Taxonomy. For example, an activity can be eligible for Taxonomy if, already low-carbon, it contributes to the transition to a net zero economy by 2050 and enables other activities to reduce their CO2 emissions. SFDR's RTS were again amended in September 2022 to include gas and nuclear.

The PEPP, a little talked about regulation

The Pan-European Personal Pension (PEPP) is a voluntary personal pension scheme created by European Regulation 2019/1238 of 20 June 2019. Coming into effect on 22 March 2022, PEPP can be marketed in every EU member state. Although a certain number of bodies have indicated that they would offer this scheme, to date no PEPP has been registered in the European database. A key feature of this personal pension product is its cross-border portability, and it therefore targets EU citizens who want to continue saving for retirement via this same product when they move to another EU country.

The regulatory challenge

As time goes by and digital technology evolves, the difficulty is to reconcile regulatory challenges with new technologies.

IT applications must be compatible with regulatory compliance obligations. Fintechs, which provide niche financial services through innovative solutions, can provide keys to effectively combining the regulatory environment and technology.

The regulator, as a stakeholder in the evolution of the financial world, is therefore regularly adapting the regulations in order to strengthen investor protection and give or restore confidence.

For those who still believe that compliance is expensive, I would like to quote the famous phrase of former US Assistant Attorney General Paul McNulty: "If you think that compliance is expensive, try non-compliance".

Article published in AGEFI LUX in December 2022, on page 4 (French only).

Jean-Pierre Gomez , Head of Regulatory & Public Affairs, SGSS Luxembourg

1Source: https://www.cssf.lu/wp-content/uploads/newsletter263.pdf - page 8.
2ESMA: European Securities and Markets Authority 

3MIFID: Markets in Financial Instruments Directive

4IDD: Insurance Distribution Directive