UK/EU Investment Management Update (January 2025)

1. UK — Private Stock Market

2. UK — MiFID II

3. UK — Cryptoassets

4. UK — ESG

5. UK — Custody and Fund Services

6. UK — Consumer Duty

7. UK — Consumer Composite Investments

8. EU — AIFMD

9. EU — EMIR

10. EU — Securitisation Regulation

11. EU — Cryptoassets

12. EU — MiFID II

13. EU — NBFI

14. EU — IFR

15. EU — ESG

1. UK — Private Stock Market

Financial Conduct Authority consults on new private stock market

On 17 December 2024, the Financial Conduct Authority (FCA) published a consultation paper (CP24/29) setting out proposals on the regulatory framework for the Private Intermittent Securities and Capital Exchange System (PISCES), a new platform on which shares in private companies may be bought and sold.

In establishing the PISCES platform, the FCA is seeking to provide investors with more opportunities to take stakes in UK private companies in order to build greater confidence in such companies and help them to grow and scale up. This proposal comes amidst the FCA’s acknowledgement of increasing demand for investors to be able to trade shares in private companies more easily, as more and more companies choose to stay private for longer, in part owing to the increasing legal and regulatory burdens on publicly traded companies.

PISCES will be a new type of trading platform that enables intermittent trading of private company shares using market infrastructure. It will use public market features such as multilateral trading as well as private market features to give companies greater discretion over how and to whom their disclosures are distributed, when trading occurs, and which investors can participate in their trading events. Notably, PISCES will not be regarded as a “trading venue,” so certain regulatory requirements applicable to shares “traded on a trading venue,” such as those under the UK Market Abuse Regulation (MAR), or transaction reporting under the UK Markets in Financial Instruments Directive (MiFID II), will not apply to trading on PISCES.

PISCES may open up new investment opportunities for hedge funds, and it will be interesting to see how this new market develops. The International Stock Exchange in the Channel Islands launched a similar private market in 2023.

The FCA is inviting comments on the consultation paper by 17 February 2025.

2. UK — MiFID II

FCA publishes updates on bond and equity consolidated tapes

On 16 December 2024, the FCA published an Update on its progress in establishing an equities Consolidated Tape (CT), including publishing the results of its prior consultation paper (CP23/33), and an independent analysis of the issues around the inclusion of pre-trade data in an equities CT commissioned by the FCA.

The Update indicates that market participants consider there is a strong case for putting in place an equities CT with post-trade data. However, whilst many market participants also support the inclusion of pre-trade data, a minority of market participants expressed concern with including such data.

The FCA will devote further time and resource to assess potential options for a UK equity CT (including whether to prioritise a post-trade data only CT in the first instance, or include pre-trade data, but on a more limited scale), and intends to engage widely on potential Consolidated Tape Provider (CTP) design options early in 2025, and work towards publishing a consultation paper later in the year.

The FCA is seeking expressions of interest from potential equity CTPs by 10 January 2025 and will arrange to speak with market participants regarding questions laid out in our update.

Additionally, on 3 December 2024, the FCA announced that it will also be establishing a bond CT and is in the process of appointing a bond CTP. The FCA has published a Concession Notice setting out the FCA’s next steps for running the tender process.

FCA updates direction modifying the UK Derivatives Trading Obligation

On 29 November 2024, the FCA announced that it had updated the direction modifying the UK’s derivatives trading obligation (DTO) from 31 December 2024.

In December 2020, the FCA had published a statement noting its intention to use its powers under the Temporary Transitional Power (TTP) to modify the application of the UK DTO.

The purpose of the direction was to avoid disruption for market participants caught by a conflict of law between the EU and UK DTOs — in particular branches of EU firms in the UK. The TTP direction therefore allowed firms subject to the UK DTO, trading with or on behalf of EU clients subject to the EU DTO, to transact or execute those trades on EU venues, providing that certain conditions were met.

The new direction is necessary because the FCA’s transitional power to modify the DTO expired on 31 December 2024. The new direction will continue to allow firms subject to the UK DTO, trading with or on behalf of EU clients subject to the EU DTO, to transact or execute those trades on EU venues, providing they meet certain conditions.

The same conditions set out in the transitional direction apply. This includes that firms must take reasonable steps to be satisfied the client does not have arrangements in place to execute the trade on a trading venue to which both the UK and EU have granted equivalence.

Given that the DTO would typically be relevant to funds or vehicles managed by investment managers, and such funds/vehicles are unlikely to have branches in the UK, the TTP direction above is unlikely to be of relevance to investment managers.

3. UK — Cryptoassets

FCA consults on cryptomarkets transparency

On 16 December 2024, the FCA published a discussion paper (DP24/4) inviting feedback on the development of the approach to the UK’s cryptoassets Admissions and Disclosures Regime (A&D Regime) and Market Abuse Regime for Cryptoassets (MARC).

The proposed A&D Regime would prohibit the making of a public offer of cryptoassets, save where an exemption applies, for example, where the offer is made via admission to trading on a cryptoasset trading platform (CATP) or made only to certain qualified investors. The A&D Regime would set out rules on the admission process for trading of cryptoassets on CATPs, substantive disclosure requirements for public offerors/issuers of cryptoassets, and obligations on the CATPs themselves. The UK government is expected to bring the activity of operating a CATP within the scope of the Regulated Activities Order (RAO).

Currently, the market abuse regulatory framework under MAR does not cover cryptoassets (other than, e.g., those cryptoassets already captured under the existing list of “specified investments” under the RAO). As such, the government is expected to introduce new legislation related to MARC covering the following:

• prohibiting insider dealing in relation to cryptoassets traded on a regulated CATP.
• requiring the disclosure of inside information relating to cryptoassets traded on a regulated CATP.
• prohibiting market manipulation in relation to cryptoassets traded on a regulated CATP.

The FCA’s proposals for the regulatory framework supplementing the new MARC legislation cover:

• a new regime that includes similar offences/prohibitions as for traditional financial instruments under MAR (e.g., prohibitions on insider dealing, unlawful disclosure of inside information, and market manipulation).
• requirements for disclosure of inside information by the issuer or other persons seeking admission of cryptoassets to trading.
• safe harbours and exceptions for legitimate behaviours.
• requirements on market participants for prevention, detection, and disruption of market abuse.
• requirements for market abuse related systems and controls, particularly for CATPs and intermediaries (e.g., brokers, principal trading firms).
• a requirement for trading platforms to engage in information sharing to aid in deterring and disrupting cross-platform market abuse.

The FCA is inviting stakeholders to submit comments on the discussion paper by 14 March 2025.

4. UK — ESG

FCA publishes Quarterly Consultation Paper

On 6 December 2024, the FCA published its 46th Quarterly Consultation Paper (CP24/26).

The proposed changes in CP24/26 include certain amendments to the Anti-Greenwashing Rule and the Sustainability Disclosure Requirements (SDR), including

• clarifying that distributors using the terms set out in ESG 4.3.2R(2) in either the name of a recognised scheme or a financial promotion relating to the scheme are also required to comply with ESG 4.1.19R(2)(a) and (b),
• removing the Glossary term link from the word “communicates” in ESG 4.3.1R(1)(a), to make clear that this is a general rule requiring all authorised firms to ensure that the information they communicate to their clients about the sustainability characteristics of their products is fair, clear, and not misleading and that “communicates” is intended to have its broader (non-Glossary), natural meaning,
• confirms that the Anti-Greenwashing Rule should be read consistently with COBS 4.2.1R(2)(b)(i) and (iii) by replicating the exclusions with respect to “an excluded communication” and “a third party prospectus” and
• clarifies the requirements relating to the fund managers’ use of sustainability labels and related disclosures under ESG 4.3.7R(4), ESG 5.3.3R(6) and ESG 5.4.3R(1).

The proposed amendments are set out in draft instruments in the appendices to the Consultation Paper. The deadline for comments on the proposals is 13 January 2025.

5. UK — Custody and Fund Services

FCA publishes Dear CEO Letter on Custody and Fund Services Supervision Strategy

On 13 December 2024, the FCA published a letter addressed to CEOs of firms in the custody and funds services sector, that is, broadly those acting as (i) third-party custodians; (ii) depositaries for both authorised and non-authorised funds; and (iii) third-party administrators who provide services such as fund accounting and transfer agency.

The FCA noted in its letter that it will continue to apply an outcomes-based regulatory approach by setting and testing high standards. The FCA identified a number of key outcomes that it will be assessing, the associated risks, and the FCA’s expectations for custody and fund services firms in the following areas:

• operational resilience
• cyber resilience
• third-party management
• change management
• market integrity
• depositary oversight
• protection of client assets

CEOs of custody and fund services firms are asked to discuss the letter with their governing bodies and executive committees, to ensure that all necessary actions are taken to ensure the relevant FCA requirements and expectations are met and to reinforce accountabilities with their senior managers for the risks highlighted therein. The FCA will be scrutinising these matters during its future supervisory engagements with such firms.

The letter indicates that the FCA is focussed on maintaining high standards in the service providers that support the UK asset management industry. Fund managers are likely to benefit from this enhanced supervisory scrutiny as their service providers focus on shoring up their systems to address the risks highlighted by the FCA.

6. UK — Consumer Duty

FCA provides update on Consumer Duty focus areas

On 9 December 2024, the FCA published an update outlining its areas of priority and focus for 2024-25 as regards the Consumer Duty, which sets high standards of care for firms towards retail customers.

The FCA intends to prioritise the following:

• Embed the Consumer Duty and raise standards by assessing how firms are implementing and complying with it. To do so, the FCA intends to (i) review board/governing body reports and complaints/root cause analysis based on data provided to the FCA by firms, (ii) review the treatment of customers in vulnerable circumstances, and (iii) support informed decision-making by reviewing how firms support customers.
• Enhance understanding of where firms are offering fair value (including, e.g., how firms deal with interest on customers’ cash balances and whether those who borrow for home/motor insurance are receiving fair and competitive deals).
• Pursue sector-specific priorities to tackle concerns in sectors including retail banking, consumer finance, payments, consumer investments, insurance, and sustainable finance.

This followed on from a Call for Input published by the FCA on 29 July 2024, which sought feedback on simplifying its rules and guidance following the introduction of the Consumer Duty. The Call for Input aimed to streamline regulatory requirements, remove overlap with other FCA rules, and clarify how the Consumer Duty interacts with the rest of the FCA’s regulatory framework. These changes were intended to reduce regulatory costs and support innovation and as a way for the FCA to meet its secondary objective to facilitate growth. The Call for Input closed on 31 October 2024, and the FCA aims to set out its next steps in H1 2025.

FCA publishes findings on Consumer Duty good and poor practices

On 11 December 2024, the FCA published its key findings of firms’ good and poor practices in relation to complaints and roots cause analysis and board reports prepared pursuant to the Consumer Duty.

The complaints and roots cause analysis was the result of a targeted and thematic review, based on a review of practices in 40 firms across a range of sectors. From the firms sampled, the FCA identified a key area of good practice:

• Management information and governance: Firms have established processes for carrying out root cause analysis of complaints management information (MI) — that is, identifying the trends and themes of complaints. Most firms could evidence clear escalation routes and accountability, meaning everyone across the business knew where to send MI and other information.

However, the FCA also identified three key areas for improvement:

• Analysing data for different customer types: Though complaints MI was captured, this was not always granular enough to tell the firm about the outcomes for different groups of customers, including those with characteristics of vulnerability. This means some issues are not being properly identified, especially where firms have diverse target markets for their products.
• Taking action based on these insights: It was not always clear whether there had been appropriate discussion on the data at decision-making forums and what actions would be taken. This means opportunities to make changes to improve consumer outcomes are being missed.
• Assessing and measuring the impact of these actions: Firms did not always measure the impact of interventions they had made to ensure these were the right changes to make. This means that sometimes firms pursued actions even though they were not as effective as they might need to be.

In relation to the board reports, the FCA’s findings covered the results of a targeted and thematic review that the authority carried out on the first annual Consumer Duty board reports from 180 firms. Under the Consumer Duty, a firm must prepare a report for its governing body setting out the results of its monitoring of consumer outcomes and any actions required as a result of the monitoring.

The FCA’s findings noted that the best reports were structured in a way that made them easy for their boards to scrutinise the key elements that the rules and guidance suggest they should cover. As for specific aspects of good reports, and areas for improvement, the FCA noted the following:

Five key aspects of good reports

• Clear outcomes focus: Dedicated sections focussed on each of the four outcomes, detailing what good outcomes looked like for customers holding their products.
• Good quality data: Commentary on good outcomes supported by good quality MI that backed up the firm’s conclusions.
• Analysis of different customer types: Consideration of different groups of customers, including those with characteristics of vulnerability.
• Clear processes for production of the report: Processes in place for producing reports for firms’ governing bodies to review and approve within the necessary timeframe.
• A focus on culture throughout the firm: Commentary emphasising firms’ commitment to effectively implementing the Duty and the role of a positive culture in delivering good outcomes.

Five Areas for Improvement

• Better data quality: Some firms did not have sufficient data quality to justify conclusions or to give governing bodies adequate assurance that firms are meeting their obligations under the Duty. Some also did not accompany their MI with adequate explanations to clearly illustrate that it constitutes evidence of good outcomes for customers.
• Comprehensive view across distribution chains: Some reports did not contain evidence that appropriate amount and types of information have been shared between the firm and third parties across the distribution chain.
• Analysis of different customer types: Some firms did not evidence that adequate consideration had been given to outcomes for different groups of customers, including those with characteristics of vulnerability.
• Challenge from the board: It was not always evident that there had been effective challenge from firms’ governing bodies on the content of the reports, for example, through the minutes of board meetings.
• Taking effective action: Some action plans and improvements were not accompanied by further details such as timescales, action owners, and clarity on the data that would be used to evidence good outcomes.

Firms in scope of the Consumer Duty should take note of the FCA’s reviews and compare against their own internal processes to ensure that, where relevant, their systems are adequately addressing the key areas for improvement across both reviews.

7. UK — Consumer Composite Investments

FCA consults on new disclosure framework for Consumer Composite Investments

On 19 December 2024, the FCA commenced a new Consultation on the formulation of a product information disclosure framework for Consumer Composite Investments (CCIs) (CCI Consultation). The CCI Consultation discusses product information requirements (CCI Disclosure Requirements) that will replace the current Packaged Retail Investment and Insurance Products (PRIIPs) framework, which derived from EU law. Please see our previous Sidley Updates of October 2024 and November 2024 for further detail on these reforms.

Post-Brexit, the FCA is reforming CCI Disclosure Requirements with a view to reducing the burden of disclosure and thereby increasing the competitiveness of the UK market in CCIs. Previously, the PRIIPs framework required the provision of a key information document to retail investors; new CCI Disclosure Requirements will be more outcome-oriented and less prescriptive, in line with the FCA’s focus on the Consumer Duty, as discussed earlier in this update.

The key changes proposed under the new CCI Disclosure Requirements are as follows:

• The FCA proposes to allow firms to design product disclosures as proportionate and relevant to the product.
• Performance fees must be described in an accessible way, appropriate to retail investors, but there will be flexibility for firms in how this is described.
• A risk metric (1-10) will be provided to consumers along with graphs depicting past-performance information.

Stakeholders are requested to provide their feedback by 20 March 2025.

8. EU — AIFMD

ESMA consults on open-ended loan originating AIFs

On 12 December 2024, the European Securities and Markets Authority (ESMA) published a Consultation Paper on developing draft regulatory technical standards (RTS) on open-ended loan-originating alternative investment funds (AIFs) under the Alternative Investment Fund Managers Directive (AIFMD).

The Consultation Paper aims to ensure that such AIFs can maintain an open-ended structure while managing liquidity risks effectively. This follows the amendment of the AIFMD by Directive (EU) 2024/927, which introduced a new definition of loan-originating AIFs and a general rule that such AIFs should be closed-ended unless the AIF managers (AIFMs) can demonstrate to the competent authorities that the AIF’s liquidity risk management system is compatible with its investment strategy and redemption policy. The amendments also mandated ESMA to develop standards to determine the requirements for these AIFs.

The Consultation Paper sets out the elements and factors that AIFMs should consider when making the demonstration to the competent authorities and when applying the existing AIFMD provisions on liquidity management.

The proposals cover the following aspects:

• Sound liquidity management: AIFMs should define an appropriate redemption policy and an appropriate proportion of liquid assets for each open-ended loan-originating AIF they intend to manage.
• Availability of liquid assets: AIFMs should consider the expected cash flow generated by the loans granted as liquid assets and may also consider other investments as liquid if they can demonstrate that they can be converted into cash over the duration of the notice period without significantly decreasing their value.
• Liquidity stress testing: AIFMs should conduct liquidity stress tests on at least a quarterly basis. AIFMs should stress test separately the AIF assets and liabilities and combine the results to determine the overall effect on the liquidity of the AIF.
• Ongoing monitoring: AIFMs should monitor on an ongoing basis various elements of the open-ended loan-originating AIF, such as the level of liquid assets, the expected cash flows, and potential future liabilities.

The consultation is open until 12 March 2025. ESMA expects to publish a Final Report and submit draft standards to the European Commission (EC) in late 2025.

The Consultation Paper is relevant for EU AIFMs and their AIFs as well as professional and retail investors investing into such AIFs. AIFMs that intend to manage or are already managing open-ended loan-originating AIFs may wish to review the proposed standards and assess their impact on their business models, liquidity management systems, and compliance arrangements. They could also consider providing feedback to ESMA on the consultation.

9. EU — EMIR

EMIR 3 published in the Official Journal

On 4 December 2024, Regulation (EU) 2024/2987 and Directive (EU) 2024/2994 were published in the Official Journal and entered into force on 24 December 2024. As outlined in our December 2024 Update, the package of amendments updating the European Market Infrastructure Regulation (EMIR) was adopted by the Council of the EU and had been awaiting publication in the Official Journal.

The EMIR 3 package amends EMIR in relation to clearing services for over-the-counter derivatives in order to make the EU clearing landscape more appealing. In particular, the new rules intend to streamline and shorten procedures, make rules more consistent, and strengthen the supervision of central counterparties. Additionally, the active account requirement will reduce excessive reliance on systemic central counterparties.

10. EU — Securitisation Regulation

ESMA publishes feedback on proposed review of securitisation disclosure templates

On 20 December 2024, ESMA published a Feedback Statement in relation to its Consultation Paper on securitisation disclosure templates under the Securitisation Regulation (SECR) (SECR Consultation). The SECR Consultation, which closed on 15 March 2024, proposed changes to the securitisation disclosure framework, specifically the 14 reporting templates set out in the attendant technical standards.

The Feedback Statement summarises stakeholder responses to the SECR Consultation. In the SECR Consultation, stakeholders were presented with four implementation options:

• Option A: Postpone the review of the templates until the next review of the Level 1 text.
  
• Option B: Introduce few refinements to the current framework to enhance disclosure.
  
• Option C: Introduce a simplified template for private securitisation and undertake a targeted revision of the templates.
  
• Option D: Undertake a complete and thorough review of the reporting framework.

The Feedback Statement notes that the majority of respondents favoured Option C. However, there were concerns about the timing and potential conflicts with the broader review of the Level 1 text.

In the short-term, stakeholders broadly saw a need for immediate solutions to the high cost and time-intensive nature of current reporting requirements. While stakeholders considered a comprehensive review of the reporting framework to be a long-term project, they invited targeted revisions from ESMA in the interim period. The Italian Banking Association and the Banque de France, for example, proposed certain amendments to streamline the current disclosure templates by removing or amending certain fields.

Following publication of the Feedback Statement, ESMA will work with the EC on possible amendments to the technical standards before commencing a comprehensive review of the framework in line with stakeholder feedback.

11. EU — Cryptoassets

EBA provides guidance on reporting requirements under MiCAR

On 18 December 2024, the European Banking Authority (EBA) published its Final Report outlining guidelines to assist competent authorities in performing their supervisory duties regarding issuers of asset-referenced tokens (ARTs) and e-money tokens (EMTs) under the Markets in Crypto-Asset Regulation (MiCAR). The regulation, which began applying from 30 December 2024, regulates the offering to the public and admission to trading of cryptoassets. The EBA’s guidelines aim to:

• ensure a common supervisory approach across EU Member States;
• address data gaps that would affect the effective supervision of issuers’ compliance with the own funds, reserve of assets, and liquidity requirements under MiCAR;
• address the EBA’s assessment of the significance criteria for ARTs and EMTs;
• specify common formats, templates, and instructions for issuers to provide the necessary information to competent authorities and the EBA, including common reference and remittance dates and thresholds; and
• include templates and instructions for issuers to collect data from the relevant cryptoasset service providers.

Issuers of ARTs and EMTs will need to familiarise themselves with the guidelines and ensure they have the systems and processes in place to comply with the reporting obligations.

12. EU — MiFID II

ESMA consults on EU code of conduct for issuer-sponsored research

On 18 December 2024, ESMA launched a Consultation Paper on draft RTS to establish an EU code of conduct for issuer-sponsored research (i.e., research paid for by issuers and distributed to investors).

The draft RTS aim to enhance investor protection and ensure that issuer-sponsored research is independent and objective, by setting out standards to identify, prevent, and disclose conflicts of interest. The RTS also outline arrangements to produce and disseminate such research.

An existing code of conduct adopted in France by three associations of market participants serves as the basis for the draft RTS, with amendments to adapt it to ESMA’s mandate under the Listing Act. The Listing Act aims to make EU public capital markets more attractive for companies and to facilitate access to capital for small and medium-sized enterprises (see our previous November 2024 Update for further information).

The draft RTS propose that issuer-sponsored research providers should:

• Have a conflicts-of-interest policy and maintain a register of potential/actual conflicts of interest, taking measures to prevent or manage these.
• Ensure that the quality, independence, and objectivity of sponsored research is not affected, with arrangements such as information barriers to separate research analysts from other individuals with conflicting interests.
• Clearly identify research sponsored by issuers and disclose the contractual relationship, remuneration arrangements, conflicts-of-interest policy, and whether the research is public.
• Contract with issuers for a minimum initial term of two years.
• Make issuer-sponsored research that is fully paid by the issuer freely accessible to the public; research that is partially paid by the issuer may be reserved for investors who contributed to the payment.
• Make available to investment firms all information necessary to assess whether the research is produced in compliance with the EU code of conduct.
• Keep records of the agreement, research, and conflicts of interest related to the issuer-sponsored research for a minimum of five years.

The Consultation Paper, which is primarily aimed at research providers, issuers, investment firms, and investors, is open for feedback until 18 March 2025. Following this, ESMA will prepare a final report to submit to the EC by 5 December 2025.

ESMA publishes final reports on Bond and Equity transparency amendments

On 16 December 2024, ESMA published a Final Report reviewing the RTS under the Markets in Financial Instruments Regulation (MiFIR) pertaining to transparency for bonds, structured finance products, emission allowances, and reasonable commercial basis. On the same day, ESMA published a separate Final Report on the RTS relating to equity transparency under MiFIR and the Markets in Financial Instruments Directive (MiFID II).

The main proposals in the MiFIR and MiFID II Reports include:

• Enhancing the definitions and characteristics of trading systems to ensure consistent application of pre-trade transparency waivers.
• Introducing a simplified approach to the liquidity determination for bonds, based on issuance size thresholds, and creating different bond groupings according to the type, currency, and credit rating of the bonds.
• Introducing a supplementary deferral regime for illiquid bonds, structured finance products, and emission allowances, allowing competent authorities to grant additional deferrals in exceptional circumstances.
• Improving the quality and consistency of the information reported and facilitating the consolidation of data by the future CTP.
• Specifying the elements to be included in the calculation of costs and margin for market data and requiring market data providers to disclose further information to clients.
• Requiring market data providers to establish client categories based on verifiable elements and to apply the same terms to all clients within the same category.
• Prohibiting market data providers from applying unfair terms in market data agreements, such as hidden costs, and allowing clients to withdraw from the contract in case of significant amendments.
• Requiring market data providers to ensure that market data agreements are specified in a clear and concise manner, using standardised terminology and format, and that they conform with the published market data policies.
• Requiring market data providers to make market data available without being bundled with other services and to send data through all offered distribution channels at the same time.

The Reports have been submitted to the EC, which will decide whether to endorse the proposed amendments.

13. EU — NBFI

ESRB publishes report on Non-Bank Financial Intermediation consultation

On 4 December 2024, the European Systemic Risk Board (ESRB) published a report on the adequacy of macroprudential policies for non-bank financial intermediation (NBFI). This report followed an EC consultation that opened in May 2024. The report sets out areas where EC legislative action is required to support financial stability and the EU capital markets union.

The report encourages a system-wide approach and calls on the EC to facilitate data sharing to close gaps in the regulatory framework. For example, the ESRB requests focus on vulnerabilities in EU money market funds and clarification on the regulatory scope regarding cryptoasset activities under MiCAR.

Several of the ESRB recommendations echo proposals made by ESMA on 22 November 2024 in its response to the EC consultation. Other key proposals made by ESMA include:

• Addressing liquidity mismatches in open-ended funds (e.g., competent authorities requiring funds that invest in illiquid assets to be structured as closed-ended funds).
• Reforming the Money Market Fund Regulation in line with ESMA’s 2022 Opinion.
• Developing data-driven supervision.
• Enhancing coordination between competent authorities to create a formal reciprocation mechanism under AIFMD to help address risks at the EU level as part of the aim to establish an EU system-wide approach.

14. EU — IFR

Amendments to supervisory reporting framework for investment firms

On 2 December 2024, the EBA published a Final Report outlining amendments to Commission Implementing Regulation (EU) 2021/2284, the final draft implementing technical standards outlining the supervisory reporting and disclosures of investment firms under Regulation (EU) No 2019/2033 (Investment Firms Regulation, or IFR). The EBA’s amendments make necessary updates further to amendments introduced for credit institutions in the Capital Requirements Regulation (Regulation (EU) No 575/2013) and apply from 1 January 2025. The amendments also introduce changes to the reporting templates under the market risk framework.

15. EU — ESG

ESMA publishes Q&As on the application of the Guidelines on funds’ names

On 13 December 2024, ESMA published Q&As providing further details on the practical application of ESMA’s Guidelines for funds’ names using terms related to sustainability or environmental, social, and governance (ESG). The Q&As relate to the following areas:

• Green bonds – Funds investing in green bonds issued in accordance with the European Green Bonds Regulation (Regulation (EU) 2023/2631) do not need to apply the investment restrictions related to the exclusion of companies involved in, for example, fossil fuels, nuclear energy, or weapons. For other green bonds, fund managers may use a look-through approach to assess whether the activities financed by the bonds are relevant for the exclusions.
• Meaningful investment – While national competent authorities should carry out a case-by-case analysis of how any sustainability-related term is used in the name of a fund, broadly funds should not be considered “meaningfully investing in sustainable investments” unless they contain at least 50% sustainable investments.
• Controversial weapons – The Q&As specify that the reference for the exclusion of controversial weapons should be the same as referred to in the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088), i.e., principal adverse impact indicator 14. This indicator requires fund managers to disclose the percentage of investments in companies that are involved in the production or trade of controversial weapons, namely anti-personnel mines, cluster munitions, chemical weapons, and biological weapons.

The Q&As are split up to address Undertakings for Collective Investment in Transferable Securities and AIFs separately, although the substance of the guidance is the same for both categories of collective investment undertaking.

ESG Ratings Regulation published in the Official Journal

On 12 December 2024, Regulation (EU) 2024/3005 on ESG rating activities was published in the Official Journal. The Regulation entered into force on 1 January 2025 and will apply from July 2026. The new rules are designed to enhance the consistency, transparency, and comparability of ESG ratings in the EU, which assess the sustainability profile of companies and financial instruments.

The Regulation introduces various changes, under which ESG rating providers will need to:

• be authorised and supervised by ESMA and comply with transparency requirements regarding their methodology and sources of information;
• obtain an endorsement, a recognition, or an equivalence decision to operate in the EU, depending on their level of compliance with the EU rules and standards; and
• separate their business and activities to prevent conflicts of interest and disclose any links or interests they have with the rated entities or products.

The Regulation is part of EU efforts to deepen its capital markets and foster sustainable finance. It will affect investors’ confidence and decision-making in relation to sustainable financial products and may affect the availability and quality of ESG ratings in the EU market. Investment managers may wish to monitor the Regulation’s implications for their ESG strategies and reporting obligations.