Meeting the new fund regulation challenge

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New or revised EU regulations applicable to funds or fund managers have been introduced, or will be enforced soon. Often the exact scope of obligations for funds or fund managers remains unclear, such as with ESG. Maren Stadler-Tjan, partner, and Oliver Zwick, counsel, at Clifford Chance, explain.

There is a degree of concern among fund managers that even several months into the process, considerable doubts remain about the implementation of SFDR and the taxonomy regulation. ‘This is despite fund managers taking these topics very seriously, because they want to get it right,’ said Ms Stadler-Tjan .

‘Investors are searching for answers, but managers feel that they’re not getting all the details they need from the regulatory decision makers to be able to deal with some of these questions,’ she said. There is nervousness about the risk from accusations of greenwashing. Efforts on the market such as reporting templates are helping to a certain extent, but they can also be ineffective and confusing. ‘There is a lot to keep up with, and both fund managers and regulators are working hard to come to grips with this,’ she said.

Step by step managers are working to restructure processes and rethink their strategies as details become clearer. ‘In Luxembourg we’re going about this in the right way, and it helps that we are very close to the regulator,’ she said.

Otherwise in the fund regulatory landscape, ‘it is important for fund managers to monitor regulatory evolutions at the European and local levels, as there is a general push towards more transparency and disclosure,’ noted Mr Zwick. With the planned revisions of AIFMD and UCITS, he is increasingly confident that we are unlikely to see a substantial change to the rules.

It is important for fund managers to monitor regulatory evolutions at the European and local levels.
Oliver Zwick

Oliver Zwick,  Investment Fund Counsel,  Clifford Chance

There will continue to be clearer regulatory guidance and thus less flexibility, such as on the structuring of fund documents and other marketing materials. This is a central aspect of the directive on cross-border fund distribution (CBDF) for UCITS and AIFMs which, among other things, harmonises many of these pre-marketing procedures. Anti-money laundering also remains a hot topic in Luxembourg and throughout Europe.

‘All of this is leading the CSSF to go into more detail on policies and procedures regarding the implementation of these rules,’ Mr Zwick said. For example, there has been reform of the so-called ‘long form report’ that certain entities need to provide to the regulator. The CSSF has also become more active as regards on-site visits, including increasing reliance on virtual as well as physical checks. ‘They don’t just come to you for two weeks and then it’s done, these checks can go on for months with follow-up requests for more information,’ said Mr Zwick .

He added that clients are telling him that this type of activity is being ramped up across Europe. ‘Some of the things that we are seeing being implemented across the continent have been standard procedure in Luxembourg for many years, such as in areas like liquidity management,’ he said. This suggests that the playing field is being levelled in terms of a strong regulatory approach which tends to be Luxembourg’s hallmark.

On the product side, the retailisation of private assets is a burgeoning trend. ‘We see that big fund managers are setting up products to give retail investors access to alternative strategies such as real estate and PE,’ said Ms Stadler-Tjan. ‘The Luxembourg toolbox has what is needed to give this trend a further boost,’ she added.

The Luxembourg toolbox has what is needed to give this trend a further boost.
Maren Stadler-Tjan

Maren Stadler-Tjan,  Investment Funds Partner,  Clifford Chance

Is the market gaining greater clarity regarding ESG regulation?

Fund managers are taking this very seriously, trying to understand the obligations and requirements and investors are clearly requesting compliance with the different regulations. However unclarity unfortunately remains, given that the regulatory technical standards are not yet applicable and the market is waiting for additional guidance from the regulation makers.

How do you see the outlook for ongoing reforms of fund regulations?

In my view it seems unlikely that there will be a fundamental change to the way Luxembourg funds are being structured. However, there will be a lot of changes nonetheless, such as for instance AIFMD2 and enhanced rules on transparency.

How will these changes affect the Luxembourg market?

In recent years, the Luxembourg market has been very successful in implementing regulatory changes. Luxembourg is therefore well prepared for the future and in some areas clearly ahead of its competitors.