Yvonne McGonigle Knowledge Consultant
Nollaig Greene Senior Knowledge Lawyer
2024 AT A GLANCE
- The enhanced European long-term investment fund launched in January.
- The final text of the revised Alternative Investment Fund Managers Directive was published.
- A review of UCITS eligible assets commenced.
- A report on Ireland’s Funds Sector 2030 Review is published.
- The Central Bank of Ireland’s regulatory and supervisory outlook report was published.
- A new UK overseas funds regime was introduced.
- ESMA published its ESG fund name guidelines.
EUROPEAN LONG-TERM INVESTMENT FUND (ELTIF)
The enhanced ELTIF Regulation (2023/606/EU), known as ELTIF 2.0, has applied in all EU countries since 10 January 2024. It enables alternative fund managers to offer retail and professional investors opportunities to access private equity, private debt and credit, real assets, and other long-term investments in the real economy. It benefits from a full retail passport.
The Central Bank of Ireland (the CBI) authorises ELTIFs in Ireland under domestic fund legislation through a new dedicated ELTIF chapter in the CBI’s 'AIF Rulebook'. Key features include:
- Retail investor ELTIFs, professional investor ELTIFs and qualifying investor ELTIFs can all be authorised in Ireland.
- ELTIF and non-ELTIF sub-funds can be established within the same fund umbrella. Existing Irish umbrella retail investor AIF (RIAIF) structures can be used to establish retail investor ELTIF sub-funds, and existing umbrella qualifying investor AIF (QIAIF) structures can be used to establish professional investor or qualifying investor ELTIF sub-funds.
- Professional investor and qualifying investor ELTIFs benefit from the CBI’s 24-hour fast-track authorisation process, with a pre-submission requirement for professional investor and qualifying investor ELTIFs, which are open-ended with limited liquidity.
The final EU regulatory technical standards (RTS) entered into force on 25 October 2024. They specify the ways in which certain key ELTIF 2.0 requirements apply, including minimum holding periods, redemptions, and liquidity management tools (LMTs) for open-ended ELTIFs with limited liquidity.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (AIFMD II)
AIFMD II (Directive (EU) 2024/927) was published in March 2024 and must be transposed into national law by 16 April 2026.
Alternative investments funds (AIFs) within AIFMD include private equity funds, hedge funds, real estate funds, debt funds and other AIFs. AIFMD II also makes targeted changes to the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS).
Key measures introduced by AIFMD II include:
- specific provisions for loan origination activities and loan-originating AIFs, including risk retention requirements and limits on leverage
- harmonised liquidity risk management requirements
- enhanced authorisation requirements for AIFMs and UCITS management companies
- targeted changes on delegation, mainly relating to information to be reported to supervisors
- broader access to depositary services outside the AIF’s home Member State
- extension of AIFM ancillary services
- enhanced data sharing and supervisory cooperation
The European Securities and Markets Authority (ESMA) has been tasked with developing more detailed rules through RTS, implementing technical standards and guidelines.
This is the first time that a loan origination framework will be regulated at EU level. The CBI intends to align its existing rules on loan origination with the new AIFMD II provisions and indicated that it will consult with industry on its framework for loan-originating funds in 2024.
The enhanced reporting and harmonised liquidity tool requirements of AIFMD II support the direction of European regulatory thinking on building stability and resilience in the sector and supporting investor protection.
ESMA CONSULTS ON LMTs
AIFMD II requires AIFMs of open-ended AIFs and UCITS to select at least two mandatory LMTs from those listed in Annex V of AIFMD and Annex IIA of the UCITS Directive.
ESMA commenced a consultation in July 2024 on draft LMT RTS and guidelines and expects to deliver the final version by April 2025. The draft RTS and guidelines are intended to promote convergent application of the directives for UCITS and open-ended AIFs and make EU fund managers better equipped to manage the liquidity of their funds, in preparation for market stress situations. Furthermore, ESMA seeks to clarify the operation of specific LMTs, such as side-pockets, which have varying practices across the EU.
The draft RTS define the constitutive elements of each LMT, including calculation methodologies and activation mechanisms. The use of suspension of subscriptions, repurchases and redemptions are in addition to the selected tools. The draft guidelines provide guidance on how fund managers should select and calibrate LMTs based on their suitability in relation to the investment strategy, liquidity profile and redemption policy of the fund.
Fund managers must also implement detailed policies and procedures for the activation and de-activation of any selected LMT and the operational and administrative arrangements for their use.
UCITS ELIGIBLE ASSETS REVIEW
On 7 May 2024, ESMA issued a call for evidence on the review of the UCITS Eligible Assets Directive (UCITS EAD) in order to evaluate the potential risks and benefits associated with UCITS gaining exposure to various asset classes. This presents a valuable opportunity to review the successful UCITS framework, which hinges on UCITS being well-regulated and on supervised investment products that offer high investor protection.
Key focus areas of the review include:
- convergence issues and clarity of key concepts and definitions
- consideration of direct and indirect exposure of UCITS to certain asset classes
Notably, the call for evidence seeks insights on issues experienced with the notion of liquidity, and on the appropriateness of the presumption of liquidity and negotiability. This highlights the shortcomings identified in ESMA’s 2020 Common Supervisory Action (CSA) on UCITS liquidity risk management.
The outcome of this review could bring about substantial change to the regulatory framework for UCITS. ESMA will evaluate the feedback and formulate technical advice for the European Commission (the Commission). Read more here.
SHORTENED SETTLEMENT CYCLES FOR EU SECURITIES
The recent move of US securities settlement to T+1 (trading date plus one day) has sparked significant discussion and industry engagement. At a European level, efforts to shorten settlement cycles are underway. A Joint Statement, issued by ESMA, the Commission, and the European Central Bank on 15 October 2024, highlighted preliminary findings and called for accelerated technical work to support the transition to T+1. The statement emphasised the need for a harmonised approach across the European trading ecosystem, given the interconnected nature of the markets, and noted the forthcoming publication of the governance structure that will oversee this work.
IRELAND FUND SECTOR REVIEW
In October 2024, the Department of Finance published its Final Report on the Funds Sector 2030 review aimed at ensuring Ireland maintains its leading position in asset management and fund servicing.
The review concludes that Ireland is well-positioned for growth in the funds and asset management sector. The report makes recommendations across key areas, including:
- legal structures and products
- the regulatory and supervisory regime
- technological innovation
- retail investment
- structured finance
- the green transition
- effective industry engagement (exemplified by the recent ELTIF chapter in the CBI’s AIF rulebook)
The policy aim for fund structures is to enhance Ireland’s leading role in exchange-traded funds (ETFs) and money market funds (MMFs), and to boost private asset opportunities, primarily through regulated structures. Specific recommendations include:
- consideration of the CBI’s ETF portfolio transparency requirements
- engaging in EU discussions on ETF fund naming conventions
- reviewing the AIF rulebook and related requirements for private asset funds
- evaluating tax measures to improve the attractiveness of the Investment Limited Partnership (ILP)
The review also calls for reform of the taxation of Irish-domiciled funds to align with EU, EEA, and OECD territories. This includes removing the eight-year deemed disposal requirement, and consulting on options for an entity-level tax for Irish Real Estate Funds (IREFs).
The review presents significant opportunities for Ireland’s funds sector on the international stage. A recent CBI speech emphasises the significance of ETFs in modern financial markets and Ireland’s achievement as a leading ETF jurisdiction in the EU.
CBI - FOCUS AREA FOR FUNDS
Building on previous publications, in February 2024, the CBI published its first annual Regulatory and Supervisory Outlook (RSO) and accompanying letter to the Minister for Finance.
Key risks identified for the funds sector include how funds manage leverage, liquidity, pricing, and entry-exit mechanics. The CBI refers to ESMA’s CSA on Asset Valuation, where the CBI identified deficiencies. Other risks include conflicts of interest, delegation and outsourcing, ESG disclosures, data quality, cybersecurity, and artificial intelligence (AI).
In 2024/2025 the CBI will focus on:
- risk based scrutiny and approval of prospectus and fund service provider applications
- completion of the ESMA CSA on the Sustainable Finance Disclosures Regulation
- participation in ESMA’s Depositary Peer Review
The CBI aims to enhance its regulatory and supervisory processes, making them more data-driven, agile and scalable, while developing a proportionate and responsive regulatory framework. The practice of mini thematic reviews is also expected to continue.
The CBI’s thematic review of the roles of ‘Authorised Participants’ and ‘Market Makers’ in the ETF ecosystem identified good practices and areas for improvement, such as due diligence, ongoing monitoring and stress testing. The review also identified a lack of board reporting and potential reliance and concentration on a small number of ‘Authorised Participants’ and ‘Contracted Market Makers’. A CBI industry communication will provide further details and further engagement with industry can be expected.
MARKETING UCITS IN THE UK
In September 2024, the UK Government introduced the Overseas Funds Regime (OFR), a new gateway for EEA UCITS other than MMFs to be marketed and sold to UK retail investors. The OFR provides that a collective investment scheme under non-UK law will be recognised if it is from a jurisdiction and of a type approved by HM Treasury and has sought and obtained recognition from the Financial Conduct Authority (FCA). HM Treasury issued an equivalence decision covering all EEA countries in relation to UCITS and UCITS sub-funds (other than MMFs).
The OFR is available to new EEA UCITS that have not previously marketed to UK retail investors, as well as to EEA UCITS that are operating under the Temporary Marketing Permissions Regime (TMPR) set up post-Brexit. For funds already in the TMPR, there are a series of ‘landing slots’ to smooth the transition process. A roadmap published in May 2024 sets out implementation timelines.
Irish authorised UCITS which intend to make an OFR application to the FCA may need to make changes to fund offering documents in accordance with the FCA guidance. The CBI has clarified the process for making such post-authorisation amendments to the UK country supplement or prospectus/supplement, which should be factored into timelines for submitting OFR applications.
LOOKING AHEAD
- Clarity is expected on the Commission’s legislative proposal to improve the Sustainable Finance Disclosure Regulation and the timing of revised Level 2 disclosure templates (discussed in the Spotlight on Sustainable Finance).
- The outcome of ESMA’s CSA to assess disclosures and integration of sustainability risks in the funds sector is expected in early 2025.
- ESMA’s work programme for 2025 includes focusing on strengthening EU capital markets, green and sustainable transition, enhanced cross-border cooperation amongst EU supervisors and shortening of the settlement cycle to T+1.
- Further detail on AIFMD II targeted amendments through RTS, implementing measures and guidance is awaited. Fund managers should also anticipate updates to the CBI’s rules in advance of the 2026 implementation date.
- The 2023 proposal for an EU retail investment package (amending AIFMD, the UCITS Directive and PRIIPS Regulation) is still going through the EU legislative process.