Further legal and regulatory developments

On 3 April 2024, the CSSF published its updated CSSF FAQ on the Luxembourg Law of 12 July 2013 on alternative investment fund managers and its updated CSSF FAQ on the Law of 17 December 2010, elaborating in both updates on whether MiFID rules apply to the marketing of funds (Questions 26.E and 10.5 respectively). The updates specify further details on the application of MiFID rules to the marketing of funds. They clarify that if an investment fund manager (“IFM”) does not perform the marketing function itself for a fund under its management, certain exemptions do not apply. MiFID rules may apply to the entity undertaking marketing, depending on distribution and services provided. If such entity performing the marketing function is another Luxembourg IFM, the latter might need additional authorisation for marketing. No extra authorisation is needed if this IFM merely connects potential investors with an IFM and/or its investment fund. The responsibility lies with this IFM to assess if its activities qualify as pre-marketing or marketing of funds.

On 22 April 2024, ESMA published its proposal to change the ELTIF Technical Standards (“ELTIF RTS”). Upon the European Commission's request, ESMA recommends a limited number of changes to the ELTIF RTS to balance protecting retail investors with promoting the capital market union. The proposed changes focus on redemption policies and liquidity management, aiming to align more closely with the Commission's feedback. This follows ESMA's December 2023 final report on the draft ELTIF RTS under the revised ELTIF Regulation and the Commission's subsequent request for amendments. The European Commission, European Parliament, and Council will review and potentially adopt these revised ELTIF RTS.

On 29 April 2024, the CSSF issued a communication on macroprudential measures for GBP denominated liability driven investment (“LDI”) funds, whose objective is to ensure the continuing resilience of the GBP LDI funds. The published final set of macroprudential measures in this respect require, inter alia, GBP LDI funds managed by Luxembourg AIFMs to maintain a minimum yield buffer to withstand a 300 basis point increase in UK yields before their NAV turns negative.

The measures mandate monthly calculations and reporting of this yield buffer, allowing one exception per year. The CSSF’s previous guidelines from November 2022 will expire after a three-month implementation period ending on 29 July 2024. Existing and new GBP LDI funds must comply with the new measures by this date.

On 30 May 2024, ESMA issued guidance on the use of artificial intelligence (“AI”) in retail investment services. AI can enhance efficiency and innovation but poses risks such as biases, data quality issues, and transparency challenges. ESMA's goal is to ensure firms comply with MiFID II obligations and prioritise clients' best interests.

AI is being used in various areas of investment services, including customer service, investment advice, compliance, risk management, fraud detection, and operational efficiency. However, over-reliance on AI, lack of transparency, data security concerns, and potential biases pose significant risks.

To comply with MiFID II, firms must disclose AI's role in investment decisions, ensure management oversight, regularly test AI models, use accurate data, and train staff on AI-related risks and regulations. Firms must also ensure AI use aligns with conduct requirements, maintain data privacy, and keep comprehensive records.

AI offers great potential in investment services but requires careful management. ESMA's guidance aims to help firms use AI responsibly, ensuring regulatory compliance and investor protection. ESMA will continue to monitor AI developments and the legal framework to assess the need for further actions.

On 3 June 2024, the European Banking Authority (“EBA”) and ESMA published a public consultation on the review of the investment firms’ prudential framework. They are gathering feedback on a potential review of the investment firms' prudential framework. Their discussion paper, released on 3 June 2024, aims to gather stakeholder input until 3 September 2024, to inform the European Commission's request for advice.

The paper examines the adequacy of current prudential requirements, identifies unaddressed risks, and considers the impact of recent EU banking regulations. It also explores extending regulations to crowdfunding and crypto-assets services and discusses remuneration policies and oversight for investment firms and fund managers.

Stakeholders can submit comments online, and a public hearing was held on 20 June 2024. Having considered the feedback being received, the EBA and ESMA will address a joint report to the European Commission, potentially leading to legislative updates.

On 25 June 2024, the CSSF issued a communication on the European Commission’s publication of new Regulatory and Implementing Technical Standards for notifying cross-border activities of AIFMs and management companies. Starting 14 July 2024, new notification templates must be used for management and marketing activities within the European Economic Area, available on the CSSF website for AIFMs and management companies, respectively.

Entities must send relevant notification forms via email initially, with a new eDesk module to follow. Separate notification templates for UCITS and AIFMD activities are now required since the new templates will no longer allow an investment fund manager to notify management activities under both the UCITS Directive and the AIFMD at the same time. Additionally, the CSSF will directly generate and add attestations to notification packages, thereby simplifying the process for entities.

On 28 June 2024, the CSSF published a communication (the “Communication”) relating to the final report issued by ESMA on 27 May 2024, with respect to the common supervisory action (CSA) conducted in collaboration with NCAs across the EU/EEA, on overseeing the MiFID II disclosure rules pertaining to marketing communications and advertisements of financial products by investment firms and credit institutions (the “Final Report”).

The Final Report emphasised the need for clarity, fairness, and adherence to regulatory standards for firms' marketing communications within the financial sector. NCAs found that most firms have established procedures involving both business and control functions to ensure marketing communications are fair, clear, and not misleading. Differing significantly among firms, these procedures vary depending on the type of financial instrument or distribution channel used, the level of detail in internal procedures, the involvement of senior management, and whether all content follows the same approval process.

The Final Report also highlight that to ensure compliance with regulations, firms generally review marketing communications and take remedial actions when deficiencies are detected. Many firms use checklists and provide staff training to ensure marketing materials are up-to-date and accurately reflect the products or services offered. Despite these efforts, NCAs identified some issues, such as inconsistent checks, outdated information, passive monitoring, and inadequate verification of third-party content. Therefore, the need to put in place internal processes and have a serious involvement of senior management to mitigate risks like greenwashing is emphasised.

With respect to sustainability-related claims, most firms apply the same processes as for other products, with some adding extra controls such as involving sustainability officers and conducting ex-post reviews. The use of third parties for marketing varies, but firms generally maintain approval processes for third-party content. Record-keeping practices also vary among firms.

The Final Report outlines that most firms did not receive complaints about their marketing communications. However, issues such as unclear fee information, misleading risk classifications, and aggressive marketing tactics were noted among those that did. Some firms have created specific categories for sustainability-related complaints. While firms generally provide easy ways for clients to seek explanations and clarifications, responsiveness varies, with issues like infrequent call-backs and unhelpful email responses.

In this context, NCAs identified several key areas for improvement in marketing practices relating to:

• Fairness and clarity: Positive examples include balanced presentations of risks and benefits, clear warnings, and avoidance of aggressive marketing practices. however, some marketing materials were not clearly identifiable, had unbalanced risk presentations, or included unclear cost information.
• Identifiability: Some marketing communications were not easily recognisable, such as newsletters without clear indications of marketing material and advertorials without disclaimers.
• Balanced risk representation: It has been noted that sometimes risks were presented in smaller fonts or different colours, mentioned at the end or in footnotes, and hidden in different layers of information.
• Cost information: Some unclear or misleading information about costs and fees have been detected, such as zero-cost claims without indicating other fees, missing cost information, and unclear presentations of additional costs.
• Comparisons and performance information: Generally, comparisons and past/future performance information were fair and balanced. However, some non-compliant practices were noted, such as simulated past performance without proper warnings, missing required information, and unclear sources for performance data.

The Final Report added that mystery shoppers confirmed similar issues, including difficulty in comparing products across firms due to inconsistent presentation and hard-to-find product information. Some firms used misleading practices such as highlighting ratings or licences to falsely imply reliability and suggesting that investors could become experienced through the firm's educational materials.

Thus, there is a need for firms to enhance their marketing communication practices, ensuring they are transparent, fair, and compliant with regulations. Priority will be given to improvement in internal processes, senior management involvement, and clear, balanced presentations of risks and benefits. NCAs were encouraged to consider the use of sanctions in case of breaches, notably in case of greenwashing.

The Communication mentioned that the overall analysis conducted in Luxembourg is mostly consistent with the conclusions of the Final Report, and the CSSF requires FMPs to comply with the recommendations mentioned in such Final Report by taking the necessary corrective measures if needed.