Background
The Malta Financial Services Authority has recently introduced changes to the investment services rulebooks for Undertakings for Collective Investment in Transferable Securities (UCITS) management companies (ManCos) and Alternative Investment Fund Managers (AIFMs) to:
(i) transpose the Commission Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU (1) as regards the sustainability risks and sustainability factors to be taken into account for UCITS; and
(ii) implement the Commission Delegated Regulation (EU) 2021/1255 amending Delegated Regulation (EU) No 231/2013 (2) as regards the sustainability risks and sustainability factors to be taken into account by AIFMs.
Why
The Delegated Directive (EU) 2021/1270 and Delegated Regulation (EU) 2021/1255 form part of the Europe Union’s commitment to fulfil the following union strategic priorities:
(i) 2016 Paris Agreement – making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development;
(ii) 2018 Action Plan Financing Sustainable Growth – reorient capital flows towards sustainable investments to achieve sustainable and inclusive growth ; and
(iii) 2019 European Green Deal – transforming the EU to ensure that there are no net greenhouse gas emissions from 2050 onwards, and ensuring that economic growth is decoupled from resource use.
Amendments applicable to UCITS ManCos
A number of requirements were introduced or changed within the relevant MFSA rulebooks applicable to UCITS ManCos and Self-Managed UCITS schemes to transpose the changes brought about by Commission Delegated Directive (EU) 2021/1270.
The changes in detail
Directive 2010/43/EU was amended as follows:
• Article 3, which deals with definitions has been amended to include definitions of sustainability risk and sustainability factors.
• Article 4, which deals with general requirements on procedures and organisation has been amended to take into account sustainability risks when complying with the requirement to establish, implement and maintain decision-making procedures and an organisational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities.
• Article 5 dealing with resources has been amended to provide that management companies are to ensure that they retain the necessary resources and expertise for the effective integration of sustainability risks.
• Article 5a has been newly introduced to provide that investment companies are to integrate sustainability risks in the management of UCITS taking into account the proportionality principle.
• Article 9(2) which dealing with control by senior management and supervisory function has been amended to introduce the responsibility for the integration of sustainability risks in the relevant activities set out in the article with respect to senior management.
• Article 17, which deals with criteria for the identification of conflicts of interest, has been amended to introduce the obligation of identifying the types of conflicts of interest that may arise as a result of the integration of sustainability risks in the ManCo’s processes, systems and internal controls.
• Article 23, which deals with due diligence requirements has been amended to introduce the requirements for ManCos to take into account sustainability risks when complying with requirements relating to due diligence required to be conducted in the selection and ongoing monitoring of investments
• Article 38 dealing with the risk management policy has been amended to introduce sustainability risks as part of the areas covered in the policy.
Amendments applicable to AIFMs
The changes applied to the relevant MFSA rulebooks relate to the introduction of the definitions of Sustainability Risks and Sustainability Factors, and the reference to the requirement to comply with the provisions of the Delegated Regulation (EU) No 231/2013.
The changes in detail
The Delegated Regulation (EU) No 231/2013 has been amended as follows:
• Article 1 which deals with definitions has been amended to include definitions of sustainability risk and sustainability factors.
• Article 18 which deals with due diligence in relation to the selection and ongoing monitoring of investments has been amended for AIFMs to take into account the sustainability risks and for AIFMs to consider principal adverse impacts of investment decisions on sustainability factors when complying with the relevant requirements.
• Article 22 which deals with resources has been amended to provide that AIFMs should retain the necessary resources and expertise for the effective integration of sustainability risks.
• Article 30 which deals with types of conflicts of interest has been amended to provide that AIFMs are to ensure that when identifying the types of conflicts of interest, these shall include those types of conflicts of interest that may arise as a result of the integration of sustainability risks in their processes, systems and internal controls.
• Article 40 which deals with the risk management policy has been amended to introduce sustainability risks as one of the areas covered in the policy.
• Article 57 which deals with the general requirements for AIFM has been amended to take into account sustainability risks when complying with the requirement to establish, implement and maintain decision-making procedures, and an organisational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities.
Key changes to be considered for implementation by UCITS ManCos & AIFMs
- Updates to the organisational structure chart/ remit of departments to ensure that these reflect clearly the responsibilities and ownership of sustainability risks;
- Updates to the company’s policies and procedures manuals to integrate the sustainability risk assessment in both the investment management and risk management process;
- Upskilling of key personnel on sustainability factors and risks;
- Updates to the Conflicts of Interest Policy; and
- Updates to the Risk Management Policy.
These changes become applicable as from 1 August 2022. UCITS ManCos & AIFMs, and relevant self-managed schemes, are guided to ensure compliance with these new obligations.
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(1) The Commission Directive 2010/43/EU implements the UCITS Directive with respect to organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company
(2) The Commission Delegated Regulation (EU) No 231/2013 supplements Directive 2011/61/EU with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision.
This document does not purport to give legal, regulatory, financial or tax advice. Should you require further information or regulatory assistance, please do not hesitate to contact Martha Chetcuti.