Disclosures Regulation is to create transparency

In the article “Disclosures Regulation is to create transparency” published on 4 January 2020 in “Börsen-Zeitung”, the main German daily newspaper exclusively focused on the financial markets, Dr Harald Glander and Daniel Lühmann talk about the EU action plan for a sustainable financial system and its implementation which is only just in the beginning stages.

Mr. Glander, Mr. Lühmann, asset managers have to prepare for the Disclosures Regulation coming into force as part of the EU action plan for a sustainable financial system. Who is the target group?

Glander: The Disclosures Regulation is targeted at all financial market players and financial advisers. The target group are regulated companies such as AIFs and UCITS management companies, banks and financial services institutions. These companies will have to observe some of the disclosure requirements even if they do not produce or sell sustainable financial products.

What are the goals pursued by the EU in enacting the Disclosures Regulation?

Lühmann: The goal pursued by the EU is that sustainability risks and the consideration of adverse sustainability effects find their way into the financial market players’ and financial advisers’ processes of making investment decisions and providing investment advice. Thus, the regulation is connected to the EU’s ambitious climate protection goals, to be attained by diverting private capital into sustainable investments. The obligation to publish information on sustainability risks and adverse effects leads the financial market players and financial advisers to create the necessary transparency for investors to make an informed investment decision.

Which information will have to be provided in the future?

Lühmann: The regulation requires financial market players and financial advisers to publish business-related information on their websites. For instance, they will have to publish information on their strategies to factor in sustainability risks in their investment decisions and in their investment advice. If they also consider adverse effects on sustainability factors in their process of making investment decisions and providing investment advice, they will generally have to publish a statement on their handling of these effects. Lastly, financial market players and financial advisers will have to disclose information on how their remuneration policy complies with the requirement to factor in sustainability risks.

Glander: Also, financial market players will have to publish sustainability-related information in the precontractual information relating to financial products. Corresponding explanations will have to be given to clients before providing the services of investment advice and portfolio management. The scope of the product-related information will expand if a financial product is to promote ESG features or if sustainable investment is sought in the form of “impact investment”. For instance, asset management companies will have to amend their securities prospectuses accordingly.

In how far have the companies concerned implemented the new requirements in this sector?

Glander: The Disclosures Regulation was published on 9 December 2019 and will be applicable to financial market players and financial advisers from 10 March 2021 onward. The newly introduced obligations will be supported by way of level 2 measures, a draft of which is to be presented by 30 December 2020. Companies subject to the requirement to disclose are only just at the beginning of this process.

Which consequences will ensue if the new disclosure requirements are not met?

Lühmann: The Disclosures Regulation itself does not provide for any legal consequences ensuing from a violation of the disclosure requirements. However, it can be expected that corresponding rules and regulations concerning regulatory offenses will apply under German law.

Glander: It is likely to be the consequences ensuing from a violation of the disclosure requirements under civil law that will be significantly more important in practice. If a company, that is required to disclose fails to inform its investors, or if the information provided is inaccurate, it may face claims for damages. This is why companies will have to ensure that the information to be disclosed is accurate and that their employees are trained in handling the new obligations.

View the original article in German here.