SFDR – ESAs give guidance on compliance until the RTS are in force

On 25 February 2021, the three European Supervisory Authorities (ESAs), ESMA, the EBA and EIOPA, jointly published a short supervisory statement on SFDR (the statement).

The aim of the statement is to achieve "an effective and consistent application and national supervision of the SFDR".

It focuses on what EU regulators should be doing to supervise compliance with SFDR in the period between 10 March 2021, when the SFDR comes into force and the date on which the Level 2 regulatory technical standards (RTS) made under it come into force (which is very likely to be 1 January 2022).

Overview

The statement's contents are mostly uncontroversial and provide a generally helpful summary on which rules apply and when. 

The good news is that the statement confirms that there is no mandatory obligation for firms to adopt the RTS prior to these coming into force - regulators in the EU ('national competent authorities' or 'NCAs'), though, are encouraged to refer in scope firms to the draft RTS in the ESAs' Final Report, published earlier in February. 

Overall, what the statement says on timing is helpful, though there is one potentially annoying comment when it comes to timing of annual reports.

A deeper dive

Looking at these points in more detail:

(a) Status of the Draft RTS between 10 March 2021 and 1 January 2022 (the interim period)

• The statement does not require firms to adhere to the Draft RTS before these come into force (which we expect to be from 1 January 2022). 
• The furthest it goes on this point is to state that NCAs are "encouraged" to refer financial market participants and financial advisers to the requirements set out in the draft RTS, and that these can be "used as a reference".
• The statement, though, also acknowledges that the RTS have not been adopted by the Commission or scrutinised by the European Parliament and Council of the EU, so the final RTS may be different. 
• In a slightly different formulation, the statement then recommends NCAs to encourage in scope firms to use the interim period from 10 March 2021 to "prepare for the application of the RTS".
• In the view of Simmons & Simmons, the statement does not undermine the widely-reached conclusion that it is not mandatory to follow the Draft RTS, when seeking to comply with SFDR on a “principles-based” basis. It is of course prudent for firms to prepare for compliance with the RTS during 2021.

(b) Timing of the first quantitative Principal Adverse Effect (PAI) report

• The statement helpfully re-confirms that the first annual PAI report with quantitative data for a reference period is due in respect of the 2022 calendar year and should be published by 30 June 2023.

(c) Timing of the first annual report for Article 8 and Article 9 products

• Slightly less helpfully, though, the statement asserts that the first annual report to be published in compliance with the RTS is the first report prepared in 2022 (our emphasis). 
• For many firms, this would mean that the report covers a period before the RTS come into force (in many cases, the 2021 calendar year).
• However, the ESAs then more helpfully propose that if the RTS aren't adopted early enough to allow firms at least six months to gather the necessary information and adapt their practices then their application should be deferred to apply to the first reporting period starting from 1 January 2022.
• With the RTS widely expected to come into force from 1 January 2022, they would need to be adopted by no later than 30 June 2021 to give firms the six month period proposed by the ESAs.

(d) Timing for non-compliance PAI statements under Article 7(2)

• There has been some confusion in the industry about the timing of the Article 7(2) PAI non-compliance statement, and whether this benefits from the article 7(1) transitional period to 30 December 2022. 
• The statement confirms our own view that it does not, and that Article 7(2) applies from 10 March 2021.