Dechert On Reg

Key Regulatory Insights From Funds Congress 2025

• Dechert LLP • Episode 13

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 What is currently top of mind for regulators in the ever-changing financial services landscape? In this episode of Dechert On Reg, host Angelo Lercara invites fellow partners Katie Carter and Marianna Tothova to discuss hot topics from the “Regulatory Horizon: Key Themes for 2025” panel at this year’s Funds Congress in London. Featuring representatives from the FCA, CBI, ESMA and CSSF, the panel highlighted regulators’ innovative use of AI to parse massive amounts of data, how these authorities are cutting through “the noise” to focus on maintaining stability and protecting investors, thoughts on the retailization of private markets in Europe and much more! 

 Show Notes:

Dechert World Compass 

Angelo Lercara:

Hello everyone, and welcome to Dechert On Reg, the podcast where we explore the ever-changing landscape of financial regulations and the key issues that are shaping the future of asset management. I'm Angelo Lercara, partner at Dechert and co-head of our regulatory product line, and in each episode we'll be joined by expert colleagues and guests to explore the most pressing issues in financial regulation. In today's episode, we're talking about this year's Funds Congress and the regulatory panel which covered a number of crucial topics for the asset management industry. So whether you're an industry insider or simply interested in the world of financial regulation, you don't want to miss this episode of Dechert On Reg. I'm excited to have two experts joining us. My colleagues, Katie Carter and Marianna Tothova, are here today to discuss with us. Let's dive in. Hi. Katie, hi Marianna.

Katie Carter:

Hi, Angelo.

Marianna Tothova:

Hello.

Angelo Lercara:

To set the stage of today's episode, maybe let's say a few words on Funds Congress. So, Funds Congress is the largest free-to-attend industry conference that focuses on the key themes in asset management. Established in 2011, it is the only major annual event that brings together all major asset classes and fund jurisdictions. This year, it took place in February at the QEII Centre in London, and there were roughly 1000 attendees. One of the highlights is the regulators' panel on which representatives from different regulators discuss the most pressing topics. And I had the privilege myself to act as the moderator a few times. And it's actually great fun and interesting to interact with the regulators. So, this year it was you, Katie, who moderated the panel, and Marianna, you were in the audience listening very carefully, Katie, who were the panelists this year?

Katie Carter:

So this year, Angelo, I was really pleased to be joined by Camille Blackburn, who's the director of wholesale buy side from the Financial Conduct Authority. We also had Gavin Curran, who's the head of Funds Supervision Division at the Central Bank of Ireland, Emmanuel Doumas, who’s a senior policy officer from the European Securities and Markets Authority and Marco Zwick, who's a director at the CSSF from Luxembourg.

Angelo Lercara:

The panel opened, of course no surprise, with the discussion on the wider global landscape, and the panelists were so kind to offer insights into their approach. Katie, could you please summarize a bit what was discussed?

Katie Carter:

Of course. So, they were all obviously very keen to point out that they are regulators and not politicians. But with that in mind, they had a few insights that they offered. So, from an ESMA perspective, the view is that the fast-paced changes and the kind of current degree of volatility, both in the political landscape and other areas which impact the financial services market - so, things like the quick uptake and the quick-changing pace of AI, for example - and make the choices that they have to make as regulators more difficult when they're trying to balance the views between all the different kind of market participants, the different regulators, what they're trying to achieve. There are a lot of moving parts, and those parts are moving quickly. It makes it quite difficult for them to kind of take stock and work out what it is that they need to take into consideration. And I think the view from ESMA seems to be that they maybe have to take global developments into consideration more now and give a bit more weight to it than they would have previously done just because of what's going on. From the CBI perspective, their approach seems to be that they try and filter out ... Gavin called it "the noise." So, they're trying to filter out the noise of kind of all of those wider geopolitical developments, and really think about what's most important to the CBI, looking at the data that's available to them, what their priorities are on the basis of that and then maintaining the focus of their own regulatory agenda. And he did note that obviously it's necessary to give consideration as to whether those priorities, once identified, need to be tailored to factor in the wider geopolitical landscape, but they want to start with kind of what it is that's important to them first and then think about those things afterwards. And in the CSSF perspective, I think they were quite pleased that they're not politicians, they don't have to deal with this, and that they want to focus on on being regulators. So, Marco Zwick mentioned that their approach is to focus on the CSSF's mandate, which is investor protection and making sure that the financial markets maintain their stability and that they need to do this regardless of what's going on outside of Luxembourg, basically. He did say that kind of part of being a regulator now is just to manage if a crisis or a change comes up that they just have to deal with that on a case by case basis, but it does mean he said that, you know, this kind of current environment, in his view, meant that relationships between the regulators are more important than ever, that they have a good working relationship with other regulators in this space. And one example he gave was the emergence of crypto assets and, kind of, that giving rise to more geopolitical risks. From their perspective as a regulator, what they're then focusing on from that is good governance, making sure that that is really in place and that the right risk-management processes and procedures are there. I think that goes back to his kind of initial comment about, you know, consumer protection and protecting the stability of the financial markets, so kind of looking at those wider changes and making sure whether the systems and controls they put in place support that. And lastly, from the FCA's perspective, Camille used the words predictable volatility, that whilst there is a lot of change going on, it's a sort of environment where you should be anticipating that a lot of change is going to happen. It's going to be quick paced, some of those kind of geopolitical changes, but other changes are happening, and that market participants and the regulators are getting more used to dealing with operating in that sort of environment. One of the observations she made was that what they're seeing is because the more traditional markets that UK regulated entities sort of dealt with, so the U.S., for example, because there's volatility in those markets, and the landscape is changing that the FCA is seeing market participants look to other markets, so places where they wouldn't necessarily have looked to distribute products before, or targeting investors and jurisdictions they wouldn't have normally looked at before. And the FCA, where we look at those sorts of changes within the context of things it would normally focus on so, again, consumer protection. But they're also focusing under the new sort of labor government. We've got this new growth strategy they're working towards, so the FCA has to be mindful of that as well.

Angelo Lercara:

Yeah, it's actually interesting that all of the panelists emphasized investor protection, consumer protection a lot ,the four of them. And obviously, one of the hot topics which we're dealing with, probably on a daily basis, which was also a topic on the panel, is retailization of private markets, and how to make sure that retail investors would understand the risks and would maybe know what they're doing. Marianna, what's your take on the European efforts towards retailization of private markets?

Marianna Tothova:

Yes, agreed. It's very high on everyone's agenda, and that was also confirmed by the FCA, by Camille Blackburn, who indicated that, in the upcoming portfolio letter that the FCA will be sending to the managers, it does touch two out of three topics of that portfolio letter. So, the first topic that she mentioned was support of confident investing in private markets. And the second one was to ensure good outcomes for consumers. And the third topic, not necessarily directly related but of course related, is ensure market effectiveness and navigate in the dynamic markets that also Katie mentioned, the predictable volatility. So, the FCA has seen the retailization in a few waves, first through ETF products and some other innovations, one of them being LTAF, over the last two years. But they've also seen gradual incorporation of private assets in model portfolios as well, and even discussed the creation of private assets indices. So, there's a lot of innovation, a lot of drive of the market towards retailization. And the FCA is looking at all of that through the lens of consumer duty regulation, and they want to make sure that the managers, product manufacturers take into account how to create value for those types of investors, and also that those assets that they create and sell are appropriate for those investors.

Angelo Lercara:

And LTAF is the UK version of what Europeans know under ELTIF, right?

Marianna Tothova:

More or less. Yes, like, UK national product, yes. And then one topic which is really a silver lining when we're talking about private assets and retailization is valuation. So, over the last year, FCA has conducted a review of valuations in private markets, and the results of that survey and thoughts of the FCA on various aspects of that survey will be published in the course of March. Two hints were given on the content of the publication, of the findings, it will be focused on governance and ensuring that boards and the management have oversight over valuations or over how to spot any inconsistencies or exceptions in evaluations, and another aspect was spotting and management of conflicts of interest as to who values the assets, etc. And when we spoke about retailization with the ESMA representative, they have focused mainly on the new retail product, which is the ELTIF 2, or the revamped ELTIF vehicle, and we can already see that ELTIFs are being created at a quicker pace. And, as we can see, and as it was also mentioned, it's not only in the typical jurisdictions, but we see ELTIFs in additional jurisdictions, so not only in Luxembourg, but also in Ireland, in France, etc. And we can always check the ESMA register of ELTIFs to see where we are. That's continuously updated. And at the European level, ELTIF 2, there is a lot of hope for the product that hopefully this one could work, because the previous products historically have not taken off as much as we would have wanted, such as uVECA or EuSEF, but hopefully if ELTIF 2 works, it might open the door to creating more European-wide productive effort. And one very important point that was underlined was disclosure. So if we're selling private assets to retail investors, we really need to disclose in detail and maybe emphasize on comprehensive and clear and non-misleading disclosure, and that is linked, then, with the work that is currently being done on retail investment strategy. But we do not have the shape or form of that yet.

Angelo Lercara:

It's my impression that the European Union is trying to come up with something so successful, like the UCITS product, and they're desperately trying to find something which would add to that great success story. Katie, there are also a lot of ELTIF-related developments, obviously, in the in the core ELTIF country, I would call it Luxembourg, but also in Ireland. Can you talk about that, please,

Katie Carter:

Yeah, sure. An additional observation on what a little bit? you just mentioned, Angelo. So, in some of the kind of conversations I had with Emmanuel from ESMA outside of the panel, he mentioned that they're a bit disappointed with what he called the slow uptake of ELTIFs at the moment in Europe. And I agree with you. I think they are looking for sort of the next UCITS. I do think that one of our Lux partners gave me a sort of UCITS history lesson a few weeks ago, and pointed out that, obviously, when UCITS came out, it took a little while for those to take off as well. So, whilst they are obviously a great success story now, it took a little while for the market to kind of get used to them and for there to be as money, you know, in circulation as there are now. So, you know, that may well be the case for ELTIFs that it takes a while for everyone to get on board. But from an ESMA perspective, they will be happy, I think, with what both the CBI and CSSF representatives said in terms of the fact that they are both focused and committed to the ELTIF framework. They've done a lot of background work, sort of waiting for the new Level 2 to come out, and that they are sort of focusing on trying to foster more retail investment into the private markets, and kind of get that sort of Irish ELTIF 2 platform to really be attractive

Angelo Lercara:

Sorry, Katie, just for those in the audience to product manufacturers, you know, as part of that, you know, it's no surprise, it kind of mirrors some of the things That Marianna said, but they're going to be really focusing on good governance, evaluation and investor transparency. From a CSSF perspective, again, you know, they were talking about the fact that, obviously they've got the Part 2 funds in Luxembourg, which Marianna is much more familiar with than me, but obviously there's already kind of a history of the CSSF trying to support retail investment into private markets through the Part 2 structure. So from an ELTIFs perspective, they are very much on board with the Part 2. who are not familiar with Part 2. So, this is a fund type which exists in Luxembourg and which obviously is an AIF. It's not a UCITS, it's an AIF that can be used for retail marketing and also for investments in private assets. It's called Part 2 because it's in part two of the law, right?

Katie Carter:

That's right, but with the difference that Part 2 funds can't and do not have marketing passport to retail investors, only to professional investors.

Angelo Lercara:

Right. Sorry, Katie.

Katie Carter:

That's OK. So, from an ELTIFs perspective, I think, you know, it's no surprise, given the approach that the CSSF has previously taken to, you know, helping investors get exposure to private markets that they seem to be fully on board with ELTIF 2, and that they are focusing on that and looking forward to kind of having more ELTIFs set up in Luxembourg, making use of that passport to increase that access to private markets even further.

Angelo Lercara:

Thanks, Katie.

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Unknown:

Moving on to another very interesting topic, actually, I'm happy that you asked the question, it's on data. And I asked myself a lot, what are they going to do with all of this data that, you know, almost all managers and many other market participants would send them a huge amount of data. And, you know, I ask myself, as I said, "What are they going to do? Is anyone reading the data or analyzing the data?" And so, I was pleased when you asked the question, what the regulator is actually, how they actually interact with this large volume of data? What did they tell you?

Katie Carter:

So, this is a question I get asked by clients all the time, Angelo, I have to say, "Why do I have to provide all of this information? And do they actually do anything with them?" And there's definitely, for a time, some of the information that our clients support, I wasn't entirely convinced whether anyone was actually really looking at it. I think what was quite interesting is that all of the regulators that I spoke to mentioned that they are currently in the process of employing more data scientists internally, so they're using technology and AI to parse through all the data. So, I think the good news for our clients, if you want to look at it through a glass-half-full approach, is that everything that's being reported is being looked at to an extent. From a CBI perspective, they are taking all that data in, they're using technology to analyze it and to help inform what they're going to do in terms of, you know, what do they need to focus on? Are they seeing the same errors come through in data from market participants? Does the data show that there's something that they need to look at more closely, or something that they think that there's a misunderstanding in the market in terms of what's required from market participants? So, I feel that that that was actually quite interesting in terms of, you know, a lot of the conversations that we have with our clients. And I think it's fair to say is people trying to keep up in thinking about AI, you know, how can they use it as a regulated entity? What do the regulators make of it? But actually, on the regulator side, they're having the same thought processes around, you know, is it the types of technology they can use, how they can use it? They're having to also make investments and try and be innovative to make sure that they can continue to kind of function with, you know, whilst our clients have to provide a lot of data to regulators under the various EU and UK regulations, actually, then on the flip side, the regulators then have to deal with the data that they get, you know, and that the volume of that is high. So I feel like that was quite interesting. One of the things that I was keen on, just kind of from a personal interest perspective, was when you think about SFDR and the taxonomy on the ESG side of things, the amount of data that has to be disclosed to investors and to the regulators is huge. And one of the things that Gavin from the CBI mentioned is that that is one of the things that they're using the technology to parse through to kind of look to see what's happening. Is there certain phraseology that's being used in disclosure that isn't necessarily as clear as it could be, and kind of gathering that together when they're doing their reviews. And then the last thing I think he mentioned, which I'm sure they are interested in, is how the firms that they regulate themselves using technology to kind of provide the data, but also to kind of look at things in the business. ESMA, I think, said similar things in terms of, you know, their use of technology to parse through data, etc. The FCA, Camille mentioned, again, they are mindful that whilst they're trying to get to grips with technology and how it works and the innovation around that, so are they. So. they're on the same journey as the entities that they regulate and that the FCA has spent, you know, at least the last two to three years internally trying to put systems in place and to kind of get the right people on board to help them use that technology. She mentioned they've got a dedicated market analysis team, which basically is data scientists and people that have advanced coding skills, so they're all kind of focused on making sure that they internally have the right skills to parse through that data, to use the technology that's now available to them, and then also build that into their regulatory agenda, which I thought was quite interesting,

Marianna Tothova:

Yeah, and I wanted to mention that, and some of them do recognize that there is a little bit of trial and error as well, right? Everybody's learning.

Katie Carter:

Yeah, I think that's fair to say. It must be a difficult area to regulate,if I put myself in their shoes, because you're trying to potentially have to regulate an area which is difficult to understand if you're not technologically kind of developed. I would put myself in that bucket in terms of trying to understand AI, how it works, you know, and I've had a few questions, I'm sure Angelo, you'll have had discussions on this around, you know, how can people use AI to potentially do things like provide investment advice, for example? And there's a lot of complexity around that in terms of, you know, previously, when I've had to advise firms who do algo trading or quant trading, some of that is actually having to take a step back and try to understand what the algorithm or the computer program actually does to then be able to advise on that. And it becomes quite complicated quite quickly. So I think as a regulator, it must be, you know, on one side, you've got the technology that you can use to parse through the data and everything, but on the flip side, you've got firms that are using that technology, and you have to kind of regulate them, so it must be quite challenging right now.

Angelo Lercara:

Yeah, definitely. I agree. You know, I'm curious to see, you know, with all of these possibilities for the regulators to analyze the data, whether there will be shorter reaction times. So, in the meaning of that, you know, we will get some more feedback from the regulators on what to change, on what to do next, on what should be done better, just because of the ability to really thoroughly analyze the data and being able to come back to the industry on a shorter notice or much shorter time than currently. So, I'm curious to see whether, you know, this will lead to any, well, probably more work, I would assume, for the managers, but hopefully also to a more positive guidance to, you know, investor confidence.

Katie Carter:

Yeah, and feedback in more real time, I suppose, because if you've submitted a report four or five months previously, and then suddenly you get feedback from the regulator on, you know, certain points in there, potentially, if you've got to go back and fix, that would be a bigger job than if you get your feedback two weeks later in terms of, you know, it's still going to be, I agree with you, an uplift that kind of more real-time feedback could, in a way, be helpful. You know, sometimes we see things when that feedback has been provided a long time after whatever's happened has happened, it makes it more challenging to go back and tweak things, doesn't it?

Angelo Lercara:

Yeah. Marianna, the last question Katie asks, I would phrase it whether there are any other thoughts that keep regulators awake at night. I'm not sure whether the answers were so dramatic, but maybe you can tell us about it.

Marianna Tothova:

Yes. So, I'll try to regroup this, maybe in two topics. One is within the EU and one is in the UK. So, FCA seems to be focusing this year, really, on the investor protection linked to all the innovations that we mentioned, and how we can look at that to the extent retail investors are concerned through the consumer duty lens. And in terms of upcoming work, this year FCA will be focusing on valuations, as we discussed already, but also with the results of the work under the testing, under the system-wide exploratory scenarios, SWES, and how the transmission of risk fits to the economy. So many market participants would have participated in this exercise. So, this year, they will follow up on the work that has been done and some results will be published. So, that's on the FCA's agenda. And on the European agenda, we can take out our compliance calendars, but there's quite a lot of work going on. First of all, there's a lot of work on the ESMA side and the National Authority side in the funds world on costs and fees. So, there have been surveys, and this will continue ESMA's peer review of depositories, further work on the implementation of DORA, which might not seem very exciting, but it has to be complied with. We are awaiting the RTS under AIFMD 2 in various aspects, whether it's LMTs or loan origination. Then, obviously, ESMA fund names guidelines also need to be implemented. One thing that has been mentioned also is, again, valuation in the private markets. Retail investor strategy, again, we don't have a political consensus yet, so let's see where this will get. It will affect the whole retailization discussion as well. And very important is the creation of the AMLR. So, the AML authority at the level of the EU, which has now slowly started to work and, obviously, the implementation of the sixth AML directive. One quite interesting point that was also mentioned was the potential review of the money market funds regulation based on the consultation on non-bank financial institutions. But, again, this is still a big question mark. We do not know when and in what form that will come.

Angelo Lercara:

Wow, very long pipeline will keep everybody busy for the next few years, I guess. Katie, Marianna, a big thank you for joining us and sharing your insights with us. We really appreciated your expertise, and it's been great having you in this conversation. Thank you very much. As we wrap up today's episode, I'd like to extend my thanks to our incredible production team. It's their dedication and hard work behind the scenes that make this podcast possible. So, here's to our talented producers and engineers and everyone else involved in bringing this show to life. To our listeners, thank you for tuning in to our financial regulatory podcast. We hope that you found today's episode informative and engaging. If you enjoyed the show, please consider subscribing, rating and reviewing us on your favorite podcast platform. See you next time.