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2026 Regulation Priorities: Funds Congress Recap

• Dechert LLP

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What are European regulators focused on this year? In this episode of Dechert On Reg, host Angelo Lercara is joined by Dechert partners Katie Carter and Mark Dillon and counsel Christine Renner to discuss highlights from the regulatory panel at this year’s Funds Congress, held February 6 in London. Topics include evolving regulatory divergence, targeted burden-reduction initiatives and strategic priorities for ESMA, the Central Bank of Ireland, the CSSF and the FCA in 2026 and beyond.

Angelo Lercara:

Man, 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, a 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 three experts joining us today. My colleagues, Katie Carter, Christine Renner and Mark Dillon are here with us. Let's dive in. Hi Katie, Hi Christine, Hi Mark.

Katie Carter:

Hi, Angelo.

Christine Renner:

Hi.

Mark Dillon:

Hi, Angelo.

Angelo Lercara:

To set the stage of today's episode, let's say a few words on Funds Congress. Funds Congress is the largest free-to-attend industry conference that focuses on the key themes in asset management. It was established in 2011, and it's 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 approximately 1,000 fund managers, asset allocators and more than 30 speakers that attended. One of the highlights every year is the regulators panel on which representatives from different regulators discuss the most pressing topics. This year, Katie, it was you who moderated the panel, and Christine and Mark were in the audience, listening very carefully. So for listeners who weren't in the room, Katie, who were the regulators on your panel, and what was the single core question you wanted to answer about the 2026 agenda?

Katie Carter:

So this year, we were lucky enough to be joined by representatives from Central Bank of Ireland, from CSSF, ESMA and the FCA, which was a really good mix of regulators. And I think their main focus, or the main thing that I was interested to talk to them about, was obviously one, what were the key things on the regulatory agenda for 2026 and beyond, but also to try and get a bit of a feel for how closely the FCA is still working with European regulators post-Brexit, and how much we should expect in terms of divergence in key areas.

Angelo Lercara:

Right, yeah. And if you had to summarize the panel in one sentence, what's the biggest shift, what do you think, in regulatory focus for this year?

Katie Carter:

So I think it was about kind of trying to really work together to make sure that the regimes and the regulations really work for the industry. There were definitely themes around simplification, burden reduction - which doesn't necessarily mean what asset managers would like it to mean in terms of less rules being applicable, but really just looking about how the rules operate, whether they operate in a smart way, whether they're duplicative, whether there's room for improvement to make things work easier for the industry and the regulators.

Angelo Lercara:

And you started with two main topics, AIFMD 2.0 and the UCITS changes that are coming. What do you think are the top two priorities regulators emphasize, probably especially around liquidity management tools, and what's still in motion?

Katie Carter:

Yes, so definitely a firm focus on people complying with the liquidity management tool requirements in AIFMD 2.0 and UCITS VI, making sure that market participants were really looking at those in light of the correct ones for the strategies for the products that they manage, rather than just sort of selecting ones off the list without proper consideration. I think they really are worried about systemic risk, which is why there's so much focus on liquidity management tools. And obviously we know that that's also where the loan origination rules and AIFMD have come in, that there is this concern that the fund industry is so big, but the systemic risk within the fund industry isn't necessarily managed in the way that they would like to see it right now. So I think that was part of it. I think also there was a lot of focus in the regulators' responses on these questions and other questions on data, volume of data, what they're going to do with the volume of data that they receive, and looking towards more harmonized reporting to the extent possible across the various directives.

Angelo Lercara:

Mark, from the CBI perspective, what did they signal as the main expectations for firms? I think they mentioned good implementation. What does it look like in

Mark Dillon:

Yeah, it's an interesting question, Angelo. I practice? think definitely what we've seen over the last few years, and what was emphasized by Gavin on the panel, is that good implementation really is substance over form. So increased engagement, more understanding, I think, from the regulator, that there's going to be a process towards full compliance, and that it's not necessarily that somebody's in full compliance Day 1 and they never need to touch it again. This is intended to be an ongoing development of top compliance and top policies and procedures, and we did see it with other implementation of recent regulations like DORA, where there was an understanding of the extreme level of work that had to be done to comply, and that actually, it may not be as simple as saying somebody's in full compliance. So there was an understanding that this will be be a journey. Now I think compliance with AIFMD 2.0 is a little bit more straightforward than DORA, but at the same time, some of the points that were being raised in terms of the regulator were things like the operational element, not just choosing your LMTs and disclosures, but actually ensuring there's appropriate governance in place. And that's the more qualitative element, which I think we're going to see more of. So I think that's what the regulator is getting at, to actually make sure that managers are really engaging with the requirements, to make sure that they actually have the appropriate impact in practice.

Angelo Lercara:

Yeah. Christine, from a Luxembourg platform point of view, what do you expect will be the hardest for managers? Will it be the, you know, the LMTs, the loan origination requirements, or maybe the whole reporting section?

Christine Renner:

So the hardest part of this is often turning the rules into day-to-day operating capabilities. And one important element is obviously the point where the rules need cooperation between all the different players in the market. So if we have reportings that need to be done by both the AIFMs and the depositaries, you need data from your distributors. That is one part that is going to be important. What is also going to be important is what Mark has said before, turning what you have in your own policies into an actual functioning operation. And we have also seen that in the past, when the CSSF has done onsite visits. That is something that they're focused on and that they have commented on in the past, and you see it again and again in the circulars that they've been issuing.

Angelo Lercara:

Thanks, Christine. Katie, I think another very important topic which we were all curious about was obviously the UK direction of travel. You know, since Brexit, we see, potentially, and probably also, really, you know, a different direction taken by the FCA in some points. And the FCA is representative, actually explained the FCA's UK AIFMD review, and I think it emphasized simplification and also pointed on proportionality. What should our listeners take away as the UK direction of travel?

Katie Carter:

Yes, so this was something I was really interested to hear about, because they announced that they were going to do a review of AIFMD. They've also mentioned that they were going to review UCITS and MiFID. But other than that announcement and some high level ideas, there hasn't been a lot of additional information coming out. So what they confirmed was they're doing a rule-by-rule review at the moment, and what they're focusing on is, are there duplicative rules? You know, have we got rules in different places which effectively net out at the same thing? Is there a way to get rid of some of those and simplify and clarify the FCA's expectations? They also said, and the FCA generally, sort of, from a UK specific point of view, prefers to regulate from a principles-based approach. So, you know, we have core principles that all FCA regulator firms are supposed to comply with, and everything derives from those principles. So I think they're taking this opportunity to move the more kind of rules-based approach in the EU over to a more principles-based approach with the FCA. So what they tend to do is give you general principles, but then leave it to you to make sure that the firm is in compliance with those principles using proportionality, but based on the size of the business, the type of clients that you service, etc. And so he confirmed that that's what they're looking to move towards. Some of the information he provided was already known in the market. In terms of, from an AIFMD perspective, they're looking at three different kind of tiers of AIFMs, for example, rather than small AIFM and full AIFMD, full scope AIFM like we have now. So there'll be three buckets. Those buckets will be driven by AUM and not asset value that's actually being managed, rather than kind of the target set out in fund documents. They're looking to try and reduce, sort of the cliff edge elements that come with AIFMD. So if you pass over the £100 or £500 million you don't suddenly become full scope, that there's going to be some grandfathering and some transitional approaches, which is interesting. They also confirm they're really happy to get rid of rules if they don't think they serve any purpose or they think that they're unnecessary, which is good. So we're expecting consultation probably mid-2026 with a policy statement to follow early 2027, but it's unlikely that any of these rules will come into force until at least 2028, so watch this space.

Angelo Lercara:

Okay, it sounds extremely useful to me all and very reasonable. I think we would need more of that.

Katie Carter:

Devil will be in the actual detail that gets published. I think, yeah, sounds good, right now.

Angelo Lercara:

If we take a look from the continent, Christine or Mark, in practical terms, what do you think firms will feel friction first, from you know, these UK-EU differences. Is it product rules, disclosures, maybe, or reporting, or just the supervisory approach? What do you think?

Mark Dillon:

the way we're probably seeing it at the moment, just in terms of the impact, and I think it'll depend, as Katie said, when we actually see the actual rules, how much divergence there ultimately is. At the moment, we're not seeing huge amounts, but where we are, we're seeing them in particular areas. So I would say on the retail side, we're probably seeing it more on the marketing bit. So we're going through all four at the moment, Katie, dealing with that. Hopefully you're getting near the end of it, Katie.

Katie Carter:

We're nearly at the W's, near the w's.

Mark Dillon:

So that was surprisingly heavy lift for going managers in terms of actually understanding the level of detail that the FCA wanted, and to the extent they were going to update their main docs or have supplementary documents. But in terms of disclosure on the retail side, that has significant impact. And then I suppose it depends how important the UK retail market is in terms of selling into it. And then we're probably seeing on the private fund side, as we have more divergence the treatment of non-EU AIFMs, particularly with the UK AIFMs, where, say, an Irish fund was appointing a UK AIFM, they could be fairly comfortable that the UK AIFM was going to comply with the same level of rules. Now, as we start to increase divergence, that's not as clear, and maybe there's more due diligence to be done by the fund board in terms of potentially carrying out a gap analysis, understanding what the differences are. But also we see the regulators potentially reacting. We don't know where it will necessarily land definitively, but certainly the Central Bank's new rules more explicitly set out what AIFMD rules will apply to a non-EU AIFM managing an Irish fund. So while I'd say the changes or the impact is not necessarily very significant now, except in narrower areas, the more divergence we get, the greater that will be.

Christine Renner:

I'll maybe add two points - one negative, the other one positive. On the negative side, we have a little bit of a timing misalignment. So our rules first come into place, then your rules come into place, and then, of course, we have the VC Growth Initiative, which could potentially move us then closer again, specifically with the supervision of AIFMs and the size management, or the buckets to what you have. So we're a little bit in misalignment. The positive side, though, is we already have global managers who are working in the U.S. or sitting in the U.S. and on the continent, in the UK, so we have a much larger divergence. We're used to it in a certain extent. So that is probably going to help.

Angelo Lercara:

SFDR 2.0 was a topic also discussed on your panel. And the CSSF representative made a very interesting comment, which I liked a lot. So he said basically that SFDR 2.0 may not simplify, but should clarify the rules especially, and that's good that the regulators have acknowledged it, Article 8 and 9 started being used like labels. Christine, what's the key change you think regulators want from SFDR 2.0?

Christine Renner:

I agree with this. The labeling bit was a little bit of a problem in the market, and I think we churned ourselves a little bit inside out trying to put funds into those labels, which is obviously also not helpful for the actual disclosure. And the investor.

Angelo Lercara:

You know, we had, we had a hard time, yes, actually, you know, dealing with that, making sure that it's not understood as labeling, but no chance to keep it different, different terms.

Christine Renner:

Yeah, exactly. But I think moving to SFDR 2.0, we'll have more defined metrics. We'll have detailed requirements that can actually probably be met. I'm saying this now. I'm going to similarly, as Katie said, might regret this later having said it, but it is an emphasis that there's more disclosure and to connect to risk management and real portfolio practices. And I think my favorite bit about it is that it is a little more realistic in the sense of "what is our goal?". Our goal is to move assets to be sustainable, instead of we're labeling them as already complying with us. So this is going to be a more natural fit for the industry, but no means easier or less work, right?

Angelo Lercara:

Another interesting topic, Katie, was actually, and maybe we've been complaining a lot in this podcast over the last two years about as much, guidance not being clear, not being always appropriate, always being a lot of compromises, difficult to understand, difficult to implement. And I found it extremely interesting that ESMA apparently seems to be acknowledging it, and you know, they've not acknowledged the tension that more guidance can reduce fragmentation, but also can feel like extra burden. How did the panel characterize that tradeoff?

Katie Carter:

I also think it's interesting. As a regulatory lawyer, like, "oh, that's another 400 pages of ESMA guidance that needs to be needs to be read," and everyone sort of scratches their head a little bit, but I thought was interesting is that, as my representative said, you've got to weigh it up. So one of the purposes behind the whole European project is harmonization to remove barriers, so everyone is, like, on a level playing field. And, you know, a fund launched in Germany can be sold in Portugal, and no one's sort of asking anything about it. And I think what they've been trying to achieve is harmonization through granularity of regulation. So if the regulations are granular, there's less chance of gold plating between the member states, but it's easier for everyone to understand that everyone is operating in the same way, and that should give the LCAs an easier time getting comfortable with approving products or services or people from other jurisdictions, which sort of makes sense. But then obviously, when you're in the market, then trying to go through, I mean, I can't remember exactly what the statistic was, but when the Commission announced that they weren't going to review any more Level 2 guidelines until 2027, I think they announced something like, they'd reviewed and signed off on like 900 pieces of Level 2 regulation in the last four years. Which, that is a mind blowing amount of regulation to keep on top of, let alone implement, and, you know, comply with. So I think there's a balance. And so I think what he was saying is you can simplify it, you can have less rules, but that gives us certainty in one way. So it's a certainty versus burden reduction balance that needs to be given. And with 27 member states, that's not an easy balance for them to do. And I think what I'd said was my view on SFDR 2.0 was I agree there are definite gaps and issues with with SFDR 1.0, but SFDR 2.0 effectively means the market having to go back and start again. You know, when you look at the new product categories, the new requirements, what was our Article 8 fund under SFDR 1.0 is not going to be an Article 8 fund under SFDR 2.0, it's going to be a recategorization. But at that point, at least we're going towards something that they perceive has more consistency. It should breed more consistency. And I think that was the purpose. So I have to say, I felt a little bit more sympathy for ESMA by the end of the panel than I said before it started.

Angelo Lercara:

Yeah, you're right. The same. Same here. Same for me on the Savings and Investment Union Market Integration package and another interesting topic. CBI sounded supportive of convergence, but at the same time cautious about additional burden. What's the main opportunity? What do you think for industry and what's the main risk if this is implemented badly, Mark? one

Mark Dillon:

So it's interesting question, Angelo. I would say,

Angelo Lercara:

Mark, thanks. We're coming is it's a balance, similar to the discussion we just had about the burden of regulation and harmonization. There are positives definitely to allowing retail investors get exposure to private fund or private assets, what are seen as, I suppose, more profitable investments, which they typically wouldn't have had access to before. Similarly, you have experts investing in private funds that haven't typically had access to retail investors previously, and even retail managers that have retail customers or high net-worth individuals who they haven't been able to offer alternative investment strategies to. And from a personal perspective, being based in Ireland, we've typically had quite limited

Christine Renner:

as a topic, probably, and then as a more investment opportunities in terms of what a retail or non-professional investor can actually invest into. So that's all very positive. I think the worry is similar to the general point. So the idea, or the wish, from all market regulatory burden point is that the impact of having to accept retail investors is going to negatively impact the products themselves by imposing additional burden and actually determining whether the value that's added by complying with the additional regulation is actually worth it. There is some criticism about an over-focus on costs, and that essentially it will be a race to the bottom, and that the managers will essentially just compete on price, and then that will erode participants, and apparently also the regulators, to keep the actual value that retail investors would have got from investing with some of the top managers, because from their perspective that the benchmarking is primarily on cost, it drives the market in a particular direction. Similarly with some of the other points, like, there's long been discussion after MiFID around the value of commissions, and if the ability to charge commissions is not available for retail investors, there's an argument that actually retail investors lose out, because a lot of them, in practice, we find are not willing to pay additional fees to get the kind of advice they need to make investments. So in terms of actually understanding the balance, that's really going to be an important thing. In theory, it sounds great, but a lot of it is going to be the implementation of the rules and how it actually impacts the industry, and whether it actually will have the benefit for retail investors that we hope will all right. cross-border funds competitive. And on the warning side, we are going to, probably are going to have a closer look at valuation and how firms do this.

Angelo Lercara:

Mark?

Mark Dillon:

I would say the point we spoke about probably first was the good implementation point. So what do things like governance look like? How are the LMTs actually going to be used? Christine said valuation came up a number of times. I think each of the regulators mentioned valuation. We know there's been CSAs recently, the Central Bank's been very engaged in valuation.

Angelo Lercara:

Katie, Christine, Mark, 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. Thanks a lot. As we wrap up today's episode, I'd like to extend my thanks to our incredible production team. It is their dedication and hard work behind the scenes that make this podcast possible. So here's to our talented producers, sound engineers and everyone else involved in bringing this show to life. To our listeners, thank you for tuning into 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.