Reporting obligation regarding insurance transactions related to investment funds
On 15 September 2016, the Financial Services and Markets Authority (FSMA) published its communication_2016_15 on the reporting obligation regarding insurance transactions related to investment funds (NL / FR) (hereafter, the communication).
Article from Regulatory Newsflash of 23 September 2016
The purpose of the communication (NL / FR) is to remind insurance companies of their reporting obligation and provide where necessary, further guidance. Additionally, the FSMA provides concrete recommendations to improve the quality and provision of these reports.
The basis for these recommendations can be found in a sector analysis performed by the FSMA on the annual and semi-annual reports to be drafted by insurance companies commercializing branch 23 life insurance products to retail investors.
The FSMA’s analysis revealed that not all insurance companies draft annual and/or semi-annual reports and that some reports were of poor quality. The FSMA has in the meantime already discussed the relevant shortcomings with the respective insurance companies and urged them to take some remediation actions, which led to higher quality reports.
Main principles set out in the communication
The communication provides some further guidance on (a) the format and provision of annual and semi-annual reports and (b) on the required content.
Format and provision of reports
A report should be drafted for every underlying investment fund. In case an insurance contract is linked with multiple investment funds, the FSMA rejects the current practice to draft one report containing an overview of all possible underlying investment funds. A specific report should be drafted for the relevant investment fund itself.
The FSMA also considers it insufficient to provide only the (semi-) annual reports of the underlying undertakings for collective investment (UCIs) or to replace the reporting requirement by the provision of periodical factsheets, product sheets, or other information.
Provision of the reports
These reports should be made available at the insurance company’s registered offices. However the FSMA recommends to also publish them on the insurance company’s website.
Content of the reports
Composition of the investment fund
The FSMA considers it to be insufficient to limit the information on the composition of the investment funds to the enumeration of the different UCIs (UCITS or AIF) and recommends a ‘look-through’ approach providing information on the assets of the underlying UCIs.
Composition of the portfolio
In order to have a concrete view of the portfolio at reporting date, a breakdown of the portfolio and the movements within the portfolio is to be provided. FSMA recommends to provide an overview of the movements within the underlying UCIs, complemented with graphs and tables on the actual composition of the portfolio, including the relevant geographic, monetary, sectoral, qualitative,… criteria.
Transactions in derivatives or foreign currencies
The FSMA concluded that this information is often missing in the reports. Furthermore, a common mistake made, especially in case of investment funds with only one underlying UCI, is to copy the amount of the obligations of the underlying UCI. This amount would not correctly represent the obligations of the investment fund, since the investment fund is rarely the only investor in the UCI. The amount of the obligation should reflect the percentage of participation of the investment fund in the underlying UCI or financial instrument.
Regarding the obligations deriving from foreign currencies FSMA recommends to use the applicable exchange rates at the moment of reporting.
Overview of the investment objectives
The regulator clearly recommends to explain the investment objectives and functioning of the investment fund a lot better. It is not enough to ‘copy/paste’ the investment objectives of the underlying UCI’s since this does not necessarily correspond to the investment objective of the “insurance” investment fund.
Description of the risks
Similar to the comment on the investment objectives, the (semi-) annual reports should contain a description of the relevant risks of the investment fund and should take into account the relevant characteristics and composition of the investment fund (instead of copy/pasting from the underlying funds).
Evolution of the investment fund’s value
The reports should reflect the evolution of the value of the investment fund’s units over a sufficiently long period. To enhance the uniformity of the reporting on this topic FSMA recommends to include the start date of the investment fund and, where possible, to describe the evolution of the unit’s value over the same period as this is required for the underlying UCI’s.
Partner, Regulatory Risk & Compliance
Tel: + 32 2 800 2306
Director, Regulatory Risk & Compliance
Tel: + 32 2 800 2491
EMEA Centre for Regulatory Strategy