Q1 2026 - European Regulatory Update for Funds

The first quarter of 2026 saw a steady flow of UK and EU regulatory initiatives and updates, which are relevant to European private fund managers as well as non-European managers marketing or operating in Europe.

This update summarises the following developments from the quarter:

EU Updates:

1. AIFMD 2
2. ESMA Report on Marketing Communications
3. European Commission notice on the application of the EU sustainable finance framework to the defence sector
4. European Commission consultation on venture and growth capital fund reform
5. EMIR 3

UK Updates:

1. Revisions to UK EMIR
2. HM Treasury consultation on changes to the Appointed Representatives regime
3. FCA's "Consumer Composite Investments" regime
4. Securitisation framework consultation

EU:

AIFMD 2

As readers will be aware from our previous publications, Directive (EU) 2024/927 of the European Parliament and of the Council of 13 March 2024 amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds ("AIFMD 2") amended the AIFMD with effect from 15 April 2024 and individual member states of the European Union have until 16 April 2026 to implement these amendments into their national laws.

By way of reminder, AIFMD 2 introduces, amongst other things, new rules applicable in respect of alternative investment funds ("AIFs") that engage in loan origination, new requirements applicable to alternative investment fund managers of "open-ended AIFs" and enhanced disclosure requirements vis-à-vis investors.

With the deadline for transposition of AIFMD 2 into the national laws of individual member states fast approaching, there are certain jurisdictions where the updated national framework has been finalised and published whereas there are other jurisdictions where the applicable regulatory/legislative processes remain ongoing and it is apparent that the deadline will not be met. As such, it is important to continue to monitor national law developments and to seek advice from local counsel on supervisory expectations and processes in relevant jurisdictions. Note that, in addition to updating the AIFMD framework, AIFMD 2 may also have an impact on national laws governing loan origination activity by investment funds in certain jurisdictions.

Whilst 16 April 2026 will be a key staging post for AIFMD 2 implementation efforts, firms should continue to monitor developments after this date. This includes monitoring for developments in jurisdictions which are delayed in their transposition of AIFMD 2 and related changes to national law, as noted above, but also for broader developments in market practice and supervisory expectations in respect of AIFMD 2 requirements. In addition, AIFMD 2 mandates the European Securities and Markets Authority to produce a number of regulatory technical standards ("RTS"), implementing technical standards ("ITS") and guidelines to supplement the amending directive, some of which are yet to be finalized. Key amongst these are the RTS and ITS in respect of the regulatory reporting obligations introduced by AIFMD 2 which are expected by 16 April 2027.

For the avoidance of doubt, AIFMD 2 only impacts the AIFMD regime as it applies in the European Economic Area ("EEA") and does not impact the UK's corresponding regime under the United Kingdom Alternative Investment Fund Manager's Regulations 2013 ("UK AIFMD") (although this is currently under review by the FCA). As such, it will not impact funds managed and/or marketed in the UK but not the EEA.

ESMA Report on Marketing Communications

On 6 January 2026, the European Securities and Markets Authority ("ESMA") published its third report on marketing requirements and marketing communications under the EU's Cross-Border Distribution of Funds Regulation ("CBDF Regulation"). The report includes:

• an overview of national rules on the marketing of funds in all EU Member States (which are reported to be substantially unchanged since ESMA's previous report issued in 2023);
  
  
• statistical data on cross-border marketing notifications under the EU Alternative Investment Fund Manager's Directive ("AIFMD"); and
  
  
• examples of breaches of the CBDF Regulation detected by national competent authorities.

Persons involved in reviewing marketing communications for compliance with the CBDF Regulation and the associated ESMA Marketing Communication Guidelines may be interested to note, as potential pitfalls, the examples of breaches given. For marketing communications relating to AIFs, these included:

• an SFDR Article 6 fund described in its marketing materials as "sustainable";
  
  
• a statement that an AIFM followed the UN's Principles of Responsible Investment ("PRI"). At the same time, all funds under management reported solely in accordance with SFDR Article 6. Hence, the information that the AIFM followed PRI was deemed misleading, since it did not include sustainability in its investment decisions;
  
  
• sensationalist expressions (e.g., "invest in the best private equity funds") made without objective data;
  
  
• comparisons to funds with non-comparable risk/reward profiles;
  
  
• a statement of expected yearly net returns without reference to risks or the required disclaimer on estimated future performance;
  
  
• substantial inconsistencies in the investment strategy and investment policy between the marketing communication and prospectus;
  
  
• a marketing communication for a fund promoted to retail and professional investors using technical terms without a glossary to define them; and
  
  
• in the fact sheet of a sub-fund operating under the fund of funds structure, instead of describing the sub-fund's own investment strategy and portfolio composition, the fact sheet outlined the investment policy and portfolio structure of an underlying foreign fund in which more than 90% of the sub-fund's assets were invested, without informing investors that the data presented referred to the underlying fund.

European Commission notice on the application of the EU sustainable finance framework to the defence sector

Following the Commission's publication in March 2025 of the Joint White Paper for European Defence Readiness 2030 (the "White Paper"), which provides a framework for its plan to boost EU defence capabilities, the Commission has published a Notice to provide guidance on the applicability of the EU sustainable finance framework to the defence industry. The notice emphasises that the sustainable finance framework sets no limits on the financing of any sector, including the defence sector, and encourages defence sector investments, like those in any other industry or sector, to be assessed on a case-by-case basis.

The Notice covers various elements of the EU sustainable finance framework, including (among others), SFDR, MiFID II and the EU Taxonomy:

1. SFDR: The Notice reiterates the White Paper's statement that "the SFDR does not prevent the financing of the defence sector," and emphasises that investments in the defence sector are not considered to automatically result in negative principal adverse impact ("PAI") exposures. Financial products which consider PAIs and invest in the defence industry are advised to undertake particular analysis in respect of PAIs related to human rights and exposure to controversial weapons. In relation to human rights, the Notice encourages financial market participants to factor in due diligence requirements and measures put in place to comply with export control legislations, which contribute to the fulfilment of the UN Global Compact Principles and OECD Guidelines for Multinational Enterprises, and therefore PAIs 10 and 11. In relation to controversial weapons (PAI 14), the Notice notes that the definition of "controversial weapons" deemed to have a principal adverse impact in the SFDR Level 2 regulation is limited to four categories of banned controversial weapons, and does not include nuclear weapons.
   
   
2. MiFID II: The Notice emphasises the requirement under MiFID II for investment firms to consider clients' sustainability preferences, which makes direct reference to "sustainable investments" under the SFDR and "environmentally sustainable investments" under the EU Taxonomy. It highlights that there is no provision requiring investments in the defence sector to be considered to have adverse impacts for the sole reason of being invested in that sector, and there is therefore no requirement for such investments not to be offered to clients with sustainability preferences.
   
   
3. EU Taxonomy: The Notice notes that undertakings involved in defence-related activities can, like any other sector, claim Taxonomy-alignment for eligible horizontal investments (such as energy efficiency, clean transport or infrastructure investments). Additionally, the fact that specific defence industry activities have so far not been included in the EU Taxonomy does not prejudge the defence industry's environmental performance.
   
   
4. European Commission consultation on venture and growth capital fund reform

The European Commission published a targeted consultation on 15 January 2026, aiming to collect concrete evidence and stakeholder feedback on the barriers for venture and growth capital managers arising from the application of the European Venture Capital Funds Regulation ("EuVECA"), the AIFMD and national legal frameworks for investment funds, as well as on possible policy measures addressing such barriers.

The purpose of the proposed reforms is to increase the competitiveness of EU venture and growth capital fund managers and enable a more dynamic and integrated market for their funds.

The consultation included questions aimed at evaluating the ability to:

• strengthen the scalability and competitiveness of small-size AIF managers (EU venture and growth capital fund managers with AuM below EUR 500million) and mid-size AIFMs (AIFMD-licensed EU venture and growth capital fund managers with AuM between EUR 500 million and EUR several billion) through simplification and by facilitating cross-border fundraising and investment;
  
  
• support bigger ticket investments into the EU real economy, including scaleups and infrastructure projects, notably in a cross-border context;
  
  
• support the emergence of larger and more competitive EU venture and growth capital fund managers, capable of operating at a regional, European and global scale; and
  
  
• ensure effective and proportionate regulation, particularly for small-size AIF managers and mid-size AIFMs.

This is with a view to analysing whether a more proportionate regulation and compliance burden that is better adapted to small-size AIF managers and mid-size AIFMs and their risk profile, investment strategy and business model could deliver effective supervision and continuously ensure a high level of investor protection and the integrity of the market.

The response period for the questionnaire ended on 18 March 2026, and the industry awaits further developments.

EMIR 3

The third review of the European Market Infrastructure Regulation (Regulation (EU) 2024/2987) ("EMIR 3") came into force late in 2024, bringing several revisions to the existing EU EMIR framework including an Active Account Requirement, Post Trade Risk Reduction requirements and changes to Clearing Thresholds. In connection with the revisions to clearing thresholds, in February 2026 ESMA published draft Regulatory Technical Standards setting out revisions to the clearing thresholds.

To reduce unnecessary complexity and burden, ESMA has:

• retained five categories of clearing threshold, avoiding additional categories or more granular thresholds;
  
  
• clarified the timing of calculation of positions, allowing counterparties to apply the new thresholds during their usual assessment window or earlier, if they wish to benefit sooner from the new regime; and
  
  
• enhanced stability and visibility in the mechanism triggering the review of the clearing thresholds.

ESMA has submitted the final draft RTS to the European Commission for endorsement, following which they will be subject to adoption.

UK:

Revisions to UK EMIR

The UK version of EMIR has been subject to various revisions since the UK's departure from the EU, most recently a consultation in 2025 in which the FCA and the Bank of England proposed amendments to address certain technical issues relating to UK EMIR trade reporting requirements.

The FCA and BoE published updated technical standards (FCA Handbook Notice 132, Bank of England Policy Statement) reflecting these changes in August 2025 which came into force at the end of January 2026.

HM Treasury consultation on changes to the Appointed Representatives regime

In February 2026, His Majesty's Treasury ("HMT") launched a consultation on proposed changes to the Appointed Representative regime, following a policy statement in August 2025 citing concerns around the poor oversight of Appointed Representatives and risk for consumer harm arising.

By way of reminder, an Appointed Representative is a firm/person who carries on regulated activities under the responsibility of an authorised firm (known as the "principal"). Appointed Representatives are exempt from the general prohibition under the Financial Services and Markets Act 2000 from carrying on regulated activities without authorisation. In effect, Appointed Representatives rely on the regulatory authorisation of their principal firm, which accepts responsibility for the regulated activities they perform.

The most significant change contemplated in the proposal is that firms would require a specific regulatory permission before acting as principal. However, firms with existing Appointed Representatives would be grandfathered into the regime - they would not be required to apply for the new permission and would be able to maintain their existing Appointed Representative appointments and appoint new ones.

Fund sponsors either acting as principal to Appointed Representatives, or which are themselves Appointed Representatives, should closely monitor the outcome of the consultation which is due to close on 9 April 2026.

FCA's "Consumer Composite Investments" regime

Following two open consultations and the publication of final rules in Policy Statement 25/20 on 8 December 2025, the Financial Conduct Authority's new regime for providing retail investors information on "Consumer Composite Investments" ("CCIs") and supporting informed decision-making came into effect on 6 April 2026. This regime replaces a number of disparate rules currently in force, including the onshored Packaged Retail and Insurance-based Investment Products Regulation, known as PRIIPS, and the disclosure requirements of the UCITS Directive. Whilst firms may now elect to comply with the new CCI regime, it is possible to continue to use PRIIPs and UCITS disclosures until 8 June 2027.

Please refer to our client alert "Q4 2025 - European Regulatory Update for Funds" as well as the more detailed article "FCA's Investment Regime May Prove A Double-Edged Sword" published on Law360 for more detail.

Securitisation Framework Consultation Papers

On 17 February 2026, the Prudential Regulation Authority ("PRA") published a consultation paper (CP2/26) and the Financial Conduct Authority ("FCA") published a parallel consultation paper (CP26/6) on proposed reforms to the UK's securitisation framework.

The key proposals broadly cover:

• simplifying securitisation due diligence requirements by making them less prescriptive and moving towards a principles-based approach;
  
  
• introduction of a "L-Shaped" risk retention modality which combines two existing retention methods;
  
  
• streamlining market disclosure (transparency) requirements for all securitisations;
  
  
• removing the distinction between "public" and "private" securitisations;
  
  
• introducing certain exceptions to the ban on re-securitisations; and
  
  
• clarifying credit-granting requirements.

The FCA and the PRA worked closely in developing their proposals which are broadly aligned. Both consultations close on 18 May 2026.

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