Q3 2026 – European Regulatory Update for Funds

Notwithstanding the summer holidays, the third quarter of 2026 brought a further flurry of regulatory developments in both the UK and the EU. In this quarterly update, we look at:

EU Updates:

1. AIFMD II
   
   
2. SFDR 2.0
   
   
3. EU Market Integration and Supervision Package
   
   
4. Retail Investment Strategy
   
   
5. ELTIF 2.0
   
   
6. ESMA Common Supervisory Action with National Competent Authorities on the Risk Management Function
   
   
7. EU AML Package

UK Updates:

1. HMT's and FCA's consultation on amendments to the UK AIFM Regulations
   
   
2. FCA Non-Financial Misconduct rules

EU Update - AIFMD II: Transposition Status Across the EEA

The 16 April 2026 deadline for European Union member states to transpose Directive (EU) 2024/927 ("AIFMD II") amending the AIFMD into national law is now firmly in the rearview mirror. Nevertheless, implementation across the bloc remains distinctly patchy. One month after the deadline, transposition was reported complete in only 11 of the 27 member states and, whilst the position has moved on substantially since then, a meaningful minority has not done so as at the date of this update.

At the time of writing, the European Commission's official register of national transposition measures shows that a clear majority of member states have notified implementing legislation, though many did so after the 16 April 2026 deadline. Germany's Fund Risk Limitation Act entered into force for the most part on 16 April 2026, introducing inter alia a new "Special Purpose Lending Company" concept extending the banking-licence exemption to AIF/AIFM-controlled special purpose vehicles. Luxembourg's transposing law was adopted on 3 March 2026 and took effect in time for the deadline. The Netherlands, Ireland, Denmark, Finland, Hungary, Romania and Croatia also transposed on or close to the deadline with only Croatia reported to have gone beyond the minimum requirements of AIFMD II (so-called "gold-plating") in its implementing measures. Italy's implementing legislative decree was approved in March 2026 and took effect on 16 April 2026, but secondary implementing rules from the Bank of Italy remain in consultation. A further group of jurisdictions, including Belgium, Sweden and Austria, completed transposition only in the months after the deadline.

A smaller number of jurisdictions have not completed transposition as at the date of this update. Crucially, France's enabling government ordinance has stalled due to domestic political issues and the French Treasury is only targeting a National Assembly vote towards the end of February 2027. In the meantime, the Autorité des marchés financiers ("AMF") is operating a transitional regime for funds created before 16 April 2026 pending formal transposition. Spain's draft Bill and Royal Decree remain subject to public consultation and parliamentary process. Portugal, Greece, Cyprus, Latvia and Estonia have not notified any implementing measures to the European Commission as at the date of this update.

The practical consequence of this patchwork is that the regulatory position for any given fund now depends materially on its jurisdictional touchpoints. For managers with loan-originating fund structures spanning multiple EEA jurisdictions, continued monitoring of national implementing measures, together with specific local advice in jurisdictions that have not yet transposed, remains essential.

Looking beyond national transposition of the Level 1 Directive, AIFMD II implementation work is far from complete even in jurisdictions that have transposed on time. A number of important Level 2 and Level 3 measures remain in train. The most impactful of these is likely to be the technical standards on Annex IV reporting, a draft of which has not yet been made publicly available notwithstanding that the updated reporting regime is presently expected to apply from 16 April 2027.

EU Update - SFDR 2.0: Trilogues in Sight

The reform of the Sustainable Finance Disclosure Regulation ("SFDR") continues its progress through the EU legislative process, with the first trilogue negotiations scheduled for 22 October 2026.

By way of reminder, the trilogue phase of the process involves informal, closed-door negotiations between representatives of the European Commission, the European Parliament and the Council of the European Union with the aim of reconciling their three respective positions on the legislative proposal into a single, final text. Trilogues typically proceed through several rounds of negotiation on an item-by-item basis and any compromise reached must still be formally approved by both the Parliament and the Council before the legislation can be adopted. Whilst the Council had already agreed its negotiating position over the summer, the Economic and Monetary Affairs Committee of the Parliament announced its negotiating position on 10 September 2026 and this position is expected to be announced at the start of Parliament's October plenary session.

The Council's mandate is broadly supportive of the Commission's proposal, though it does depart from it in two respects of particular interest to managers and sponsors: (i) the introduction of an "opt-out" from most of the SFDR 2.0 framework for AIFs marketed exclusively to per se professional investors (a feature of an earlier leaked draft that did not survive into the Commission's published text); and (ii) an extension of the transitional period for compliance with the revised regime from 18 to 24 months following entry into force.

The Parliament's negotiating position aligns with the Council on these two headline points, likewise proposing a 24-month transitional period and an opt-out from most of the SFDR 2.0 framework for AIFs marketed exclusively to per se professional investors. The two opt-outs are not, however, identical in scope. Unlike the Council's version, the Parliament's opt-out would not disapply the restrictions on sustainability-related claims in fund names and marketing materials, so managers relying on it may still need to comply with fund names and marketing content requirements even for opted-out, professional-only AIFs.

Beyond the opt-out, industry groups engaging with the Parliament have focused on a number of areas where the negotiating position is argued to raise the compliance burden materially as compared with both the Commission's proposal and the Council's position. These include a stricter disclosure regime for non-classified products under the proposed Article 6a (requiring a prominent statement in periodic reports that the product does not meet EU sustainable finance product standards); a mandatory, specified list of principal adverse impact ("PAI") indicators in place of the current flexibility to select from a broader menu; and a comply-or-explain obligation on engagement strategy applicable across all three product categories.

With the Council and Parliament positions now set, the trilogue phase will need to reconcile materially different starting points, particularly around the scope of mandatory disclosure and the treatment of non-classified products. Whilst there is no fixed time by which the trilogues must be concluded, assuming that the 24-month transitional period proposal of the Council and the Parliament is adopted, it appears likely that SFDR 2.0 will not take effect until some time in 2029.

EU Update - EU Market Integration and Supervision Package: Legislative Progress

On 25 June 2026, the outgoing Cyprus Presidency of the Council of the EU published a progress report on the European Commission's Market Integration and Supervision Package ("MISP") (see our Q2 2026 and Q4 2025 updates for further detail on the substance of the MISP).

The Presidency held four Council Working Party discussions on proposed asset management amendments to the UCITS Directive, AIFMD and cross-border distribution of investment funds regime, covering (amongst other things) (i) annual supervisory reviews, (ii) depositary passporting, (iii) marketing communications, (iv) passporting upon authorisation and material changes, (v) harmonisation of authorisation for UCITS, UCITS ManCos and AIFMs and (vi) the EU intragroup delegation derogation.

Key takeaways include:

• Depositary passport: Discussions among the Member States showed some support for the introduction of a depositary passport, subject to devising supervisory cooperation and information-sharing safeguards. However, a number of Member States voiced concerns, and instead supported the increase of the relevant thresholds in the existing AIFMD depositary localisation derogation.
  
  
• Authorisation harmonisation: Support was expressed for harmonisation of the authorisation procedures for UCITS, UCITS ManCos and AIFMs, as well as passporting upon authorisation and removing EU and national barriers to cross-border distribution.
  
  
• Marketing: A compromise was achieved regarding cross-border distribution of funds, namely providing host Member State national competent authorities with the ability to retain supervisory powers over marketing communications on an ex-post basis, while harmonizing the content, format and treatment of marketing communications.
  
  
• Annual review of large asset management groups: There was significant interest in alternative approaches to the original MISP proposal regarding the annual review of large asset management groups, including the concept of "coordination colleges" and greater use of existing supervisory convergence tools.
  
  
• Intra-group delegation derogation: Several member states have expressed concerns with respect to the interaction of the new regime with the sectoral rules applicable to group entities, as well as supervisory responsibilities allocated among the different national competent authorities involved.

The outgoing Presidency has invited the incoming Irish Presidency to take forward the work on the file, with a view to consolidating compromise solutions and making progress towards a Council negotiating mandate.

EU Update - Retail Investment Strategy

The Retail Investment Strategy package (see Q4 2025 update) has been finalised and endorsed by the Council, three years after the European Commission first proposed it. The package comprises an Omnibus Directive amending, amongst others, MiFID II and AIFMD, together with a separate regulation amending the PRIIPs Regulation, and introduces significant changes to investor protection requirements, including changes to the MiFID client categorisation regime, new "value for money" requirements, revised inducement tests, enhanced costs and charges disclosures, and changes to suitability, marketing and cross-border oversight requirements.

The package still needs to be officially endorsed by the European Parliament before formal adoption and publication in the Official Journal, which is expected in Q4 2026. Most changes, including those to client categorisation, are due to apply around Q2 2029, two-and-a-half years after entry into force, although certain PRIIPs changes will apply earlier. We intend to publish a client alert once the rules are fully finalised and published in the Official Journal.

EU Update - ELTIF 2.0: State of the Market

The ELTIF market continues to scale. While the pace of new ELTIF launches has steadied since the start of the year (the European Securities and Markets Authority Register of authorised ELTIFs (the "ELTIF Register") indicates that 14 new ELTIFs were authorised in Q3, down from 26 in Q1 and 19 in Q2), the galvanising impact of ELTIF 2.0 remains clear to see, with increased product activity and interest in the ELTIF regime since the reforms were introduced in 2024.

From market data available, certain key themes emerge:

• Luxembourg continues to consolidate its position as the ELTIF domicile of choice. 79% of Q3 authorisations listed on the ELTIF register were Luxembourg SICAVs, which represents the highest quarterly share recorded so far this year. By contrast, the French AMF authorised no new ELTIFs in Q3, having authorised 8 in Q1 and 6 in Q2. Ireland has seen steadier numbers, with the CBI authorising 5, 2 and 3 ELTIFs across the first three quarters respectively, while Germany's BaFin authorised 3 ELTIFs, all in Q2.
  
  
• Based on authorisation figures, Private debt remains the leading asset class, while private equity continues to rise in popularity and infrastructure remains of interest.
  
  
• The number of new asset managers venturing into ELTIF launches has steadied over the course of the year, while established sponsors continue to build out their product ranges.
  
  
• Evergreen funds continue to ascend, with a number of new ELTIFs launched this year designated as evergreen structures and reflecting wider market interest in the form.

Taken together, the picture is one of a market with continued focus on Luxembourg as the structuring jurisdiction of choice and private debt as the most popular asset class, albeit with an increasing interest in private equity and other private market offerings. Even as the overall pace of new launches slows, activity remains high, with the continuing momentum from established providers concretising ELTIF products as an increasingly popular means of unlocking private markets access for retail investors.

EU Update - ESMA Common Supervisory Action with National Competent Authorities on the Risk Management Function

On 3 July 2026, ESMA launched a Common Supervisory Action ("CSA") on the risk management function of AIFMs (and UCITS management companies) across the EU, in which it will work in close collaboration with National Competent Authorities ("NCAs"). The CSA will be conducted throughout 2026 and 2027.

The objective of the CSA is to assess how market participants comply with key risk-related provisions under the AIFMD (and UCITS) framework, with a focus on the effectiveness, independence and expertise of the risk management function.

NCAs will focus on three key areas:

• governance and organisation of the risk management function;
  
  
• identification, measurement and monitoring of risks; and
  
  
• reporting to senior management and governing bodies.

The CSA will be conducted using a common assessment framework developed by ESMA. This framework sets out the scope, methodology, supervisory expectations and timeline for the exercise, ensuring a comprehensive and convergent approach across the EU. Throughout the exercise, NCAs will share knowledge and supervisory experiences through ESMA, further supporting supervisory convergence in the oversight of the risk management function.

This CSA follows ESMA's publication of its Final Report on the 2025 CSA on Compliance and Internal Audit Functions of UCITS Management Companies and AIFMs in May 2026, representing a continued focus on the governance and internal controls of UCITS management companies and AIFMs.

Following ESMA's announcement, the Luxembourg CSSF and the Maltese MFSA have kicked off their own CSAs, with more European jurisdictions to follow.

The CSSF launched the CSA on 27 July 2026 by asking a sample of Luxembourg-based investment fund managers ("IFMs") to complete a questionnaire, with a focus on the three key areas set out by ESMA. Notably, the CSSF's communiqué frames sustainability risk as one of the material risks an IFM's management framework is expected to cover, alongside the material risks identified by ESMA.

ESMA is expected to publish a final report with the results of the CSA in 2028.

EU Update - EU AML Package

Followers of European financial services regulation will be aware of the myriad of anti-money laundering ("AML") provisions introduced in recent years, most recently the EU AML package comprising the AMLAR Regulation establishing the new European AML Authority, the AMLR Regulation establishing a new, EU-wide AML Rulebook, the Transfer of Funds Regulations (though this was adopted early 2023, before the rest of the package) and the 6^th AML Directive updating the AML framework across the EU.

The AML package formally entered into force in July 2024, and will apply, in the main, from 2027.

There are a number of reforms which may have a significant impact on anyone carrying on regulated business in the EU such that they will need to consider compliance in advance of the package coming into force. We have set out a high-level summary below.

• The AMLAR Regulation establishes a new European AML Authority ("AMLA"). Established in Frankfurt, AMLA will directly supervise the largest European financial institutions and will provide support to national authorities to facilitate cross-border cooperation.
  
  
• The AMLR Regulation replaces the previous AML directives and establishes a single European AML rulebook. Key provisions include stricter due diligence obligations, a cap on cash payments, a broadening of the list of "obliged entities" subject to the rules and a change to the "beneficial ownership" threshold.
  
  
• The 6th AML Directive will update certain of the mechanisms Member States are required to have in place to prevent money laundering and, amongst other things, require national authorities to improve the accuracy of existing beneficial ownership registers and specify administrative arrangements national authorities should have in place and penalties that can be imposed by them.
  
  
• The Transfer of Funds Regulations recasts the existing regulation on the transmission of information accompanying transfers of funds and certain crypto assets (already in effect, as referenced above).

Managers that do not have European operations may not need to consider the implications of the package, but those managers with people on the ground providing regulated services from establishments in Europe (or which use European third-party "hosted" AIFM service providers which will themselves be subject to the rules) are likely to find that existing internal policies and procedures on AML will need to be enhanced, and additional due diligence questions are likely to be required to meet the requirements of the new rules, both in connection with admission of investors and establishment of new structures.

UK Update - HMT and FCA consult on amendments to UK AIFM Regulations

In July 2026, His Majesty's Treasury ("HMT") and the UK Financial Conduct Authority ("FCA") published their much-anticipated proposals on reforming the UK alternative investment fund managers ("AIFM") regime.

As many readers will be aware, at present, the UK AIFM regime largely reflects the European Union's Alternative Investment Fund Managers Directive and supplemental rules and guidance ("EU AIFMD") as it stood at the end of the Brexit transition period on 31 December 2020 and, in particular, prior to the EU AIFMD's recent amendment ("EU AIFMD II"). HMT and the FCA are, however, now in the process of taking a red pen to the UK rulebook with a view to streamlining and clarifying the regime, ensuring that the application of the rules and requirements are proportionate to an AIFM's size and activities, removing overly prescriptive or redundant requirements, and reducing the administrative burden on AIFMs. In doing so, they hope to boost the UK's attractiveness as a centre for fund management without compromising investor protection.

The proposed reforms are expected to have a significant impact for UK AIFMs. However, there are also implications for non-UK AIFMs marketing their funds in the UK pursuant to the national private placement regime.

For further information, please refer to our recent client memoranda:

10 Things UK AIFMs Should Know About HMT's and the FCA's Proposals on Reforming the UK AIFM Regulations⟶

5 things non-UK fund managers marketing in the UK should know about HMT's and the FCA's proposals on reforming the UK AIFM Regulations⟶

UK Update - Non-Financial Misconduct: Extended Scope

A new rule, COCON 1.1.7FR, came into force in the FCA's Code of Conduct Sourcebook ("COCON") on 1 September 2026, extending the scope of the conduct rules in non-bank firms (including AIFMs and investment firms). Serious workplace misconduct such as bullying, harassment and violence is now covered by the conduct rules where it relates to an individual's role, even where the behaviour is not part of, or for the purpose of, financial services activities. Guidance has also been published to assist firms considering whether non-financial misconduct is serious enough to breach the FCA rules.

Key practical impacts include:

• Staff awareness: Firms have a duty to notify conduct rules staff about the new rules and take all reasonable steps to make sure they understand how they apply.
  
  
• Broader scope of application: Non-bank firms must now consider whether serious workplace misconduct by conduct rules staff, even where unconnected to regulated activities, could trigger a COCON breach. If a firm takes disciplinary action for non-financial misconduct that is a breach of the conduct rules, they will need to notify the FCA.
  
  
• Policies and training: Firms should review whistleblowing, disciplinary, HR and conduct-rules training policies to ensure non-financial misconduct is captured and that conduct rules staff understand the extended scope.
  
  
• Fitness and propriety: Findings of non-financial misconduct may now be more directly relevant to a firm's ongoing fit and proper assessments of certified staff and to regulatory references. The guidance emphasises that firms aren't expected to monitor employees' private lives in order to assess their fitness and propriety. However, they are expected to consider allegations if there is good reason to do so - such as alleged conduct that would breach regulatory standards if it were repeated at work. For SMF holders, the guidance also confirms that the obligation to disclose appropriately to the FCA or the PRA information of which the regulator would reasonably expect notice may extend to certain private life matters where they are material to an individual's fitness and propriety.
  
  
• Manager responsibility: The new guidance confirms that managers must take reasonable steps to protect staff against misconduct such as bullying or harassment, and take seriously or deal appropriately with complaints.