Esma outlines rules for AMs to move from UK to EU post-Brexit
The European Securities and Markets Authority (Esma) has outlined supervisory principles to be applied to regulated firms such as asset managers moving to onshore their business once the UK leaves the European Union.
In an opinion titled General Principles To Support Supervisory Convergence In The Context Of The UK Withdrawing From The EU, the Authority sets out the principles it wants to see applied uniformly across the EU as local regulators deal with a possible “relocation of entities, activities and functions from the [UK]”.
“The opinion is addressed to national competent authorities,” Esma stresses – reflecting previous comments from its chair Steven Maijoor to delegates attending the Association of the Luxembourg Fund Industry European Asset Management Conference in March this year, when he warned of the dangers of competition developing between different NCA’s seeking to lure UK-based business to their particular jurisdictions, and Esma’s role along with other EU institutions in ensuring that a unified negotiation position is taken with regards to the Brexit negotiations.
#ALFIEAM17 am firms looking to other EU27 locations post-Brexit should not result in unhealthy regulatory, supervisory competition
— jonathan boyd (@jonathanboyd) March 21, 2017
— jonathan boyd (@jonathanboyd) March 21, 2017
Esma stated further in its latest opinion that it “is a practical tool to support supervisory convergence in the context of increased requests from UK financial market participants seeking to relocate to the EU27. It covers all legislation referred to in the Esma Regulation, in particular the AIFMD, the Ucits Directive, Mifid I and Mifid II.”
Maijoor is quoted in the statement that: “The EU27 have a shared interest in building a common approach to dealing with relocating firms that wish to continue to benefit from access to EU financial markets. Firms need to be subject to the same standards of authorisation and ongoing supervision across the EU27 in order to avoid competition on regulatory and supervisory practices between Member States. Effective and efficient supervision are essential to support the Capital Markets Union.”
The CMU Action Plan was launched in September 2015 by the European Commission, including, rather ironically, by then commissioner responsible for Financial Stability, Financial Services and CMU Jonathan Hill – the UK’s commissioner at the time. Hill resigned subsequent to the Brexit referendum vote in June 2016. Back in 2015 he said: “I want the Capital Markets Union to help European businesses, and our SMEs in particular, have a wider range of funding sources. I want it to give consumers more options for investing their money. I want to knock down barriers to make it easier for capital to flow freely across all 28 Member States.”
Esma’s intervention comes amid concerns of regulatory arbitrage opening up during the negotiating period.
“New authorisations must be granted in full compliance with Union law and in a coherent manner across the EU27. Any outsourcing or delegation arrangement from entities authorised in the EU27 to third country entities should be strictly framed and consistently supervised. Outsourcing or delegation arrangements, under which entities confer either a substantial degree of activities or critical functions to other entities, should not result in those entities becoming letterbox entities nor in creating obstacles to effective and efficient supervision and enforcement,” the Authority warns.
However, it also holds out a carrot in addition to its big stick: “Esma will establish a forum – the Supervisory Coordination Network – to allow NCAs to report on and discuss cases of relocating UK market participants. This will help to promote consistent decisions by NCAs. Esma is prepared to take further measures to support supervisory convergence, including issuing Q&As, providing additional opinions to NCAs, and conducting peer reviews.”
The nine principles outlined by Esma, which it wants NCA’s to adhere to include:
1. No automatic recognition of existing authorisations;
2. Authorisations granted by EU27 NCAs should be rigorous and efficient;
3. NCAs should be able to verify the objective reasons for relocation;
4. Special attention should be granted to avoid letter-box entities in the EU27;
5. Outsourcing and delegation to third countries is only possible under strict conditions;
6. NCAs should ensure that substance requirements are met;
7. NCAs should ensure sound governance of EU entities;
8. NCAs must be in a position to effectively supervise and enforce Union law; and
9. Coordination to ensure effective monitoring by Esma.
Looking forward, the Authority states that it “intends to develop further guidance in areas such as asset managers, investment firms and secondary markets to provide sector specific details on the aspects described in the general opinion.”