Soon after the results of the June 2016 UK referendum, a number of Member States began to emerge as likely jurisdictions for UK financial services firms to re-locate to.
Soon after the results of the June 2016 UK referendum, a number of Member States began to emerge as likely jurisdictions for UK financial services firms to re-locate to. Amongst a number of other issues, the question of regulatory arbitrage and differences in supervisory approaches adopted by national competent authorities came into focus. A brief synopsis of that activity can be found in Chapter 5 of our report, EIMR 2017.
Earlier this year, ESMA’s chair, Steven Maijoor, began to express concern about the risks of supervisory arbitrage. ESMA has now issued nine principles (PDF 144 KB) to foster consistency in authorisation, supervision and enforcement related to the relocation of entities, activities or functions from the UK. We understand that EIOPA is considering issuing its own opinion on this subject for insurance companies.
ESMA’s principles for the consistent authorisation, supervision and enforcement of relocation activity are issued in the form of an Opinion. As such, it is not binding on national regulators (NCAs), but we suggest that political pressure to follow the principles will be strong, especially given the wider review of the supervisory powers of ESMA and the other European Supervisory Authorities.
When issuing the principles, Steven Maijoor said, “The UK plays a prominent role in EU financial markets and the relocation of entities, activities and functions to the EU27 creates a unique situation requiring a common effort, at EU level, to safeguard investor protection, the orderly functioning of financial markets and financial stability….. Effective and efficient supervision are essential to support Capital Markets Union.”
The nine principles are:
In particular, principles 4, 5 and 6 highlight that firms should not take for granted that they can continue with the current delegation models. For example, as we noted in February, establishing funds in the EU27 and essentially performing all substantive investment management activities or functions in the UK could be restricted or even prohibited going forward. In another move, which reiterates this point, ESMA, have also just published their opinion on supervisory convergence in the investment management sector. Of particular note is the view expressed by ESMA that the delegation rules set out in AIFMD should be interpretated consistently in the context of UCITS, albeit that there is little by way legal basis or requirement for this in the UCITS legislation itself.
Under certain pieces of EU legislation, delegation or outsourcing activity to third countries requires prior cooperation agreements between the EU NCA and the third country authority. Principle 6 notes that certain key activities and functions should be present in the EU. And Principle 7 requires EU entities to have sound governance and effective decision-making powers even where the entity is part of a group.
The ESMA principles provide a clear indication of the direction of travel, which firms will wish to factor into their Brexit contingency planning and decisions.