2017 looked set to be a year of shifting sands for portfolio management.
In February we noted that in the field of portfolio management of collective investment funds, 2017 looked set to be a year of shifting sands, as three separate debates coalesced: supervisory convergence, third-country provisions and ‘Brexit’. With the publication of ESMA’s opinions on supervisory principles for the relocation of UK-based activities, those sands are becoming rocks and are spreading to the full range of asset management activity.
The future EU-UK trade agreement remains unknown and is unlikely to be clear for many months, or even years. Asset and fund management firms around Europe – of all types and geographies – cannot wait for certainty. They must undertake a thorough impact assessment across their entire operation, or risk one of more of their activities being restricted, clients adversely impacted and business lost.
ESMA’s first general opinion on principles on the supervisory approach to the relocation of activities from the UK to EU27 caused a flurry of concern around the European industry as it suggested that certain activities and functions needed to be undertaken in the EU. Its three sector-specific opinions issued six weeks later relieved some of those concerns but confirmed others.
The opinions on ‘investment management’ (actually covers UCITS and AIF managers) and on investment firms (including asset managers) cover authorisation, governance, delegation or outsourcing, non-EU branches and effective supervision. The wording of the opinions is not identical but has a similar effect. In particular, the opinions apply only to UK applicants for EU27 authorisations, which could leave them subject to stricter requirements than existing and new EU27 applicants.
No reliance should be placed on firms’ existing authorisations and there should be no derogations or exemptions. The choice of Member State should be driven by objective factors and not by regulatory arbitrage. It is not clear how the national regulator of the chosen Member State can evidence that it has objectively assessed the application in this regard. Both the governance and delegation/outsourcing sections go to the question of the ‘substance’ of the firm. In particular, ESMA says that the AIFMD requirements should also be applied to UCITS managers.
Non-EU branches should not be used to provide services to EU clients to the extent that the EU firm is in effect a letter box entity. National regulators should have the capacity and adequate resources to supervise the firm effectively, taking into account the firm’s operations in other jurisdictions and the impact of Brexit on its current delegation model. For UCITS and AIF management, ESMA adds that regulators should consider carefully their ability to assess documentation presented in a foreign language without appropriate translation.
ESMA has also published a letter from Steven Maijoor, ESMA’s chair, to Vice-President Dombrovski, inviting the Commission to consider enhancing the approach to the recognition of third country regulatory regimes. There are different arrangements in different pieces of legislation - which are a mixture of equivalence, endorsement, recognition or passporting – or no arrangement at all. The provisions in MiFID II, AIFMD and the UCITS Directive are all quite different, for example.
Also, the framework is time and resource-intensive, requiring detailed assessments of other countries’ regimes and lengthy negotiations if a country is not initially adjudged equivalent. ESMA says that areas such as access to information and timely identification of changes in third-country regimes, practices and supervisory approaches should be strengthened. It also believes there should be the possibility of supervision at EU level.
ESMA’s contributions further underline that the EU’s evolving approach to third countries is a business risk for firms around Europe, which will increase as the UK moves towards its exit from the EU and the future EU-UK trading relationship is negotiated. Firms need to assess, decide and act now, or risk serious disruption to their business models and loss of clients.