ESMA seeks a consistent regulatory approach | KPMG | GLOBAL

ESMA seeks a consistent regulatory approach to Brexit relocation activity

ESMA seeks a consistent regulatory approach

Soon after the results of the June 2016 UK referendum, some Member States began to vie for business seeking to relocate functions or activities out of the UK. A brief synopsis of that activity can be found in Chapter 5 of our report, EIMR 2017.

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Soon after the results of the June 2016 UK referendum, some Member States began to vie for business seeking to relocate functions or activities out of the UK. 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. 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:

  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.

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 is likely to be prohibited going forward.

Under certain EU legislation, delegation or outsourcing activity to third countries requires prior co operation 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.

ESMA is expected to issue sector-specific amplifications of the Principles for asset managers, investment firms and secondary markets. Whatever the immediate reactions of the NCAs, 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.

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