Brexit | ESMA Opinion to support Supervisory Convergence

On July 13th 2017, the European Securities and Markets Authority (“ESMA”) issued three opinions setting out relocation principles specific to investment firmsinvestment management and secondary markets, sixteen months after the Brexit vote to end the UK’s 43-year membership of the European Union.

Those opinions complete the previous ESMA opinion “general principles to support supervisory convergence in the context of the United Kingdom withdrawing from the European Union” published in May 2017.

Through these three opinions, ESMA aims at promoting consistency in the authorisation, supervision and enforcement of laws relating to the relocation of entities, activities and functions from the United Kingdom.

With respect to the investment management sector, the principles are based on the objectives and provisions of Directive 2009/65/EC of July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as amended (“UCITS Directive”) and Directive 2011/61/EU of 8 June 2011 on alternative investment fund managers (“AIFM Directive”). The investment management opinion focuses particularly on authorisation, governance and internal control, delegation and effective supervision risks of the investment management sector.

ESMA particularly refers to “white-label” business and states that national competent authorities (“NCAs”) should give special consideration to entities engaged in this business. These types of entities may gain additional business as a result of the UK withdrawing from the EU. A significant rise in business activities within a relatively short period of time may create additional operational risks. ESMA states that NCAs should assess whether the structures put in place by such entities and the resources they employ are appropriate.

The opinion has given rise to some debate especially concerning the provisions on delegation. ESMA particularly highlights the risk of circumvention of delegation rules relating to investment management activities when authorised entities appoint investment advisers. Where the authorised entity follows their advice without carrying out their own additional qualified analysis, such arrangement should be considered as a delegation of investment management activities. NCAs should be satisfied that the policies and procedures of authorised entities provide for clear documentation and recordkeeping of their own qualified analysis carried out after the receipt of the investment advice.

Regarding the area of investment firms, ESMA sets out principles based on the objectives and provisions of the MiFID framework with emphasis on authorisation, substance requirements and effective supervision aspects.

The ESMA opinion relating to secondary markets mainly addresses regulatory and supervisory arbitrage risks stemming from third country trading sites relocating in the EU27 seeking to outsource activities to their jurisdiction of origin.

The Commission de Surveillance du Secteur Financier (“CSSF”) has already confirmed in a press release dated July 14th 2017 that the three opinions were in line with the CSSF’s practice.