The European Securities and Markets Authority ("ESMA") has issued an opinion (the "Opinion") addressed to EU national competent authorities ("NCAs") including the Central Bank of Ireland (the "CBI") to address regulatory and supervisory arbitrage risks arising as a result of Brexit.

The Opinion assumes a "hard Brexit" and that the UK will become a third country after its withdrawal from the EU, which is currently scheduled to occur on, or before, 30 March 2019 (unless an extension is agreed).

The Opinion focuses on the activities of AIFMs, UCITS management companies1 and MiFID firms seeking to relocate from the UK to the remaining EU Member States ("EU27"). In particular, the Opinion addresses outsourcing or delegation activities by relocating firms with the objective of ensuring they do not become letterbox entities nor create obstacles to effective and efficient supervision and enforcement by the NCAs.

ESMA's Principles for Authorisation and Supervision

The Opinion sets out nine high level principles regarding authorisation and supervision, namely:

  1. No automatic recognition of existing authorisations of UK entities post-Brexit;
  2. Authorisations granted by NCAs in the remaining EU27 should be rigorous and efficient;
  3. NCAs should be able to verify the objective reasons for relocation;
  4. Special attention should be given to avoid letterbox entities in the EU27;
  5. Outsourcing and delegation to third countries (i.e. the UK post-Brexit) 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 EU law; and
  9. There should be co-ordination among NCAs to ensure effective monitoring by ESMA.

CP86 and the Irish Position

As per our previous client update, the CBI completed a substantive review of the Irish market, introducing guidance in December 2016 ("CP86") which is "designed to underpin the achievement of substantive control by fund management companies, acting on behalf of investment funds, over the activities of their delegates."

As a result, many of the principles in the Opinion are already part of the Irish regulatory landscape for AIFMs and UCITS management companies, for example:

  • CP86 contains extensive provisions on anti-letterbox tests2; and
  • Paragraph 29 of the Opinion and CP86 are aligned on the principle that EU market participants can only outsource or delegate tasks or functions but not responsibilities. For example, CP86 provides that delegation by Irish AIFMs and UCITS management companies does not reduce the board’s ultimate responsibility. Notwithstanding any such delegation, the directors must at all times retain and exercise overall control of the relevant company’s management and supervision of its delegates.

There are also some provisions where further clarity and analysis will be required for entities applying for authorisation in Ireland under CP86. It is also likely that application documentation will be amended to track the principles outlined in the Opinion.

Going Forward

The Opinion clearly flags that ESMA intends to develop further "sector-specific" opinions concerning asset managers, investment firms and secondary markets. It is likely that these will add greater detail to the principles outlined in the Opinion.

The Opinion notes that under certain EU legislation (e.g. AIFMD), outsourcing or delegation arrangements to a third country entity are conditional on prior cooperation agreements between the EU NCA and third country authority. We expect further work in this area.

ESMA also notes3 that it will establish new practical convergence tools in the form of a forum for reporting and discussions among NCAs regarding market participants seeking to relocate entities, activities or functions to the EU27. This Supervisory Coordination Network will promote consistent decisions by NCAs. This is an interesting development and one to watch closely to see whether the concept of such a Network expands further.

We await comment, if any, by the CBI in relation to this Opinion and also to see the reaction of other NCAs and industry associations.