ESMA opinions to support supervisory convergence in EU27 in the context of Brexit.

On 13 July 2017, the European Securities and Markets Authority (ESMA) published the following opinions to support supervisory convergence in the context of the UK leaving the EU:

  • Opinion on investment firms which addresses regulatory and supervisory arbitrage risks related to the relocation of investment firms' activities.
  • Opinion on investment management which addresses regulatory and supervisory arbitrage risks related to the relocation activities of UCITS management companies, self-managed investment companies and authorised AIFMs.
  • Opinion on secondary markets which addresses regulatory and supervisory arbitrage risks stemming from third country trading venues (regulated markets, multilateral trading facilities and organised trading facilities) relocating to the EU27 and seeking to outsource activities to their jurisdiction of origin.

In the opinions, ESMA has assumed that the UK will become a third country after its withdrawal from the EU. However, the opinions are without prejudice to any specific arrangements that may be agreed between the UK and the EU27, future ESMA opinions or other convergence tools. While the opinion is aimed at relocating entities in the context of Brexit, these principles and additional expectations may apply more generally over time, in order to ensure consistency.

In a related press release, ESMA explains that the opinions set out sector specific principles and build on the nine principles set out in the general cross-sectoral opinion that ESMA published in May 2017 The opinions provide guidance which is intended to ensure a consistent interpretation of the requirements relating to authorisation, supervision and enforcement, with a view to avoiding regulatory and supervisory arbitrage risks. The opinions are addressed to the national competent authorities (NCAs) of the EU27, as well as of Norway, Lichtenstein and Iceland (in accordance with the EEA agreement).

Through the recently established Supervisory Co ordination Network, ESMA is also providing a forum for reporting and discussion among NCAs regarding UK market participants seeking to relocate to the EU27. The aim of the forum is to promote consistency of supervisory decision making by NCAs.

While the opinion on investment management addresses regulatory and supervisory arbitrage risks related to any relocation activities of UCITS management companies, self-managed investment companies and authorised AIFMs, it also opines on the interpretation of the delegation requirements and the common supervisory focus. It sets out principles based on the objectives and provisions of the UCITS Directive and AIFMD and addresses regulatory and supervisory risks in relation to authorisation, governance and internal control, delegation and effective supervision.

Some key points of interest are discussed below.


A relocating UK entity must undergo a full authorisation process. The opinion notes that EU investment management legislation does not provide for any reliance on previous or existing authorisations in other member states or third countries and there are no transitional provisions.

Effective Supervision

NCAs should consider the group structure and location of shareholders so as to ensure that this is not an obstacle to effective supervision.

Objective Reasons for Choice of Jurisdiction

NCAs must assess whether the relocating UK entity has provided a clear justification for relocating to a particular Member State (to avoid regulatory arbitrage).


Governance structures and internal control mechanisms should be calibrated to the nature, scale and complexity of the business and the activities carried out. The opinion sets out details of criteria to be assessed.

Where authorised entities are part of a corporate group, NCAs should be satisfied that there are no reporting lines to group functions or other individuals within the group that would contradict the principle of avoiding or mitigating conflicts of interests or impair the independence of internal control functions.

While the EU investment management legislation sets out that authorised entities must have at least two Senior Managers, NCAs should not rely on this minimum number for all authorised entities without taking due account of the actual size of their business and/or complexity, nature and range of their business activities. NCAs should also be able to carry out on-site visits of a ManCo without notice and meet with its senior management at short notice.

Combining the risk, compliance and/or internal audit functions should generally be avoided as this is seen as likely to undermine the effectiveness and independence of these control functions.

White Label Business

NCAs should give special consideration to the white label business (where fund managers provide a platform to promoters by setting up funds for a promoter and typically delegating investment management functions to those promoters or appointing them as investment advisers) in order to ensure they maintain sufficient human and technical resources whilst dealing with an increased volume of work brought about by Brexit.

Time Commitments

NCAs should consider issuing guidance on appropriate thresholds (in terms of aggregate time commitment) for directors and senior managers and be transparent about their expectations.


ESMA notes that the AIFMD delegation requirements have been specified in level 2 provisions, unlike the UCITS delegation requirements. ESMA notes that it essential for NCAs to have a harmonised approach and concludes that the NCA's interpretation of the UCITS Directive and the relevant national laws should be consistent with the principles set out in Articles 75 to 82 of the AIFMD Level 2 Regulation.

NCAs must satisfy themselves that there are objective reasons for the entire delegation structure and should carry out a case by case analysis. ESMA notes that “in no way should this assessment be interpreted as a mere notification procedure”.

Specific considerations are set out in respect of delegation of portfolio management or risk management to non-EU entities. NCAs should give “special consideration” to the appointment of investment advisers so as to ensure that the delegation rules are not circumvented. ESMA opines that where EU managers appoint, and base their investment decisions on, third party investment advice, then if managers make investment decisions without carrying out their own qualified analysis before concluding a transaction, such arrangements are to be considered as being a delegation of investment management activities. Moreover, 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 investment advice.


Authorised entities should not delegate investment management functions to an extent that exceeds by a substantial margin the investment management functions performed internally. This assessment must be carried out in relation to and at the level of each individual fund and not in relation to a group of funds.

NCAs should apply additional scrutiny to situations where relocating entities (even those of smaller size employing simple investment strategies and having a limited range of business activities) do not dedicate at least 3 locally-based FTE (including time commitments at both Senior Management and staff level) to the performance of portfolio management and/or risk management functions and/or monitoring of delegates.

NCAs will need to ensure that authorised entities relocating from another member state transfer a sufficient amount of portfolio management and/or risk management functions to avoid a scenario where (i) substantially more portfolio management and/or risk management functions continue to be carried on under a delegation back to their original member state and; (ii) the entity maintains substantially more relevant human and technical resources in the original member state despite the relocation.

NCAs should be satisfied that where relocating entities use non-EU branches, this is objectively justified and does not result in material functions/services being provided by the branch back into the EU.

ESMA Opinion on Asset Segregation and Custody Services

ESMA issued an opinion on

a) the optimal approach to asset segregation under AIFMD and the UCITS Directive; and

b) how the depositary delegation rules should apply to central securities depositaries (CSDs).

The opinion sets out suggestions to the EU institutions for possible clarifications of the legislative provisions under both AIFMD and the UCITS Directive relating to:

a) the asset segregation requirements in case of delegation of safe-keeping duties by the appointed depositary of a fund (whether UCITS or AIF); and

b) the application of depositary delegation rules to CSDs.

ESMA suggests a regime that ensures assets are clearly identifiable as belonging to the AIF or UCITS, consistent with any reuse (where permitted). The regime should also ensure that investors receive adequately robust protection by avoiding the ownership of the assets being challenged upon the insolvency of any of the entities in the custody chain.

ESMA concludes that only minimum EU-wide segregation requirements should be prescribed, leaving room for stricter requirements or different account structures if national laws (on ownership, insolvency, tax or fiscal) in particular member states make them necessary.

ESMA Q&A on application of AIFMD and UCITS Directive

ESMA published a press release announcing it has updated two sets of Q&A:

The AIFMD Q&A includes three new Q&A on the reporting requirements for;

  • Loans purchased on the secondary market;
  • Conversion of the total value of assets under management (AUM); and
  • Currency of the NAV.

The UCITS Q&A includes two new Q&A on;

  • Issuer concentration; and
  • Group links, independence and cooling-off periods.

ESMA Letter on third country regimes

ESMA has issued a letter addressed to the European Commission setting out its views on the possibility of supervision at EU level of certain third country entities due to the potential impact of those third country entities on EU financial stability and investor protection. This follows the Commission proposal in June 2017 of a second set of amendments to EMIR to enhance the supervision of third country CCPs. ESMA's proposal would encompass third country regimes for credit rating agencies, trade repositories, benchmarks, and possibly also, trading venues and data providers.

ESMA Q&A on the Benchmarks Regulation

ESMA published a Q&A on practical issues regarding the implementation of the Benchmarks Regulation. The Q&A include two answers regarding the transitional provisions under the Benchmarks Regulation, clarifying which benchmarks supervised entities will be allowed to use after 1 January 2018 under transitional provisions. See our July Q&A for more information.


ESMA consultation on guidelines on aspects of the MiFID II suitability requirements

ESMA issued a Consultation Paper on guidelines on aspects of the MiFID II suitability requirements. The consultation is particularly relevant to UCITS management companies and external AIFMs when providing the investment services of individual portfolio management or non-core services. The Consultation Paper includes proposals on the draft guidelines which confirm and broaden the existing guidelines which were issued in 2012. The consultation closes on 13 October 2017. ESMA expects to publish a final report in H1 2018.

ESMA updates MiFID II Q&A on investor protection

ESMA published an updated Q&A document on investor protection topics under the MiFID II Directive and MiFIR.

ESMA has added two new Q&As covering:

  • Best execution. Q&A 15 concerns reporting requirements for securities financing transactions.
  • Recording of telephone conversations and electronic communications. Q&A 12 concerns recording of telephone conversations and electronic communications.

Information to be included by proposed acquirer of investment firm under MiFID and MiFID II Directives

On 11 July 2017, the European Commission adopted a Delegated Regulation with regard to regulatory technical standards for information to be included by proposed acquirers in the notification of a proposed acquisition of a qualifying holding in an investment firm, supplementing the MiFID and MiFID II Directives.

Notifications of proposed acquisition of investment firm under MiFID and MiFID II Directives

The European Commission adopted an Implementing Regulation laying down implementing technical standards with regard to standard forms, templates and procedures for the consultation process between relevant competent authorities on the notification of a proposed acquisition of a qualifying holding in an investment firm, in accordance with the MiFID and MiFID II Directives. Annexes were also published.

IOSCO Consultation on CIS Liquidity Risk Management Recommendations and Good Practices

The International Organization of Securities Commissions (IOSCO) published a consultation on recommendations for liquidity risk management for collective investment schemes (CIS). In the consultation, IOSCO seeks views on proposed amendments to its principles of liquidity risk management for CIS, which were published in March 2013. The amendments follow recommendations issued by the Financial Stability Board (FSB) in January 2017 on the potential systemic risks arising from the liquidity risk management of CIS.

IOSCO is consulting on the following issues.

  • Revisions to the existing recommendations relating to disclosure to investors, alignment between asset portfolio and redemptions terms, availability and effectiveness of liquidity risk management tools and fund level stress testing.
  • Additional recommendations on contingency planning.
  • Issues relating to exchange traded funds.

The consultation does not cover possible gaps in data to support optimal supervision, which IOSCO intends to consider separately.

IOSCO is also consulting on a report containing good practices and issues for consideration relating to open-ended fund liquidity and risk management.

This report sets out a number of practices used to address liquidity risk management which include ensuring consistency between the liquidity of a fund's assets and its liabilities, liquidity risk management tools and fund level stress testing.

The deadline for responses to both consultations is 18 September 2017.

MMF Regulation

On 30 June 2017, the Regulation on Money Market Funds was published in the Official Journal of the EU. It entered into force on 20 July 2017. It will apply from 21 July 2018, with the exception of Article 11(4), Article 15(7), Article 22 and Article 37(4), which apply from 20 July 2017. Please see our In Focus paper here for more information on this topic.

PRIIPs KID Guidelines and PRIIPs KID Q&A

The EU Commission adopted guidelines for the Key Information Document (KID), which is required under the Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs) by 1 January 2018.

The PRIIPS Regulation sets out rules on the format and content of the KID to be drawn up by PRIIP manufacturers and on the provision of the KID to retail investors and those selling or advising on the products. These guidelines are intended to help providers and distributors of investment products, funds and investment insurance policies design their KIDs by smoothing out potential interpretative divergences throughout the EU. The guidelines address 19 issues, some of which are listed below.

  • Products covered by the PRIIPS Regulation.
  • Products made available to retail investors against no consideration.
  • Multi-option PRIIPs.
  • Insurance-based investment products with PRIIPs and non-PRIIPs as underlying investment options.
  • Territorial application.
  • Use of KIDs by UCITS (UCITS may not replace a UCITS KIID with a PRIIPs KID).
  • PRIIPs only sold by intermediaries.
  • Distribution of a PRIIP without a KID.
  • A non-PRIIP product offered alongside a PRIIP.

New and existing RIAIF products must be accompanied by a PRIIPs KID from 1 January 2018. Professional Investor AIFs are likely to fall within the scope of PRIIPs Regulation. QIAIFs which do not limit investor eligibility to MiFID professional clients will also be caught by the PRIIPs Regulation (and so be obliged to prepare a PRIIPs KID). Examples of the types of investors in QIAIFs who would not be MiFID professional clients would include high net worth individuals, corporate investors who are not regulated to operate in the financial markets or corporate investors whose main activity is not investing in financial instruments. Some QIAIFs may choose to limit access to the fund to MiFID professional clients only so as to fall outside the scope of the PRIIPs Regulation. UCITS are exempt from the obligation to produce a PRIIPs KID until 31 December 2019. In due course, the PRIIPs Regulation will be subject to review which will assess whether the transitional arrangements for UCITS should be prolonged, or whether, with some adjustments, the UCITS KIID might be replaced by or considered equivalent to the PRIIPs KID. Where funds are wrapped into insurance products, they may be required to provide supplementary information or data to enable the underlying insurance company to produce the PRIIPs.

The European Supervisory Authorities (ESAs) issued a Q&A on the PRIIPs as laid down in Commission Delegated Regulation (EU) 2017/653 which sets out regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents.

The Q&As concern issues linked with the presentation, content and review of the KID, including the methodologies underpinning the risk, reward and costs information. The issues were raised by stakeholders, including product manufacturers and distributors. An accompanying press release states that the ESAs will continue to answer and publish further Q&A.

Anti Money Laundering/ Combating the Financing of Terror/ Corruption

New methodology for EU assessment of high risk third countries under 4AMLD

The Council of the EU published a cover note with a letter from Commissioner Vĕra Jourová, to the Presidency of the Council of the EU, concerning the assessment of high risk third countries under 4AMLD. The annex to the letter contains a roadmap which has been developed by the European Commission following the European Parliament's May 2017 resolution objecting to the revised proposed Delegated Regulation of 24 March 2017 amending the Commission's list of high risk third countries under 4AMLD. Commissioner Jourová is committed to delivering a new approach for identifying high risk third countries by following a staged approach, focusing on priority third countries first. These priority countries will be chosen on the basis of their financial importance for the EU and their exposure to the risks of money laundering and terrorist financing. The Commission's list of non-co-operative tax jurisdictions, which will be issued at the end of 2017, will also be taken into account.