The European watchdog has issued its much anticipated opinions on outsourcing/delegation of: (i) fund management companies; (ii) MiFID entities; and (iii) trading venues. This Newsflash focuses on the opinions as they relate to investment management (“Opinions”). The Opinions should be read in parallel where relevant. The Opinions follow on from ESMA’s cross-sectoral opinion released in May, i.e., that national regulators are to adopt a consistent approach to safeguard against regulatory arbitrage in the lead-up to Brexit.

ESMA clarifies the key issues around substance, delegation and outsourcing in an investment management and trading context that regulators need to consider in approving firms that seek to re-locate from the UK. For example, the Opinions seek to extend the delegation requirements that apply under AIFMD which includes the requirement that an AIFM cannot delegate to the extent that it becomes a “letter-box” entity to UCITS management companies.

ESMA states that applicants are to ensure that the choice of Member State for relocation is driven by objective factors and national regulators should carefully assess the activities. Authorisations are not to be granted where the applicant has opted for a jurisdiction for the purpose of evading stricter standards in another Member State.

Prior to the Brexit vote, regulators have been under increased pressure by ESMA to ensure appropriate substance where the delegation model was being employed. For example, the Central Bank of Ireland (“Central Bank”) only recently finalised an arduous consultation process (which resulted in final guidance on fund management company effectiveness (commonly referred to as CP 86)) designed to ensure that the Irish authorisation and supervisory regime, particularly in the context of delegation and oversight by governance/management bodies and senior managers, is robust.

The opinion also echoes recent communication by the Central Bank, most notably in a speech given by Gerry Cross, Director of Policy and Risk, on Brexit issues where he urged firms seeking to re-locate to Ireland to do so for the right reasons and “not for reasons of supervisory arbitrage”.

We will be keeping a watchful eye through our international network of offices in the key European asset management domiciles on how national regulators implement the Opinions as we move nearer to Brexit, particularly with regard to the impact on delegation arrangements to UK entities (and knock-on effects for other third country entities such as U.S. or Asian managers) post Brexit.

In essence, the Opinions restate the existing regulation regarding delegation, which derives mostly from the AIFMD Level II Regulation, but apply it in a more general context for the asset management industry and also seek to ensure a common interpretation and supervisory focus on how these requirements are implemented.

In implementing the Opinions, regulators will need to ensure that a balance is struck between ensuring appropriate oversight in a manner that does not deprive EU investors of the best available investment opportunities while maintaining a level playing field.

We will be shortly publishing a more detailed Dechert OnPoint focusing on the impact for U.S. and UK managers.