On 13 July 2017, ESMA issued an opinion - specifically relating to the investment management sector - providing further guidance to national competent authorities on permitting UK market participants access to the single market following Brexit.

On 8 June 2017, we informed you of the opinion of ESMA of 31 May 2017 which addresses cross-sectoral regulatory and supervisory arbitrage risks that arise as a result of increased requests from financial market participants seeking to relocate into the EU27 within a relatively short period of time (the “Cross-sectoral opinion”).

The 13 July 2017 opinion is a follow up specifically related to the investment management sector (AIFMD and UCITS)1. The opinion is addressed to the national competent authorities (“NCAs”) of the EU Member States (EU27) and sets out principles and rules that should be applied to the specific case of relocation of entities, activities and functions following the UK’s withdrawal from the EU. Many of the rules are aimed at securing that the licensed entities that will be set up in the EU27 will have a sufficient level of substance and control and will not give rise to regulatory and supervisory arbitration. The opinion is to a large extent supplementing the topics set out in the Cross-sectoral opinion, in particular in relation to the following aspects:

  • authorisation;
  • governance and internal control;
  • delegation; and
  • effective supervision.

Although the opinion is addressed to NCAs, market parties wishing to relocate their AIFMD or UCITS licensed entity from the UK to EU27 should take the opinion into account in their Brexit planning as it contains material views of ESMA in the areas mentioned above. In particular, when setting up licensed entities in EU27 market parties should pay attention to creating sufficient substance in the entity as set forth in the opinion.

ESMA issued a similar opinion with respect to MiFID II / MiFIR2 and EIOPA with respect to Solvency II3.

Many of the rules and criteria in the opinion are elaborating principles included in the AIFMD and UCITS Directive. With respect to some of the rules in the opinion, we expect debate as to whether ESMA is going beyond the scope of the mentioned directives; for example in the field of limitations imposed on delegation and the freedom to choose the E27 country of residence to set up the licensed manager.

Below, we have summarized the main highlights and key takeaways from the opinion.


  • UK parties wishing to re-locate to EU27 should undergo a new full license application procedure (i.e. no reliance on previous or existing authorizations in other EU27 member states or third countries, preferential or disadvantageous treatment or transitional regimes).
  • NCAs should give consideration to issues affected by relocation and to situations where the applicant is part of a group/has links with non-EU parties (e.g. influence by shareholders / members on the sound and prudent management of the authorised entity and its compliance with AIFMD / UCITS).
  • No regulatory arbitrage: NCAs should scrutinize applications in order to ensure that the choice of the member state for relocation is driven by objective factors (and not by regulatory arbitrage).

Governance and internal control:


  • NCAs should ensure that the members of the governing/management body of the authorized entity have the ultimate decision-making powers with regard to the business conduct of the AIFM or UCITS manager (“authorized entity”) even where the entity is part of a corporate group.
  • NCAs should be satisfied that relocating entities have established sound governance and internal control mechanisms, which are calibrated to the size, nature, scale and complexity of their business and range of activities carried out in the course of their business. This requires a case-by-case assessment.
  • A situation should be avoided where authorised entities of significant size and/or entities employing complex investment strategies or having a broad range of business activities could operate with only a minimum operational set-up.
  • NCAs should not rely on the minimum number of two senior managers for all AIFMs without taking due account of the actual size of their business and/or complexity, nature and range of their business activities.
  • Conflicts of interest: NCAs should scrutinize from a conflicts of interest perspective the allocation of responsibilities and functions within an authorised entity, intra group reporting lines and positions held by staff members of the authorized entity with other (group) entities.
  • NCAs should assess and put additional scrutiny on individuals with high numbers of (executive or non-executive) directorships to ensure their legal and regulatory obligations and responsibilities as board members are being met.
  • NCAs should be satisfied that the organisational set-up of entities allows the relevant NCAs to carry out on-site visits of the business premises at any time (even without prior notice) and to meet with senior management at short notice (within a day).

Internal control

  • Authorised entities must have effective internal control mechanisms in place in order to ensure compliance with the AIFMD and UCITS.
  • NCAs should be satisfied that the organisational policies and procedures of authorised entities provide for a strong role of the internal control functions within.
  • Combining the risk, compliance and/or internal audit functions should generally be avoided as this is likely to undermine the effectiveness and independence of these control functions.
  • Where senior management or the governing/management body itself is in disagreement on matters relating to compliance with the EU investment management legislation, the internal procedures should provide for an escalation to NCAs.

White label business

  • A significant rise in business activities within a relatively short period of time may create additional operational risks. NCAs supervising such entities should therefore give special consideration to them and assess whether they continue to have sufficient human and technical resources to manage the additional business and comply with the applicable delegation requirements.


  • Delegation is not without risk to the authorized entity and the NCA (especially when the delegate is outside the EU) and must be subject to appropriate oversight.
  • Investment advisers: Where authorised entities appoint third parties to provide investment advice and base their investment decision on the advice provided by the third party without carrying out their own qualified analysis before concluding a transaction, such arrangements are to be considered as delegation of investment management activities.
  • NCAs should be satisfied that there are objective reasons for delegation and the set-up does not allow for circumvention. This requires that NCAs assess on a case by case basis the (i) detailed descriptions, (ii) explanations and (iii) evidence of the objective reasons provided by authorised entities.
  • Authorized entities should provide evidence that the financial benefits of the envisaged delegation structure outweigh the estimated costs of performing the delegated function internally despite the costs of carrying out due diligence and monitoring the risks involved with the delegated function on an ongoing basis.
  • Due diligence: every delegation of functions must be preceded by a written due diligence on the delegate and possible alternatives, in order to ensure that the delegate is the most suitable to perform the delegated function. NCAs should be satisfied that the delegation and/or operational risk management policies and procedures of authorised entities elaborate on the initial due diligence during the selection process.
  • In respect of the assessment of delegation, special attention should be given to delegation to non-EU service providers and the application of remuneration rules when it concerns delegation of portfolio / risk management.


  • 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 should be carried out at the level of each individual fund.
  • Authorised entities should demonstrate to NCAs (by means of detailed written policies) that they dedicate sufficient human and technical resources to the selection of potential delegates as well as ongoing delegation monitoring activities and that all individuals involved in this process have the required skills, knowledge as well as experience and time commitment for their respective tasks. NCAs should therefore engage with authorised entities that intend to allocate the monitoring of a number of functions to a single person and be satisfied that this does not raise additional risks to investor protection. ESMA is of the view that where functions set out in Annex II of the UCITS Directive or Annex I of the AIFMD are not performed internally, this creates substantial workload for authorised entities as they have to select potential delegates diligently and monitor the performance of the delegated functions on an ongoing basis.
  • 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.
  • In the context of relocations, NCAs should be satisfied that relocating entities have transferred a sufficient amount of portfolio management and/or risk management functions for the relevant funds to their new home member state; granting licenses to relocating entities should not result in a situation in which these entities could continue to perform substantially more portfolio management and/or risk management functions for the relevant funds in their original member state or third country on a delegation basis and therefore also maintain substantially more relevant human and technical resources there despite a relocation.
  • One important AIFMD provision is that the AIFM cannot delegate functions to the extent that it becomes a “letterbox entity”. The AIFM must be able to retain a certain level of substance, activity and expertise, particularly in the area of risk management and/or portfolio management, even if specific roles are delegated to third parties in practice. Similar restrictions will be applied to UCITS management companies.
  • Where authorised entities intend to delegate internal control functions, NCAs should require detailed information and evidence and be satisfied that such delegation arrangements are based on objective reasons and do not impair the effectiveness of the relevant control functions of their independence.
  • NCAs should carefully monitor situations in which the risk of letter-box entities arises not only from the use of delegation arrangements, but also from situations in which EU authorised entities use non-EU branches for the performance of functions with respect to UCITS and AIFs.

Effective supervision

  • Any delegation may not impair the ability of NCAs to enforce relevant legislation. NCAs should be satisfied that they have: (i) access to all information related to delegated functions that is required for the performance of their desk-based supervisory tasks and (ii) access to business premises of delegates for on-site visits in order to effectively supervise compliance with the EU investment management legislation.
  • NCAs should consider the extent to which the applicant’s envisaged operations in other jurisdictions might impact the NCA’s resources and ability to effectively supervise the relocating entities.
  • NCAs should give special consideration to and raise the attention of authorised entities to the fact that, as from the effective date of the UK’s withdrawal from the EU, any delegations of investment management functions to entities based in the UK will only be permitted where this is in compliance with the delegation requirements in UCITS and AIFMD, a number of which require cooperation arrangements to be in place between NCAs and competent authorities in third countries.