On 31 May 2017, the European Securities and Markets Authority (“ESMA”) released its opinion on achieving a common approach to supervision (“supervisory convergence”) among EU member states following Brexit (the “Opinion”). The Opinion was addressed to national competent authorities ("NCAs").

Brexit is likely to result in many UK market participants seeking to relocate to another Member State in a relatively short period of time. This could result in supervisory arbitrage risks. To mitigate these risks, it is important that there is a consistent supervisory approach across the EU.

The Opinion sets out general principles based on the objectives and provisions of certain legislation, including the AIFMD, the UCITS Directive, MiFID I and MiFID II. The Opinion should be considered a tool to achieve supervisory convergence. We set out an overview of the principles below and what NCAs should seek to achieve.

Principle 1: no automatic recognition of existing authorities

  • No automatic recognition of authorisations previously granted to third country entities or entities established in the UK will be permitted.
  • Entities are advised to approach the relevant NCA as soon as possible to seek authorisation.

Principle 2: rigorous and efficient authorisation

  • NCAs should ensure that the relevant legislative conditions are met from day one of authorisation.
  • Detailed information should be obtained and scrutiny applied to the entity’s (i) governance structure; (ii) human and technical resources; (iii) outsourcing/delegation arrangements; and (iv) geographical distribution of activities. This will aid the assessment of legislative compliance by the entity.

Principle 3: objective reasons for relocation

  • The planned-EU based activity should be the main reason for the entity seeking authorisation.
  • NCAs should obtain information such as: (i) prospective investors; (ii) marketing and promotional arrangements; (iii) location of development of products or services; and (iv) if the entity has engaged with, or their application has been rejected by, another NCA.
  • NCAs should only grant authorisation if fully satisfied that the Member State of establishment was not chosen to avoid other Member States’ more stringent standards.

Principle 4: avoid letter-box entities

  • NCAs should reject applications where extensive use of outsourcing is proposed or delegation is planned with the intention of benefiting from an EU passport, while the substantial activities and functions would be performed outside the EU.

Principle 5: strict conditions for outsourcing/delegation to third countries

  • Only tasks or functions can be outsourced or delegated, not responsibilities. Market participants remain responsible for tasks or functions which are outsourced or delegated.
  • NCAs should be prudent when examining the extent to which an entity will engage in outsourcing or delegation.

Principle 6: substance requirements to be met

  • Outsourcing or delegation arrangements should be clearly structured and must not hinder the efficient and effective supervision of the relevant entity by the NCA.
  • NCAs should obtain enough information to ensure they have sufficient knowledge of outsourcing or delegation arrangements.
  • Outsourcing or delegation arrangements should not impact on business continuity, confidentiality or conflicts of interest. Decision-making cannot be outsourced or delegated.
  • Special attention should be paid to certain activities/functions which, in certain circumstances, cannot be outsourced. These include: (i) internal control functions; (ii) IT control infrastructure; (iii) risk assessment; (iv) compliance functions; and (v) key management functions.

Principle 7: sound governance of EU entities

  • Key executives and senior managers of EU authorised entities are expected to be employed in the Member State of establishment and work there to a proportionate degree (if not full time) in order to effectively carry out their responsibilities.

Principle 8: effective supervision and enforcement of EU law

  • NCAs should be in a position to ensure effective supervision of entities. They should have adequate resources in place so as to monitor effectively the application of the relevant legislation.
  • Effective and efficient co-operation among NCAs is extremely important.

Principle 9: coordination to ensure effective monitoring by ESMA

  • ESMA will establish a forum for reporting and discussion among NCAs (known as the Supervisory Coordination Network) which will further aid supervisory convergence.


The Irish funds industry has always been, and will continue to be, a strong partner of UK-based market participants. Brexit is likely to result in an increase in activities related to authorisation and supervision. The Central Bank of Ireland is well prepared for the potential large volume of applications and is committed to meeting any challenges ahead. The Opinion will aid NCAs, like the Central Bank, to achieve supervisory convergence in the wake of Brexit.

ESMA expects to develop further guidance for asset managers and investment firms, which we will keep you updated on.