The European Securities and Markets Authority (ESMA) has issued a strongly worded opinion (the Opinion) detailing nine general principles (the Principles) to support supervisory convergence in the context of the UK withdrawing from the EU.

The Opinion gives an indication of the regulatory direction of travel. In particular, the Principles provide a clear steer that ESMA will expect national regulators to apply significant substance requirements when assessing applications from UK regulated entities to establish an EU presence.

The Opinion will be of particular interest to UK regulated businesses in undertaking contingency planning in advance of Brexit.

What is the purpose of the Opinion?

The Opinion is addressed to the national competent authorities (NCAs) of those remaining 27 EU member states (the EU27), Norway, Iceland and Liechtenstein. The Opinion considers, in particular, the AIFMD, the UCITS Directive, MiFID I and MiFID II.

ESMA states that the Opinion should be seen as a practical tool addressing the risks of regulatory and supervisory arbitrage that may arise in the context of a large volume of applications by firms seeking to relocate to the EU27. In particular, the Opinion aims to foster consistency in relation to authorisation, supervision and enforcement.

While acknowledging that the UK and EU27 may reach specific arrangements regarding their post-Brexit relationship, the Opinion assumes the UK will become a third country after it withdraws from the EU.

What is the significance of the Opinion?

Of potentially more significance than the content of the Principles (as set out below) is the tone and timing of the Opinion.


  • One factor to note is the timing of the Opinion. It has been published just before formal negotiations are scheduled to begin. As negotiations commence, further opinions from the European regulators are to be expected. ESMA states that it intends to develop sector-specific opinions in areas such as those concerning asset managers, investment firms and secondary markets.


  • In part, from a legal perspective, much of the Opinion merely restates the current rules that apply to NCAs. However, ESMA has drafted a strongly worded Opinion. The tone adopted, in part, can be interpreted as going beyond a statement of legal and regulatory requirements.
  • For example, ESMA states that it expects NCAs to particularly scrutinise applications where it appears that an entity intends to pursue the greater part of its activities in other member states from the member state of authorisation. Some may view this statement as sitting uncomfortably with the fundamental principles of the single market, in particular, the freedom of movement and freedom of establishment.
  • This is perhaps not surprising as, although an EU-wide regulator rather than a political institution, ESMA’s stated objective is to protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and businesses.

What are the Principles?

No automatic recognition of authorisations

  • On the assumption that the UK will be treated as a “third country” after its withdrawal from the EU, new authorisations must be granted in full compliance with EU law in order to benefit from the EU passport – there will not be any automatic recognition of authorisations granted by the FCA. Entities are advised to begin applications without delay.

Authorisations granted by the EU27 should be rigorous and efficient

  • EU regulators will require evidence that UK-based entities comply with relevant legislation and ESMA guidance. However, EU regulators may take aspects of the FCA’s assessment into account where the requirements to be met are not impacted by relocation.

Objective reasons for relocating

  • The entity must provide a clear justification for relocating to the relevant Member State. Authorisation in one Member State must not be chosen to evade stricter standards in force in another Member State (where, for example, the applicant conducts most of its business).

Avoidance of “letter-box” entities

  • Regulators will reject any relocation request resulting in the creation of a “letter-box” entity (for instance, where extensive use of outsourcing and delegation is foreseen) with the intention of benefitting from an EU passport, while essentially performing all salient activities or functions outside the EU.

Strict conditions governing outsourcing and delegation

  • Outsourcing and delegation to “third countries” will only be possible under strict conditions – EU regulated entities must remain fully responsible for the direction and control of outsourced or delegated functions. Outsourcing or delegation arrangements will be conditional on prior cooperation agreements between the relevant EU regulator and the FCA.

Substance requirements must be met

  • EU regulators will require comprehensive information and access to all data related to outsourcing and delegation arrangements, and the ability to supervise them. Arrangements should not impact on business continuity, confidentiality and conflicts of interest. Also, activities that are essential to the proper functioning of the regulated entity, such as the substance of decision making, may not be outsourced or delegated outside the EU. Other important activities restricted from delegation include internal control functions, IT control infrastructure, risk assessment, compliance functions, key management functions and sector-specific functions.

Sound governance of EU entities

  • Key executives of EU authorised entities must be employed in the Member State of establishment and work there to a degree proportionate to their envisaged role. The quality and presence of such executives will be assessed as part of the application process.

Oversight by NCAs

  • EU regulators must be in a position to ensure the effective supervision of entities and application of the relevant legislation. In particular, with regard to outsourced or delegated activities, the EU regulator has the power to conduct on-site inspections without any prior authorisation.

Co-ordination to ensure effective monitoring by ESMA

  • ESMA will establish a forum to allow EU regulators to report on and discuss cases of relocating UK market participants, with the aim of promoting consistent practice among regulators.

What steps can firms take now?

  • Careful attention should be paid to developments in this area. The Opinion suggests that a minimalist approach to the substance of EU-based regulated entities when delegating post-Brexit will not be sufficient for ESMA.
  • Firms intending to rely upon outsourcing and delegation to mitigate the impact of Brexit on their business would be well-advised to undertake a Brexit impact assessment (essentially, a Brexit planning “health check”) taking into account the potential challenges the Opinion poses to Brexit contingency planning.