In an assessment of the Brexit relocation processes (available on the website of ESMA), ESMA last December made some interesting observations on how different national authorities handle firms’ relocation to the EU in the context of the UK’s withdrawal from the EU. The report focused on MiFID II investment firms, trading firm and fund managers.

General findings #

The key findings of the report with respect to all three categories were the following:

• National authorities allowed in certain cases for an extensive use of outsourcing/delegation arrangements; and

• Several firms relocated with limited technical and human resources in the EU. In particular, NCAs applied different interpretations of proportionality when it came to substance requirements. This led in certain cases to some smaller firms relocating with only very minimal set-ups.

In this regard, the ESMA also made a number of recommendations for future ESMA work to achieve greater convergence at EU level on (i) the application of the risk-based approach, (ii) the proporationality principle and (iii) outsourcing/delegation arrangements.

Findings with respect to fund managers #

With respect to fund managers in particular, the key findings are not too different from the general findings described above.

For this peer review, the ESMA in particular referred to its 2017 opinion on supervisory convergence in the area of investment management in the context of the United Kingdom withdrawing from the European Union.

Reviewed authorities were the authorities of the Netherlands, France, Luxembourg and Ireland (so the below does not necessarily apply to the position of other national authorities, such as the Belgian FSMA).

A summary of ESMA’s findings can be found on pages 10 and further of the report, but especially the below 5 points struck me as noteworthy:

1. ESMA noted a high divergence in the level of detail requested and collected by national authorities on the allocation of responsibilities and decision-making process of the firms. The same goes for eg. policies and procedures (with some regulators not having requested these even once, referring to a vague ‘risk based approach’);
2. There are very different approaches in the ways national authorities approach the assessment of a combination of functions and dual-hatting - reviewed national authorities generally seem to be rather pragmatic in light of proportionality (with sometimes thresholds that are significantly above the median size of authorised fund managers across the EU) - without however having in place detailed documented considerations in this respect.
3. None of the reviewed authorities required full compliance with the delegation rules set out in the AIFMD and UCITS Directive (§421). In particular, none of the assessed authorities requested detailed descriptions, explanations and actual evidence of the objective reasons invoked to delegate functions, nor challenged those. In this context, authorities also accepted reasoning that intragroup delegation arrangements would pose lower supervisory risk. ESMA in this respect pointed out that the EU legislation does not provide for any derogations or exemptions in case of intragroup delegation arrangements, but that the EU legislation in fact provides for specific requirements in the case of intragroup arrangements given the increased conflicts of interest.
4. Interpretation of substance requirements (i.e. sufficiency of human and technical requirements) also varied significantly. All authorities required a minimum of two senior managers, however, each authority seems to have specific (other) criteria (§435). Much to the frustration of ESMA, all reviewed authorities made note of (and seem to accept) a large reliance of their local entities on the UK group (in particular with respect to IT).
5. The ESMA also urged the Luxembourg authority to more closely monitor its white label service activity and assess whether they continue to have sufficient human and technical resources to manage the additional business and comply with the applicable delegation requirements (noting that action taken by the CSSF falls outside the time scope of the review) and sees merit in more work at the EU level to improve supervisory convergence int his respect (§505). Remarkably, the CSSF indicated that it disagrees with this conclusion on white label service activities. It indicates that the Luxembourg white label sector was subject to supervisory work, namely through the review of license extensions and onsite inspections, during the review period (pg 116).

Going forward #

It will be interesting to see:

• if/how the above conclusions will result in new guidance by ESMA,
• how national authorities will implement them, and
• last but not least, whether the conclusions of this report will have an impact on AIFMD II, which is about to enter the trilogue process after being voted by the ECON committee of the EP earlier this week.

ESMA plans to carry out a follow-up assessment in two years.

Final note with respect to Belgium #

Finally, it should also be noted that the above does not focus on the position of the Belgian FSMA. Feel free to reach out if you want to discuss our experience with the position of the Belgian FSMA with respect to above.

– Note: This post is a personal opinion/analysis and cannot be considered legal advice. Feel free to reach out if you wish to discuss further or require advice for your specific situation! –