The European Securities and Markets Authority (“ESMA”) foresees regulatory and arbitrage risks in Brexit and a potential “race to the bottom” as certain national regulators jostle for and grab UK market share. On 31 May 2017, ESMA delivered an Opinion on achieving a common approach to supervision among regulators in EEA member states in the context of Brexit.
ESMA concedes in the Opinion that “the UK plays a prominent role in the EU Single Market” and predicates the Opinion on the fact that the relocation of financial firms, activities and functions following the UK’s decision to withdraw from EU creates what it describes as “a unique situation which requires a common effort at EU level to ensure a consistent supervisory approach to safeguard investor protection, the orderly functioning of financial markets and financial stability.”
UK based financial market participants planning for a worse case “hard” Brexit scenario whereby UK becomes a “third country” and UK participants lose their passporting rights, are giving serious consideration to setting up an affiliate in one of the EU27 countries in order to retain passporting rights through and beyond Brexit, but not relocating lock, stock and barrel to EU27. ESMA acknowledges that UK participants will seek to minimise the transfer of the effective performance of those activities to the EU27 by relying on the outsourcing or delegation of certain activities to UK participants.
On 13 July, ESMA issued a further three opinions focussing on regulatory risks in collective investment management (i.e. UCITS and AIFS), MiFID investment firms and trading venues, respectively, putting flesh on the bones of the May Opinion.
All four Opinions assume a “hard” Brexit and no special bespoke deal with UK on Single Market access.
The May Opinion enumerates nine principles, broadly:
Although these principles are expressed in general terms, in some respects, they seem to impose requirements beyond those in the underlying Directives. Much will depend upon how the principles are interpreted and applied by individual regulators.
Some common themes emerge from the July Opinions on investment management and investment firms, as follows:
Ominously, ESMA warns that post Brexit any (a) delegation of investment management to the UK will only be permitted if in compliance with AIFMD or UCITS and (b) any outsourcing of portfolio management to the UK must comply with MiFID II and cooperation agreements between EU27 and UK regulators should be in place.
UK firms seeking to establish a presence in the EU27 from which to operate will need to give detailed consideration and focus to the resources and operational substance which will need to be located in the jurisdiction in which that presence is established.