[Newsflash n. 33]

Today, 31 May 2017, ESMA has published an opinion (ESMA 42-110-433) setting out general principles aimed at supporting supervisory convergence in response to the increased requests from UK financial market participants seeking to relocate to the 27 Member States that will remain in the EU (EU27), in order to continue to benefit from access to EU financial markets after Brexit.

We have been witnessing individual moves at single Member State level to attract relocating firms and ESMA is fearing that this phenomenon may lead to supervisory arbitrage. Therefore, ESMA has addressed the opinion to national competent authorities (NCAs) to ensure consistency in authorisation, supervision and enforcement related to the relocation of entities. To this end, ESMA will establish a forum – the Supervisory Coordination Network – to allow NCAs to report on and discuss cases of relocating UK market participants.

The opinion sets out nine principles:

1. No automatic recognition of existing authorisations;
2. Authorisations granted by EU27 NCAs should be rigorous and efficient;
3. NCAs should be able to verify the objective reasons for relocation;
4. Special attention should be granted to avoid letter-box entities in the EU27;
5. Outsourcing and delegation to third countries is only possible under strict conditions (indeed, pursuant to outsourcing or delegation arrangements, entities may confer either a substantial degree of activities or critical functions to other entities, thus increasing the risk that those entities become letterbox entities);
6. NCAs should ensure that substance requirements are met;
7. NCAs should ensure sound governance of EU entities;
8. NCAs must be in a position to effectively supervise and enforce Union law; and
9. Coordination to ensure effective monitoring by ESMA.

ESMA intends to develop further guidance in areas such as asset managers, investment firms and secondary markets to provide sector specific details on the aspects described in the general opinion.

The opinion openly shows the awareness of the EU institutions of the criticality of one of the key consequences of Brexit. And the signal sent out to the market and policymakers does not seem one of accommodating stance.

Please do not hesitate to contact us should you need any further clarification on the above.