A European authority's opinions on the post-Brexit treatment of U.K. money managers might cause a headache for other non-EU firms, sources warn.
The European Securities and Markets Authority, which is tasked with improving investor protection and promoting stable markets within the European Union's financial system, published its opinions July 13 detailing sector-specific principles on relocations to EU member states from the U.K.
The ESMA wants to ensure there is consistency related to the relocation of entities, activities and functions to the Continent from the U.K. The opinion specific to investment management covers principles based on the objectives and provisions of two European directives — the Undertakings in Collective Investment Transferable Securities and Alternative Investment Fund Managers directive. It addresses regulatory and supervisory risks relating to authorization, governance and internal control, delegation and effective supervision.
The opinions, which were issued to national regulators within the bloc, "provide guidance to (national authorities) aimed at ensuring a consistent interpretation of the requirements relating to authorization, supervision and enforcement in order to avoid the development of regulatory and supervisory arbitrage risks," said information on ESMA's website.
While the trigger for publishing these opinions is Brexit, sources warned other non-EU countries might be subjected to a higher regulatory burden.
"The ESMA opinions on outsourcing and delegation of invest- ment management functions apply to all ... (non-EU) countries," said Rhodri Preece, head of capital markets policy for Europe, Middle East and Africa, at the CFA Institute in London. "The opinions effectively raise the regulatory bar for firms wishing to outsource or delegate functions, such as portfolio management or risk management."
Raising that bar means requiring written due diligence reports; adequate governance, internal controls and oversight; a minimum number of staff based in the EU entity; and being subject to EU remuneration rules.
"Significantly, the opinions state that the delegation or outsourcing arrangement cannot result in substantially more portfolio management or risk management being done in the original member state of the relocating entity — effectively constraining how much front-office activity can take place in the non-EU country," added Mr. Preece.