Asset managers, Brexit planning and supervisory convergence



Ecosystems are important to the provision of financial services and the UK’s asset management ecosystem is one of the strongest within the sector. The UK has created an environment where innovation thrives within the asset management industry, creating products and services which are intended to serve the investment needs of a huge variety of investors, from individuals looking for long-term provisions for retirement to the more sophisticated and institutional investors seeking returns in particular investment classes. However, despite this strong presence, the UK’s decision to leave the EU means that asset management firms of all shapes and sizes will need to conduct a thorough analysis to understand the potential impact of Brexit. To date, this has been something of a difficult task, not least because of the uncertainty as to what the future relationship between the UK and the EU will look like, in respect of the provision of financial services.

Regardless, firms will need to have some form of ‘Brexit plan’ as we move toward 2019. With this in mind, it is important to take stock and obtain a sense of direction from what we already know about the current interpretation of the provision of financial services on a cross-border basis in the EU, and also take into account the recent European Securities and Markets Authority (ESMA) opinions on supervisory convergence in light of the UK’s decision to leave the EU.

ESMA’s principles on supervisory convergence

During summer 2017, ESMA released a number of opinions relating to supporting supervisory convergence in the context of the UK withdrawing from the EU. In its opinion, issued 31 May 2017, ESMA set out a number of principles which it expects national competent authorities (NCAs) to adhere to when looking at their supervisory approaches to any relocation from the UK. These principles were: (i) no automatic recognition of existing authorisations; (ii) authorisations granted by EU27 NCAs should be rigorous and efficient; (iii) NCAs should be able to verify the objective reasons for relocation; (iv) special attention should be granted to avoid ‘letter box’ entities in the EU27; (v) outsourcing and delegation to third countries is only possible under strict conditions; (vi) NCAs should ensure sound governance of EU entities; (vii) NCAs must be in a position to effectively supervise and enforce Union law; and (viii) coordination to ensure effective monitoring by ESMA.

It is clear that ESMA fully intends to ensure that there is no ‘fast route’ or ‘accelerated process’ recognising entities which are currently operating in the UK wishing to set up their business in an EU jurisdiction post-Brexit. Consequently, the decision to establish a new entity in an EU jurisdiction will need to be well thought out, requiring a certain level of commitment. It is inevitable in these circumstances that such an application would need to follow the usual timelines and administrative hurdles to get authorisation, usually entailing at least six months planning and up to potentially six months to one year from establishment in the EU (depending on the jurisdiction). Consequently, firms will need to think very carefully about whether this is a route they wish to take and whether it is completely necessary in order to access their desired target clients. If firms do decide this is a route worth pursuing, there are multiple options available to them to operate in the EU, ranging from a ‘lighter-touch’ arrangement of acting as a tied agent under the responsibility of a EU MiFID authorised firm (where firms would be able to provide certain MiFID services while falling under the umbrella of this MiFID authorised firm), to applying for full blown authorisation. As we know, there have been many discussions on the required ‘substance’ for such entities and no doubt this debate will continue for a while. Nevertheless, practically, this is a difficult time for firms to seek to establish themselves in jurisdictions which often may not necessarily have the same expanse of talent as has been built up within the UK’s asset management ecosystem over the years.

The use of delegation

On 13 July 2017, ESMA issued three further sector-specific principles on relocation from the UK in respect of investment management, investment firms and secondary markets. Much of the detail set out in these opinions was intended to prevent the possibility of regulatory arbitrage among the EU27, but it was also clear that ESMA is trying to draw a line in the sand with regard to their expectations of firms wishing to provide services within the EU, either via establishment or on a cross-border basis.

For many, one key aspect that will need to be looked at closely over the coming months is ESMA’s views on the use of delegation and the interpretation and guidelines that will, in the coming months, be set out by each NCA in respect of the use of delegation in their jurisdiction. The use of delegation, particularly in relation to the provision of investment services or portfolio management, is a key element of many structures used by the asset management sector and it is prudent to highlight that the use of delegation has been relied upon frequently by EU asset managers prior to the decision by the UK to withdraw from the EU. Consequently, any potential change in interpretation or approach to delegation will affect not just future arrangements with UK entities, but also existing delegation arrangements which may be in place between EU entities and entities established elsewhere. The launch of the Alternative Investment Fund Managers Directive (AIFMD) sparked debate regarding the notion of ‘letter box’ entities, with ESMA making it clear that such arrangements were not welcome. The recent opinions by ESMA reiterate this thought and also highlight the need that any delegation arrangement under the UCITS Directive must also follow the principles set out under the AIFMD to ensure at least the same level of protection is afforded to UCITS investors as to those investing in AIFs.

Taking a deeper look at delegation, ESMA set out its expectations that NCAs should be satisfied that there are objective reasons for delegation and that they should assess the detailed descriptions, explanations and evidence of the objective reasons provided by entities as to the use of a delegation structure. Consequently, NCAs will need to undertake a case-by-case analysis, taking into account the materiality of the delegated activity. In addition, ESMA sets out that where authorised entities delegate portfolio management or risk management activities to non-EU entities, NCAs will need to be satisfied that the entities selected to conduct the delegated activities are subject to regulatory requirements on remuneration that are equally as effective as those under applicable ESMA guidelines or that appropriate contractual arrangements are put in place to ensure there is no circumvention of the remuneration rules, as set out in the applicable ESMA guidelines.

One could say that ESMA’s opinion on delegation is no different to what they have previously set out (and consequently, existing non-EU entities and delegation arrangements should be in compliance), but as we know with the EU, such things are never simple and consequently it will be necessary for firms to keep continually monitoring their approach on such developments and any interpretative guidelines issued by NCAs.

Future thoughts

There is clearly a lot more detail to come as time progresses, particularly as we approach 2019. We have already heard concepts such as ‘transitional arrangements’ being set as potential possibilities for the future but yet, for now, we do not know if a ‘transitional period’ may be put in place and what form any such arrangement might take. In addition, ESMA work programme for 2018 is likely to produce more consultation papers or opinions in relation to how NCAs should approach Brexit, and it is inevitable that further thought will need to be given as to how the term ‘equivalence’ should be construed and applied across relevant regulations – a concept which may prove complex given that the concept of equivalence is not used in all EU directives. With this in mind, the only certainty is that there is no set path as to which arrangements may or may not be put in place before Brexit. Consequently, the next few months will be crucial for firms to think about their Brexit planning processes and how best to create to them to be able to adapt in a timely fashion as politicians and regulators alike set out their views as to how Brexit will be implemented.


Monica Gogna is a partner at Dechert LLP. She can be contacted on + 44 (0)207 184 7554 or by email:

© Financier Worldwide


Monica Gogna

Dechert LLP

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