Esma warns against ‘letter box’ entities in Brexit relocation guidance

The European Securities and Markets Authority has warned regulators in the EU27 to raise awareness on outsourcing arrangements with UK providers once it withdraws from the EU as it publishes Brexit relocation guidance for investment management, investment firms and trading venues.

It warns against “letter-box” entities and says investment firms must comply with the Mifid framework from day one and on an on-going basis.

Esma has released three opinions based on the UK becoming a third country following Brexit.

Because the UK plays a prominent role in the single market, Esma warns a consistent supervisory approach to safeguard investor protection, the orderly functioning of financial markets and financial stability is important.

Chair Steven Maijoor says the opinions build on the general cross-sectoral opinion issued in May and set out the standards to be observed by national authorities when considering relocation requests from the UK.

“Esma in developing these opinions is conscious of the fundamentals of the Single Market, including the freedom to locate, a cornerstone of the Capital Market Union, however it also needs to ensure that firms are treated in a convergent manner and do not select a location just for reasons of regulatory or supervisory arbitrage.”

The opinions presume that the UK will become a third country after Brexit.

On investment firms, Esma says regulators should consider their ability to assess documentation in a foreign language and that it must be able to conduct on-site visits at any time in order to supervise compliance with EU regulation.

Outsourcing of portfolio management to UK entities will only be permitted where Mifid II rules are met, including the requirement that cooperation arrangements between EU27 regulators and UK competent authorities are in place, the opinion on investment firms says.

Esma makes a similar warning on outsourcing of investment management to the UK saying this will only be permitted where the entity is in compliance with the Ucits Directive and AIFMD.

Regulators should pay particular attention to situations where trading venues would perform substantially more key and important activities from a third country, the final Esma opinion says.

Esma is providing a forum for EU27 regulators to promote consistency of supervisory decision-making.