On 31 May, ESMA published an Opinion (General principles to support supervisory convergence in the context of the United Kingdom withdrawing from the European Union) in which it highlighted the "unique situation" presented by the likely relocation of many financial services providers currently based in London to the other EU Member States in advance of Brexit. For an update on Brexit, please read our May 2017 Brexit Update here.

ESMA is concerned that competition between jurisdictions could lead to regulatory arbitrage, and this mirrors the concerns of the European Central Bank (ECB), referenced in its recent comments aimed at banking groups considering relocating to the euro area. As highlighted by the ECB, avoiding regulatory arbitrage between the EU27 Member States, and any resulting 'regulatory race to the bottom' is, in the view of the European authorities, of crucial importance and they are clearly keen to stop jurisdictions using a 'friendly' or 'soft' regulatory environment as a tool to attract firms from the UK.

In addition to its concerns regarding regulatory arbitrage, ESMA is concerned that, unless parameters are set for national competent authorities (NCAs) in the EU27 Member States, relocations could lead to a prevalence of "letter-box entities".


ESMA's Opinion focuses on entities that are subject to the AIFMD, UCITS and MiFID regimes and sets out a number of key principles.

Existing authorisations

Existing authorisations will not be automatically recognised, and relocating firms should approach the relevant NCA in the EU27 Member State that it hopes to relocate to as soon as possible.

Unlike the ECB, ESMA has not set out its view on whether existing internal models approved by the UK regulators can continue to be used in limited cases pending approval of new internal models by the new NCA (the ECB signalled that, for banking groups, this may be acceptable subject to strict conditions). ESMA's views on this may be included in future sector- specific guidance that has been signposted.

New authorisations

Authorisations granted to relocating entities by NCAs in the EU27 Member States must be rigorous and efficient, and issued in a coherent manner.

ESMA expects that NCAs will be able to take account of assessments already carried out by UK regulators in the context of EU rules to which the relocating entities are currently subject (for example, in relation to fitness and probity). However, ESMA expects NCAs to examine, in detail, the governance structure, human resources, technical resources, geographical distribution of activities, outsourcing arrangements and delegation arrangements of relocating entities.

Reasons for relocation

NCAs must verify objective reasons for relocation by reference to the relocating entity's programme of operations. Close attention should be paid to the types of investors that will be targeted, marketing and promotional arrangements, and where the entity's products and will be developed.

Outsourcing and Delegation

  • As mentioned above, ESMA expects NCAs to take particular care to avoid authorising "letter-box entities".
  • NCAs should only allow relocating entities to outsource/delegate arrangements back to third countries under strict conditions. Any such outsourcing/delegation must be subject to effective supervision and enforcement by the relevant NCA. Responsibility for the tasks or functions that the entity is allowed to outsource/ delegate must remain with the authorised entity.
  • NCAs should ensure that outsourcing/delegation arrangements do not adversely affect their ability to supervise the entity, and that they can access data relating to those arrangements, and the business location to which those arrangements have been outsourced/delegated.
  • ESMA flags that, in certain sector- specific circumstances, internal control functions, IT control infrastructure, risk assessment, compliance, key management functions and sector-specific functions cannot be outsourced/ delegated without threatening the activity of the firm and the possibility of effective supervision.


From a governance perspective, NCAs should ensure that:

  • key executives and senior management are located in the relevant EU27 Member State (on a proportionate, if not on a full-time, basis); and
  • the relocated entity has sufficient levels of own funds and liquidity (to mitigate risks in any potential future insolvency).


NCAs must be adequately resourced to enable them to effectively supervise and enforce relocated entities and ensure compliance with EU law.


There must be coordination between NCAs in the EU27 Member States and ESMA to ensure that relocations can be effectively monitored and regulatory arbitrage avoided. To facilitate this, ESMA plans to establish the Supervisory Coordination Network to provide a forum for the NCAs to discuss specific relocation cases.


ESMA has emphasised that NCAs should prepare for increased authorisation and supervision activities and should ensure that they are adequately resourced to manage this. ESMA also intends to develop guidance or sector-specific opinions on points of particular relevance to asset managers, investment firms and the secondary markets (the date of this additional guidance is not yet known however, we understand that sector-specific guidance on substance (including in the area of asset management) is expected in the coming weeks). As mentioned above, ESMA is also establishing a Supervisory Coordination Network as a forum for reporting and discussions between NCAs.


Separately, and as highlighted in our May 2017 Brexit Update ( here), the ECB has stressed that it will "resist any supervisory or regulatory race to the bottom" in the context of a relocation of banking groups to the euro area.

The ECB's priorities are very similar to those of ESMA: there must be no "letter-box entities", material risks must be managed locally, operational independence must not be compromised by outsourcing/delegation, and authorisations will not be rushed (so early engagement in the application process is key).


The Central Bank has not commented publicly on the ESMA Opinion but the views expressed in the Opinion mirror, for the most part, the position taken to date by the Central Bank in connection with firms relocating from the UK. It remains to be seen, however, to what extent the Central Bank's position on delegation in the AIFMD/UCITS area (as articulated in its consultation on fund management company effectiveness, CP86) may change as a result of the Opinion, if at all. We will continue to keep clients informed of any position taken by the Central Bank if and as soon as it issues.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.