Ireland: Brexit: ESMA Highlights Importance Of Supervisory Convergence

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.