European Union: ESMA Brexit Opinions – Investment Management

As flagged in our previous update, the European Securities and Markets Authority ("ESMA") has published three further Brexit focused opinions.

These "sector-specific" Brexit opinions cover the areas of:

  • Investment Management – encompassing the activities of UCITS management companies, self-managed investment funds and authorised AIFMs (together "ManCos");
  • Investment Firms – based on the MiFID framework[1] applicable to these firms; and
  • Secondary Markets – covering all types of trading venues, i.e. regulated markets, multilateral trading facilities and, under MiFID, organised trading facilities.

The opinions are addressed to the EU27 regulators, referred to as national competent authorities ("NCAs"), with the aim of ensuring a consistent interpretation of requirements relating to the authorisation, supervision and enforcement of entities relocating[2] from the UK following Brexit.

Concerns over an uneven playing field in the EU or even a race-to-the bottom to attract relocating UK entities have been raised, and the ESMA opinions have been issued to address the regulatory and supervisory arbitrage risks associated with Brexit.

The opinions assume a "hard" Brexit and that the UK will become a "third country" after its withdrawal from the EU.

This update focuses on the Investment Management opinion (the "Opinion") and we will issue further updates that will focus on the Investment Firms and Secondary Markets opinions.

How the Maples Group Can Help

Since the UK referendum on EU membership we have been working, on a collaborative basis, with our clients and their international advisers to address a wide range of complex legal and regulatory Brexit related issues.

Recent examples include working alongside UK legal, regulatory and tax advisers to help global investment banks, financial institutions and investment managers develop their contingency plans or to establish regulated entities in Ireland.

We have already assisted a large number of AIFMs, UCITS and MiFID entities to become authorised in Ireland as part of our clients' overall business as well as in the context of Brexit.

In addition, other parts of the Maples group, including MPMF Fund Management (Ireland) Limited, are able to provide dedicated AIFM and UCITS services to entities seeking to relocate to Ireland.

The Maples Group and Brexit

Further information is available on our dedicated Brexit microsite.

The Investment Management Opinion

The Opinion builds on the cross-sectoral opinion on expected standards for NCAs considering entities seeking to "relocate" to the EU27 from the UK. The Opinion explains that "relocation" covers not only an entity seeking authorisation for the first time in the EU27, but also an existing EU27 entity restructuring as a result of a transfer of activities/functions from a UK entity.

Based on the objectives of UCITS and AIFMD legislative frameworks, the Opinion sets out principles to address regulatory and supervisory risks in relation to:

  1. Authorisation;
  2. Governance and Internal Control;
  3. Delegation (including substance); and
  4. Effective Supervision by NCAs.

Key Points of the Opinion

In our previous update, we noted that ESMA's earlier Brexit opinion contained many principles that would be familiar to UCITS managers and AIFMs who have been authorised pursuant to the Central Bank of Ireland's (the "CBI") Fund Management Companies – Guidance.[3]

Our view has not changed and many of the principles set out in the Opinion are already part of the Irish regulatory landscape for AIFMs and UCITS management companies.

1) Authorisation

The Opinion re-emphasises that a relocating UK entity must undergo a full authorisation process as it would in any other circumstance, and that there are no transitional provisions. NCAs should scrutinise the group structure and location of shareholders to ensure this is not an obstacle to effective supervision, and that the choice of EU27 jurisdiction is based on objective factors (and not regulatory arbitrage).

2) Governance and Internal Control

Governance structures and internal control mechanisms of each ManCo should be calibrated to the nature, scale and complexity of the business and the activities carried out. The Opinion sets out a detailed list of criteria for NCAs to assess applicants in this regard, which are as follows:

  • Size of the ManCo's business (value of assets under management);
  • Number of (sub-)funds and share classes;
  • Complexity of investment strategies pursued;
  • Type and range of asset classes invested in (e.g. equity, bonds, derivatives, real estate, private equity, venture capital, infrastructure, debt);
  • Geographical spread of investments;
  • Use of leverage;
  • Use of efficient portfolio management techniques;
  • Frequency of investment activities;
  • Cross-border management or marketing activities;
  • Type and range of management functions that are (i) performed internally; and (ii) not performed by the ManCo itself are therefore subject to delegation monitoring;
  • Provision of additional MiFID services set out in Article 6(3) of the UCITS Directive and Article 5(4) of the AIFMD;
  • Number and type of investors;
  • Frequency of investor subscriptions and redemptions; and
  • Geographical distribution of marketing activities.

NCAs should also be able to carry out on-site visits of a ManCo without notice and meet with its senior management at short notice.

"White Label" ManCos

ManCos whose business involves setting-up platforms for third parties and delegating investment management to such third parties will likely see a spike in business that creates operational risk and the Opinion asks NCAs to consider whether such ManCos have sufficient human and technical resources.


NCAs should scrutinise the number of other directorships held by senior management (and focus additional scrutiny on individuals with high numbers of directorships), and should put in place guidance regarding aggregate time commitments of senior management.

3) Delegation

ManCos must prepare and submit to NCAs for analysis a detailed, evidence-backed explanation of the objective reasons for delegation (noting NCAs should give special attention to delegation to non-EU entities). This is not a mere notification and requires proper scrutiny by the NCA. NCAs should also consider extending delegation requirements to other critical functions like IT. Where there is delegation to non-EU entities NCAs should require detailed information on why this is objectively justified particularly where the geographical spread of investments is EU based.


The most notable provisions of the Opinion relate to ESMA's substance expectations. While the AIFMD and UCITS legislative frameworks largely focus on qualitative requirements, there is a shift in the Opinion to some quantitative criteria for relocating ManCos, based in part on the "letter-box" principle (namely delegation of investment management functions – measured at the level of each fund – cannot substantially outweigh those retained by the ManCo). ManCos should therefore have sufficient human and technical resources to perform investment management and to select and monitor/challenge any delegates. While ESMA has not set any minimum staffing/substance requirements, it does state in the Opinion that:

  • NCAs should apply additional scrutiny to applications where the ManCo has less than three full-time equivalents ("FTE")[5] (including scrutinising time commitments of senior management and staff) carrying out performance of investment management functions and/or monitoring of delegates. It should be noted that an FTE is not necessarily an employee of the ManCo but is rather a dedicated resource of the ManCo;
  • ManCos relocating from another member state ("Former MS") should transfer a sufficient amount of portfolio management and/or risk management functions to the new EU member state to avoid a scenario where (i) substantially more portfolio management and/or risk management functions continue to be carried on under a delegation back to the Former MS and (ii) the entity maintains substantially more relevant human and technical resources in the Former MS despite the relocation[6]; and
  • NCAs should be satisfied that the use by ManCos of non-EU branches is objectively justified and branches should not result in material functions/services being provided by the branch back into the EU.

Investment Advisers

NCAs should in particular review the appointment of non-discretionary investment advisers to ensure there is no circumvention of delegation requirements for investment management, and the ManCo should carry out its own qualified analysis on such advice.

Due Diligence

After the initial detailed written due diligence there should be continuous monitoring and review including on-site visits by ManCos to their delegates (whether EU based or not) and contingency planning.

4) Effective Supervision by NCAs

NCAs should consider the impact of operations in other jurisdictions on its ability to supervise a ManCo, and that initial conditions continue to be met by ManCos after authorisation. Delegation by ManCos should not impact the enforcement of legislation by the NCA nor access by the NCA to data regarding delegated functions, or access by the NCA to the business premises of a ManCo's delegates. ESMA also re-emphasises that cooperation between NCAs and regulatory authorities in non-EU jurisdictions (so-called "Third Countries") is a pre-requisite for certain provisions of the AIFMD and UCITS, including delegation of portfolio management to an investment manager in a Third Country (which would include the UK in a "hard" Brexit scenario).

Going Forward

As noted, much of the Opinion builds on existing Irish principles under CP86 and our view is that it is largely consistent with the current Irish framework. It will be interesting to see whether the CBI also interprets the new provisions and concepts as being consistent with its authorisation, supervision and enforcement regime so that only minor changes (if any) are required.

The Opinion is aimed expressly at relocating entities, and in the short term it may be that existing ManCos (which are not being upgraded for Brexit) are not in scope, but in the long term these principles and additional expectations may apply to all ManCos to avoid a "two tier" system.

External Reference Materials from ESMA

The Opinion and ESMA's press release can be found here.


[1] The MiFID framework encompasses among other things MiFID II and MiFIR.

[2] Relocation is to be understood in a broad sense and includes not only situations where an entity seeks authorisation for the first time in the EU27, but also cases where an existing entity in the EU27 is restructured (e.g. through an increase in the number of personnel) as a result of a transfer of activities and functions from a UK entity.

[3] The CBI completed a substantive review of the Irish market, introducing guidance in December 2016 (issued on foot of its consultation paper 86 or "CP86") which is "designed to underpin the achievement of substantive control by fund management companies, acting on behalf of investment funds, over the activities of their delegates." This was discussed in our previous update on CP86.

[4] Namely the functions listed in Annex II of the UCITS Directive and Annex I of the AIFMD.

[5] Please follow the link for a full definition of an FTE.

[6] ESMA notes these substance principles are underpinned by the legal requirement for all ManCos to have both their registered and head office based in the same jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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