Last month, the European Commission issued draft regulations proposing new powers for the European Securities and Markets Authority, as well as significant changes to the way the Paris-based financial watchdog is governed and funded.
Under the proposals, national regulators such as France's AMF or the Central Bank of Ireland will not be able to authorise a manager if that manager plans to outsource or delegate a material part of its activities to a non-EU country without notifying Esma in advance and giving Esma an opportunity to review the proposed delegation. For these purposes, a manager includes a Mifid company, an alternative investment fund manager or a Ucits management company. Esma will also be authorised to review the delegation arrangements of existing managers.
The draft regulations also propose radical changes to the governance structure of Esma that will have a direct impact on how delegation will be interpreted and applied. Currently, Esma has two boards: a board of supervisors and a management board. The first board consists of the heads of the regulators in each of the 28 member states of the EU, and the second provides administrative support to the board of supervisors.
It is proposed that the management board will be replaced by an executive board consisting of a chairman and three independent members appointed by the European Council of Ministers. It is also proposed that many of the powers currently vested in the board of supervisors will be transferred to the executive board. Accordingly, the executive board, rather than the board of supervisors or a regulator, will determine whether a manager can outsource and delegate activities to an entity or branch outside of the EU.
It is worth considering the following before giving a four-person executive board the final say on matters that are now within the remit of 28 regulators:
First, according to the commission's own impact assessment, the regulators who make up the board of supervisors in Esma do not support these proposals, as they believe the current structure is appropriate.
Second, will Esma have the capacity to review, in a timely manner, delegations outside the EU by every manager who chooses to do so?
Third, the establishment of a four-person executive board is a move towards an SEC commissioner-type model. The chairman of the executive board will have the casting vote on split decisions. In contrast, the chairman of the board of supervisors does not have a casting vote and decisions are based on simple majority.
Fourth, recently there have been concerns about Esma's interpretative guidance changing the meaning of primary regulation. While this needs to be monitored carefully, EU member states also need to be wary of the invisible hand that sometimes manages to influence Esma's output. A recent example was a proposal to ban the cancellation of shares for constant net asset value money market funds. It was included in an Esma consultation paper without that proposal going through the Esma procedure. Could that invisible hand be more influential with a four-person executive board?
If adopted, the proposed rules on delegation will apply three months after the draft regulations become law. With Brexit and the European Parliament elections in 2019, we can expect the commission to push for the regulations to be adopted next year.
EU member states and their regulators should not be rushed on these proposals, as they represent a huge power grab that could change the financial regulatory landscape.
The Esma reform proposals could precipitate a hard Brexit as well as disenfranchise regulators on important issues affecting the asset management industry in the EU.
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.