If I were to come up with a mantra for ESMA it would, beyond the shadow of a doubt, include 'foster consistency' and 'supervisory convergence', phrases that are invariably mentioned in just about every document or speech made by the Paris-based European Securities and Markets Authority.
With this mantra underpinning its actions, last summer ESMA issued a Brexit opinion in the area of investment management, giving national authorities practical guidance when reviewing relocation requests from the UK. The aim is ensure consistent interpretation of the requirements, including those relating to delegation and to the effective supervision of delegates. The opinion does not rewrite the rules on delegation and is in line with CSSF practice; however, applicants will see their file being discussed in a newly created forum (the Supervisory Coordination Network), a formal bi-monthly meeting of the EU27 authorities. While the cross-border delegation model is tried, tested, and highly successful in Luxembourg, it may be much less familiar in other EU countries that have more of a domestic industry focus.
So how should AIFMs/UCITS managers prepare for the additional layer of regulatory scrutiny of their cross-border delegation models, and show that they are managing the risks properly? In my view, investing management time upfront in formulating a comprehensive business plan is key to securing more timely results in the regulatory approval process. The reasons for and benefits of delegating portfolio management to regulated firms in other specialised financial centres should be clearly explained. A key building block in monitoring delegates is demonstrating that the company has the right expertise and competence among the board, management, and staff to supervise the delegated activities and to deal with conflicts of interest. The robustness of the process can also be shown by describing the outsourcing policy requirements for the selection and ongoing monitoring of group and third-party delegates, including operational diligence and business continuity, as well as the frequency of reporting from delegates and onsite visits and reporting lines to management. Also key is the input by the different internal control functions such as internal audit, compliance, risk management, and financial control as well as the IT tools and systems used in the ongoing monitoring of delegates.
The rules on delegation have not become stricter, but the policing of how these rules are applied has clearly increased. Asset managers need to evidence that time and resources are spent on the ongoing oversight of delegates, and that delegates are being challenged appropriately about service levels. Proper documentation of these activities is essential to preserving the delegation model entente cordiale.
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