EUROPEAN UNION: ESMA Publish Opinion to Support Supervisory Convergence in the Area of Investment Management

Monday July 17 2017

The European Securities and Markets Authority (ESMA) publishes opinion to support supervisory convergence in the area of investment management in the context of the United Kingdom withdrawing from the European Union.

This opinion sets out principles based on the objectives and provisions of the UCITS Directive and AIFMD, which are applied to the specific case of relocation of entities, activities and functions following the UK’s withdrawal from the EU. It seeks to supplement the principles set out in the cross-sectoral opinion by addressing regulatory and supervisory risks in the area of Investment Management, in particular in relation to the following aspects:

• authorisation;
• governance and internal control;
• delegation and
• effective supervision.

Authorisation

NCAs should ensure full compliance with the authorisation requirements set out in the UCITS Directive and AIFMD (hereinafter referred to jointly as ‘EU investment management legislation’). Consequently, NCAs should require applicants to provide them with a complete set of information as required by the EU investment management legislation and should carry out the complete authorisation procedure without any derogations or exemptions.

Relocating UK entities should undergo the same authorisation procedure and be subject to the same standards as other applicants. This means that UK-based applicants should be subject neither to preferential nor disadvantageous treatment compared to other applicants.

Governance and internal control
The EU investment management legislation requires that authorised entities establish, implement and maintain effective governance structures and internal control mechanisms. Moreover, it is required that the persons who effectively conduct the business are of good repute and are sufficiently experienced also in relation to the investment strategies pursued and that the names of those persons and of every person succeeding them in office (hereinafter ‘Senior Managers’) will be communicated forthwith to the competent authorities.

The EU investment management legislation sets out that the conduct of the authorised entity should be decided by at least two Senior Managers meeting the aforesaid conditions and that both the head office and registered office must be located in the same Member State. NCAs should ensure that the members of the governing/management body of the authorised entity have the ultimate decision-making powers in regard to the business conduct of the authorised entity even where the entity is part of a corporate group.

Sound governance and internal control mechanisms require clarity as to the allocation of responsibilities, documented policies and procedures, structures which foster constructive challenge and the effective provision of relevant information to Senior Management, the governing/management body and, where it exists, the supervisory function.

Authorised entities must have effective internal control mechanisms in place in order to ensure compliance with the EU investment management legislation.

Delegation

The use of delegation arrangements may be an efficient way to perform some functions or activities. However, such arrangements (in particular when the service provider is outside the EU) are not without their risks both for authorised entities and for their NCAs and must be subject to appropriate oversight; points which this opinion seeks to address.

NCAs should be satisfied that authorised entities have organisational policies and procedures in place in order to comply with the delegation requirements set out in the EU investment management legislation at all times.

ESMA is of the view that the interpretation of Article 13 of the UCITS Directive and the relevant national laws transposing this provision should be consistent with the principles set out in Articles 75 to 82 of the AIFMD Level 2 Regulation. In this respect, NCAs should ensure that UCITS investors, which are often retail investors, benefit from at least the same level of protection as AIF investors.

NCAs should be satisfied that there are objective reasons for delegation. This requires that NCAs assess the (i) detailed descriptions, (ii) explanations and (iii) evidence of the objective reasons provided by authorised entities and are satisfied that the entire delegation structure is based on objective reasons.

Effective supervision
NCAs should consider the extent to which the applicant’s envisaged operations in other jurisdictions might impact the NCA’s resources and ability to effectively supervise the relocating entities. NCAs should ensure that initial conditions set at the moment of authorisation are met on a continuous basis, including those relative to delegation arrangements.

NCAs must ensure that any delegation does not impair their ability to enforce relevant legislation. NCAs should be satisfied that they have (i) access to all information related to delegated functions that is required for the performance of their desk-based supervisory tasks and (ii) access to business premises of delegates for on-site visits in order to effectively supervise compliance with the EU investment management legislation.

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