EU Supervisors’ approach on Asset Management after Brexit

Overview of ESMA Guideline ESMA34-45-344.


ESMA publishes on 13 July 2017 the opinion ESMA34-45-344 (the ESMA Opinion) defining the approach European National Competent Authorities (EU NCAs) (1) will follow applying UCITS Directive and AIFMD, in case of relocation of entities, activities and functions following the UK’s withdrawal from the EU . The ESMA Opinion assumes that the UK will become a third country after its withdrawal from the EU and is therefore without prejudice to any specific arrangements that may be agreed between the EU27 and the UK and to any future ESMA opinions or other convergence tools.

The ESMA Opinion addresses regulatory and supervisory risks in the area of investment management, in particular in relation to the following aspects:


EU NCAs ensure full compliance with the authorisation requirements set out in the UCITS Directive and AIFMD (the EU Investment Management Regulation). Consequently, the EU NCAs should require applicants to provide them with a complete set of information as required by the EU Investment Management Regulation 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. Indeed, ESMA clarifies that UK-based applicants should not expect any preferential (nor disadvantageous) treatment EU as current legislative framework does not provide for any reliance on previous or existing authorisations in other Member States or third countries nor any transitional provisions in case of relocations of market participants.

It should be highlighted that EU NCAs should evaluate submitted applications in order to ensure that the choice of the Member State for relocation is driven by objective factors (eg the programme of operations, information on prospective investors, marketing and promotional arrangements, the identity and geographical localisation of distributors’ activities, language of offering/promotional materials). EU NCAs should carefully assess the geographical distribution of planned activities of the applicant and should not grant authorisations where the applicant has opted for a jurisdiction for the purpose of evading stricter standards in another Member State. In other words, EU NCAs should reject applications made on the basis of regulatory arbitration.

Governance and internal control

ESMA requires EU NCAs to make sure that relocating entities have established sound governance and internal control mechanisms.

Sound governance (senior management and conflicts of interest)

The EU Investment Management Regulation requires that authorised entities establish, implement and maintain effective governance structures and internal control mechanisms, including specific rules on the supervision of the senior management.

EU NCAs are asked to supervise that relocating entities establish sound governance and internal control mechanisms. With particular regard to senior management, it is recommented that EU NCAs expect and receive evidence that the responsibilities listed in Article 9 of the Commission Directive 2010/43/EU15 (UCITS Level 2 Directive) and Article 60 of the Commission Delegated Regulation (EU) No 231/201316 (AIFMD Level 2 Regulation) have been clearly allocated to members of the governing/management body, the senior management and, where it exists, the supervisory function of authorised entities. ESMA Opinion clarifies that the responsibilities stated therein cannot be delegated, even when the delegation is within the same corporate group and that EU NCAs should investigate in depth directors who have an high number of directorships to ensure that they actually met their legal and regulatory oblligations and responsabilities.

Furthermore, the allocation of responsabilities and functions should be made in a manner that mitigates or avoid conflicts of interest. EU NCAs would require a detailed description of the conflicts of interest policies and procedures and would have regard to the compliance with the relevant disclosure requirements set forth in the EU Investment Management Regulation.

Calibration of governance structures

Calibration of governance structurs deals with the size and sophistication of the applicants. In particular, authorised entities should calibrate procedures, mechanisms and organisational structures to the size, nature, scale and complexity of their business and to the nature and range of activities carried out in the course of their business. EU NCAs will verify that authorised entities of significant size and/or entities employing complex investment strategies or having a broad range of business activities operate with a satisfactory organisational structure and sufficient human and technical resources and not a only a minimum operational set-up.

Internal control mechanism

As a general principle, authorised entities must have effective internal control mechanisms in place in order to ensure compliance with the EU Investment Management Regulation. This means that EU NCAs would require that:

  • the organisational structures ensure that all material legal risks are assessed by individuals that have sufficient knowledge and experience in the relevant legal matters and are independent from risk-taking functions
  • the organisational policies and procedures provide for a strong role of the internal control functions within the organisation and that the internal control functions should be consulted in particular before taking significant strategic decisions, and
  • internal control functions carry out their control activities on a continuous basis and provide regular reports to the governing/management body and, where it exists, supervisory function on the results of their control activities, including reporting of significant deficiencies.


ESMA considers essential for EU NCAs to have a harmonised approach on delegation and address the risks of regulatory and supervisory arbitrage.

EU NCAs shall verify that there are objective reasons for delegation (reviewing the detailed descriptions, explanations and evidences) and take into account the materiality of the delegated activity. ESMA clarifies that this assessment shall not be interpreted as a mere notification procedure, therefore EU NCAs shall analyse the information and evidence provided by authorised entities and be satisfied that there are indeed objective reasons for the delegation and that the delegation structure does not allow for a circumvention of the EU Investment Management Regulation and the responsibilities of authorised entities.

Delegation to non-EU entities, as well as the proposal of complex structures, could make oversight and supervision of the delegated functions more difficult. ESMA therefore requires EU NCAs to give special consideration to such delegation arrangements and be satisfied that their implementation is justified based on objective reasons despite the additional risks which may arise from them.


Authorised entities should not delegate investment management functions to an extent that exceeds by a substantial margin the investment management functions performed internally and shall demonstrate to EU NCAs that they dedicate sufficient human and technical resources to the selection of potential delegates as well as ongoing delegation monitoring activities and that all individuals involved in this process have the required skills, knowledge as well as experience and time commitment for their respective tasks.

In this regard, and having in mind Brexit consequences, ESMA clarifies that EU NCAs will have to make sure that relocating entities transfer a sufficient amount of portfolio management and/or risk management functions to their new home Member State. Granting authorisations to relocating entities shall not result in a situation in which these entities will be able to continue to perform substantially more portfolio management and/or risk management functions for the relevant funds in their original Member State or third country on a delegation basis and therefore also maintain substantially more relevant human and technical resources there despite a relocation.

Non-EU branches

EU NCAs are required to carefully monitor situations in which the risk of letter-box entities arises not only from the use of delegation arrangements but from situations in which EU authorised entities use non-EU branches for the performance of functions with respect to UCITS and AIFs. Where relocating entities intend to establish or maintain non-EU branches, EU NCAs should be satisfied that the use of non-EU branches is based on objective reasons linked to services provided in the non-EU jurisdiction and does not result in a situation where non-EU branches perform material functions or provide material services back into the EU.

Assessment of delegation arrangements

ESMA recognizes that the use of delegation arrangements may be an efficient way to perform some functions or activities but at the same time stress that such arrangements (in particular when the service provider is outside the EU) involve risks both for authorised entities and for their EU NCAs and therefore should be duly oversighted.

EU NCAs are required to assure that authorised entities have organisational policies and procedures in place in order to comply with the EU delegation requirements and, in this context, give special consideration to the appointment of investment advisers and make sure EU Investment Management Regulation are not circumvented.

Due diligence

EU NCAs will verify that the delegation and/or operational risk management policies and procedures of authorised entities elaborate on the initial due diligence during the selection process. Every delegation of functions must be preceded by a written due diligence and the written contractual arrangements between authorised entities and delegates should detail precisely the individual tasks and activities that are delegated. As the delegate may not be subject to equivalent legal and regulatory obligations, an authorised entity delegating portfolio management activities should not simply assume that the delegate will provide its services in compliance with the operating conditions set out in the EU Investment Management Regulation (eg due diligence, best execution or recordkeeping requirements). Delegation to non-EU entities should therefore not result in a situation where authorised entities carry out less intensive desk-based oversight and/or conduct less frequent on-site visits due to the geographical location of the delegate.

Effective supervision

EU NCAs should consider the extent to which the applicant’s envisaged operations in other jurisdictions might impact their resources and ability to effectively supervise the relocating entities, at the moment of authorization and on continuous basis (including those relating to delegation arrangements) and their ability to enforce relevant legislation.

Furthermore, EU NCAs should give special consideration to, and raise the attention of authorised entities, to the fact that, as from the effective date of the UK’s withdrawal from the EU, any delegations of investment management functions to entities based in the UK will only be permitted where this is in compliance with, amongst other conditions, UCITS Directive and AIFMD. In addition, it should be noted that a number of other provisions in the EU Investment Management Regulation require cooperation arrangements to be in place between the relevant EU NCAs and competent authorities in third countries.

ESMA Opinion is available here.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.