knowledge 21 July 2020 |

Brexit: ESMA Confirms Brexit Co-Operation Agreements

In welcome news for the Irish funds industry, ESMA has confirmed that the memoranda of understanding (“MoU”) between ESMA and EU national securities regulators on the one hand and the UK’s FCA on the other, which cover co-operation and exchange of information, will come into effect at the end of the transition period. These MoUs will allow arrangements for fund manager delegation of portfolio/investment management to the UK to continue when the UK leaves the EU.

Overview

Regulation 23 of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 and Regulation 21 of the European Union (Alternative Investment Fund Managers) Regulations 2013 permit investment management to be delegated to third parties subject to the fulfilment of a number of conditions. In the case of delegation to a third country entity, this includes the condition that co-operation between the Central Bank of Ireland and the supervisory authorities of the third country is ensured.

On 1 February 2019, ESMA and EU national securities regulators announced the agreement of MoUs with the UK’s FCA to cover co-operation and exchange of information in the event the UK left the EU without a withdrawal agreement. The MoUs are:

  • an MoU between ESMA and the FCA concerning the exchange of information in relation to the supervision of credit rating agencies (CRAs) and trade repositories (TRs). The MoU will allow ESMA to continue to discharge its mission and meet its mandate regarding investor protection, orderly markets and financial stability in the EU; and
  • a multilateral MoU (MMoU) between EU/EEA securities regulators and the FCA covering supervisory co-operation, enforcement and information exchange between individual regulators and the FCA, and will allow them to share information relating to, amongst others, market surveillance, investment services and asset management activities. This, in turn, will allow certain activities, such as investment management, to continue to be outsourced and delegated to UK based entities by service providers based in the EEA.

On 17 July 2020, ESMA, EU national securities regulators, and the FCA confirmed (here) that these MoUs, agreed in 2019, “remain relevant and appropriate to ensure continued good co-operation and exchange of information after the UK leaves the EU and will come into effect at the end of the transition period, which is set to expire on 31 December 2020.”

In its announcement, ESMA also states that its previously published Brexit statements, in particular, ESMA’s general opinion to support supervisory convergence in the context of the UK withdrawing from the EU issued on 31 May 2017 and sector-specific opinions issued on 13 July 2017, remain relevant and should continue to be followed.

Comment

The MoUs were initially entered into as part of the preparations for a no-deal Brexit. However, it appears from ESMA’s announcement that the MoUs will apply post 31 December 2020 irrespective of the outcome of the Brexit negotiations, bringing welcome certainty to the Irish funds industry.

However, the existence of co-operation agreements is only one of the requirements that must be met when delegating to third country entities. In this respect, funds and fund managers may be interested to note that, on 7 July 2020, the European Commission updated its Notice to Stakeholders Withdrawal of the United Kingdom and EU Rules in the Field of Asset Management (here).  That Notice also deals with the issue of delegation arrangements, among other things, and reminds stakeholders of the importance of ensuring that delegation arrangements do not result in the creation of letter-box entities. 

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.