Clarification on ESMA’s Asset Manager Delegation Rules as Clear as Mud

Last week, the EU Council’s legal service attempted to add clarity to ESMA’s delegation opinions but the most recent utterances have had the opposite effect thus adding to asset managers’ Brexit anxieties.

The ability of UCITS and AIFMs asset managers to delegate has been a key area of focus ever since the UK triggered Article 50 stating intention to leave the EU. Last week, the European Commission announced that national competent authorities (NCAs) are not bound by the European Securities and Markets Authority’s (ESMA) recommendations on fund manager delegations. The advice aimed to sooth industry concerns, but instead added to the Brexit-related anxiety that persists in the market.

ESMA previously suggested that post-Brexit, NCAs would be required to submit all delegation authorization requests to ESMA, who would then issue an opinion resulting in either a refusal of the request or a two-step approval process. The industry worried that the two-step process would slow down their ability to respond to other challenges posed by Brexit, such as ensuring regulatory compliance across all locations and activities as well as maintaining jurisdictional flexibility. There were also fears that giving ESMA veto authority over NCA decisions would take too much power away from NCAs. NCAs and cross border managers were asking themselves: who is in charge here?  Extensive loss of national regulatory sovereignty is one of the big drivers behind supporters of Brexit, remember.

In principle, the industry welcomed the announcement as it solidifies NCAs’ continued authority, however it does not reduce the burden of the proposed two-step approval process. Moreover, would NCAs ever in practice feel comfortable acting against ESMA’s opinion? A likely unintended consequence would be that managers choose to set up funds in jurisdictions where the NCA is deemed to be more supportive of their delegation plans.

A positive result here is proof EU regulators are listening to the industry’s concerns. We’ve also seen evidence of this regulatory pragmatism within recent EMIR revision proposals that make the rules more fit for purpose. However, in this instance, the solution falls short of what managers were seeking: namely, an expedited approval process to the benefit of asset managers and end-investors.

When it comes to Brexit, there remains a need for cross border fund managers to make their voices heard with a collective call for greater clarity. The current half-way approach promotes uncertainty and does nothing to help the industry navigate the many complex challenges that lay ahead.