Is a memorandum of understanding ESMA solution to a no deal Brexit case scenario? This seems to be the case from a recent speech held (please find it here) by Steven Maijoor, Chair of ESMA, when detailing some of the imminent steps to be taken at global European and EU 27 level in order to prepare to deal with a hard Brexit case scenario.
Even though in the limited context of MiFID II, the part of the speech that specifically relates to Brexit gives a clear idea of the approach that the European Union intends to adopt at a more global level towards third countries and that will be applicable more specifically when shaping the future relationship with the United Kingdom in case of a no deal scenario. The three working areas identified in the speech contain high level principles that can be transposed from MiFID to the fund management industry.
A renewed approach of the EU towards the United Kingdom and third countries in general, which takes stock of the deep interconnection existing today and the need for ensuring that the general aims of investor protection and risk monitoring are preserved especially in a case of no deal scenario post Brexit.
Whilst, at least on paper, the common approach seems to be that it is in the best interest of both parties to come to a successful agreement, the likelihood of a no deal scenario is still very present and so is the need to make sure that measures are in place to ensure a smooth transition, well ahead of withdrawal day. The speech from Steven Maijoor, comes at the same time when the United Kingdom, in the course of the process of onshoring (please see more about onshoring here) had released draft statutory instruments to define the temporary permission regime applicable to the UCITS and AIFM directives.
Even though onshoring has its own unique aims, related to establishing a functioning UK rulebook in the event of a no deal Brexit, the approach with regards to marketing in UK of foreign EEA UCITS and AIFs has been designed to ensure a smooth transition for a period of at least two to three years, with some minor adjustments to the current marketing authorisation practices once the transition period will be over.
Similar approach seems the one that will be adopted by the EU, when making sure that one of the main elements required in the regulatory architecture of the relations of the EU vis-à-vis third countries are put into place well ahead of time. This is far from being exactly a concession to the UK, rather a late awakening to the consequences, both in terms of investor protection and risk monitoring, ensuing from the very deep interconnection of the UK and the EU and the fact that a very large part of market participants are based there today in light of a no deal withdrawal.
Memorandum of Understanding ESMA solution to a no-deal?
The majority of the EU regulation on financial services contains provisions to cater for situations where a non-EU – third country – element is involved. Let’s take an example from the fund management industry that is very relevant to the topic, which is delegation to a third country entity of investment management from either an EU management company or fund. In a case like this, be it in the UCITS or AIFM directive scenario, there are clear requirements, both subjective and objective, in other words related to the entity itself or the specific non-EU domicile where the entity sits, imposed on the third country entity in order for the delegation to be acceptable. And these criteria are by and large also adopted in the case of the private placement authorisation under AIFM directive, as pre-conditions, as well as under MiFID II.
Amongst the objective requirements we count the existence of a memorandum of understanding between the authority of the third-country home state of the foreign entity and the corresponding EU home state authority of the management company or fund, in the case of delegation, or where the marketing will take place, in case of the private placement or where the services will be provided for MiFID II. Now, this might represent an issue going forward for the United Kingdom, which is still part of the EU, because for this very reason there has been no need so far to have a memorandum of understanding nor there is one in place with the rest of the EU 27.
In re-thinking the general approach of the EU towards third countries, Steven Maijoor in his speech stresses also the importance played by supervision and enforcement in European markets at a more general level. The purpose of a memorandum of understanding is to ensure that there is cooperation in place between the third country and the relevant EU domicile with regards to the exchange of information that are vital to ensure that systemic risk is prevented in Europe and that safeguard and protection of investors interests is attained. The confirmation that works to establish this framework and to put in place such memorandum of understanding with the UK at the EU-27 level gives additional level of comfort that, no matter what deal will be adopted, there will be continuity of market operations between the EU and the UK and a smooth transition, for a while.
More countries than we could have ever expected have been engaging bilaterally in order to solve potential gaps between regulatory systems and ensuing regulation. This has happened at all levels and not only in the fund management industry. Some findings from a recent report of the European Commission on equivalence decisions count at least 212 equivalence decisions adopted by the European Commission on a total of 32 jurisdictions deemed equivalent accordingly.
What is more important is that over time a more robust practice around these decisions has been developed, which gives more certainty to this framework.
A potential scenario for a no deal Brexit?