The Front Page, Asset Management & Investment Funds: EU & International Developments
ESMA issues principles on supervisory approach to relocations from the UK
The European Securities and Markets Authority (ESMA) published an Opinion setting out general principles aimed at fostering consistency in authorisation, supervision and enforcement related to the relocation of entities, activities and functions from the United Kingdom. The opinion is addressed to national competent authorities (NCAs), in particular of the 27 Member States that will remain in the EU (EU27).
The opinion aims to support supervisory convergence in the context of increased requests from UK financial market participants seeking to relocate to the EU27. It covers all legislation referred to in the ESMA Regulation, in particular the AIFMD, the UCITS Directive, MiFID I and MiFID II. It notes that in the course of the UK withdrawing from the EU, UK-based market participants may seek to relocate entities, activities or functions to the EU27 in order to maintain access to EU financial markets. These may seek to minimise the transfer of the effective performance of those activities or functions in the EU27, i.e. by relying on the outsourcing or delegation of certain activities or functions to UK-based entities, including affiliates. ESMA aims to ensure that the conditions for authorisation as well as for outsourcing and delegation do not generate supervisory arbitrage risks. The opinion points out that new authorisations must be granted in full compliance with Union law and in a coherent manner across the EU27. Any outsourcing or delegation arrangement from entities authorised in the EU27 to third country entities should be strictly framed and consistently supervised. Outsourcing or delegation arrangements, under which entities confer either a substantial degree of activities or critical functions to other entities, should not result in those entities becoming letter-box entities.
The opinion sets out the following principles which are applied to the specific case of relocation of entities, activities and functions following the UK’s withdrawal from the EU.
- Principle one: No automatic recognition of existing authorisations.
- Principle two: Authorisations granted by EU27 NCAs should be rigorous and efficient.
- Principle three: NCAs should be able to verify the objective reasons for relocation.
- Principle four: Special attention should be granted to avoid letter-box entities in the EU27.
- Principle five: Outsourcing and delegation to third countries is only possible under strict conditions.
- Principle six: NCAs should ensure that substance requirements are met.
- Principle seven: NCAs should ensure sound governance of EU entities.
- Principle eight: NCAs must be in a position to effectively supervise and enforce Union law.
- Principle nine: Coordination to ensure effective monitoring by ESMA.
ESMA AIFMD and UCITS Q&As
ESMA published updated questions and answers documents (Q&A) on the application of the AIFMD and the UCITS Directive.
The AIFMD Q&As include three new questions and answers on:
- Reporting to NCAs on the breakdown between retail and professional investors;
- Notification of AIFMs on the AIFs to be managed, if domiciled in another Member State; and
- Use by an AIF of the exemption for intragroup transactions under Article 4(2) of Regulation (EU) 648/2012 (EMIR), if subject to the clearing obligation of Article 4(1) of EMIR.
The UCITS Q&As include one new question and answer on:
- Application to UCITS of the exemption for intragroup transactions under Article 4(2) of EMIR, if subject to the clearing obligation of Article 4(1) of EMIR.
On 16 May 2017, the Council of the EU published a press release announcing that it has adopted the Regulation on money market funds (MMF Regulation). The MMF Regulation will enter into force 20 days after its publication in the Official Journal of the EU (OJ). Most provisions in the legislation will apply twelve months after the date of entry into force.
ESMA published a Consultation Paper (CP) on the MMF Regulation, closing on 7 August 2017. The CP contains proposals on draft technical advice (TA), draft implementing technical standards (ITS), and guidelines under the MMF Regulation. The key proposals relate to asset liquidity and credit quality, the establishment of a reporting template and stress test scenarios. ESMA aims to finalise the TA and ITS for submission to the EU Commission, and issue the guidelines, by the end of the year.
On 11 May 2017, a corrigendum to the text of revised EU Commission Delegated Regulation (EU) 2017/653 was published in the OJ.
The Delegated Regulation supplements the Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards regarding the presentation, content, review and revision of KIDs and the conditions for fulfilling the requirement to provide KIDs. The corrigendum amends certain formula that appear in Annex II and Annex IV to the Delegated Regulation. The Delegated Regulation came into force on 2 May 2017. It will apply from 1 January 2018, and Article 14(2) will apply until 31 December 2019.
ECON report on FinTech
On 3 May 2017, the European Parliament's Committee on Economic and Monetary Affairs (ECON) published a report on FinTech and the influence of technology on the future of the financial sector. The associated press release urges the EU Commission to create “a comprehensive Action Plan in the framework of Capital Markets Union and Digital Single Market”. Key priorities identified are:
- Cybersecurity and data protection,
- Level playing field,
- Interoperability and passporting, and
- Room for controlled innovation and fostering financial education and IT skills.
Anti- Money Laundering/ Combating the Financing of Terror/ Corruption
ESA guidelines on risk-based supervision under 4AMLD
NCAs must notify the ESAs as to whether they comply or intend to comply with the guidelines (or give reasons for non-compliance) by 7 June 2017. NCAs will be considered to be non-compliant if they do not give notification by the deadline. The guidelines specify the characteristics of a risk-based approach to AML/ CTF supervision. They also set out what NCAs should do to ensure that their allocation of supervisory resources is appropriate for the level of money laundering and terrorist financing risk associated with credit and financial institutions in their sector. Specifically, the guidelines require NCAs to identify and assess the money laundering and terrorist financing risk to which their sector is exposed, and adjust the focus, intensity and frequency of supervisory actions in line with the risk-based approach.
List of high-risk third countries under 4AMLD
Article 9(2) of 4AMLD gives the EU Commission the power to adopt delegated acts identifying high-risk third countries. On 17 May 2017, the European Parliament published a press release announcing it has voted in plenary to adopt a resolution objecting to the revised proposed Delegated Regulation amending the EU Commission's list of high-risk third countries under the Fourth Money Laundering Directive (4AMLD). A provisional version of the resolution has been published. The resolution notes that the EU Commission proposes amending the list by adding Ethiopia and removing Guyana from the list.
In January 2017, the Parliament objected to the original version of the proposed Delegated Regulation (which mirrored the FATF list) and called on the EU Commission to submit a revised version. The Parliament considers that the EU should have an independent, autonomous process for determining whether countries pose a threat of financial criminality, rather than relying on the judgement of an external body. The resolution:
- objects to the EU Commission's revised proposed Delegated Regulation;
- instructs the Parliament's President to forward the resolution to the EU Commission and notify it that the revised proposed Delegated Regulation cannot enter into force;
- calls on the EU Commission to submit a new delegated act that takes account of the concerns set out in the resolution, including the Parliament's recommendation to adopt a roadmap, to deliver an autonomous evaluation process; and
- instructs the Parliament's President to forward the resolution to the Council of the EU and the governments and parliaments of the EU member states.
Wolfsberg Group guidance on PEPs
- The definition of a PEP
- The definitions of "close family members" and "close associates" of a PEP
- The identification of a PEP and their close family members or close associates
- Control by PEPs of organisations, state-owned entities and public sector bodies
- Key components of the PEP risk management framework
- Declassification of PEPs
- PEP screening
The guidance replaces the Wolfsberg Group FAQs on PEPs published in May 2008. The Wolfsberg Group has updated its webpage on FAQs. The webpage also notes that the Wolfsberg Group's FAQs on selected anti-money laundering issues in the context of investment and commercial banking are currently under review and have temporarily been removed from the website.
The publication statement sets out suggested actions that could be taken to address corruption relating to PEPs, such as governments issuing PEP lists relevant to their jurisdictions, reputable media and non-governmental organisations highlighting the most corrupt countries and regimes, and regulators adopting a more risk-based approach to assessing Financial Institutions' PEP regimes.
For more information please contact a member of the Asset Management & Investment Funds Team.
Date Published: 31 May 2017