UK financial firms setting up entities in the EU27 countries are likely to try to keep those operations simple by running many activities and functions from the UK, ESMA said in an opinion addressed to EU national competent authorities (NCAs). It is important that this does not create risks to supervision and any such arrangements must be "strictly framed and consistently supervised", ESMA said.
"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 letterbox entities nor in creating obstacles to effective and efficient supervision and enforcement," it said.
The opinion sets out principles for NCAs. There should be no automatic recognition of existing authorisations, it said. Any authorisations granted must be rigorous and efficient, and NCAs should be able to verify the reasons for the relocations.
Special attention should be paid to avoid letterbox entities, and outsourcing and delegation to third countries should only be allowed under strict conditions.
NCAs must make sure that supervision requirements on outsourcing and delegation are met, ensure sound governance of EU entities, and be in a position to effectively supervise and enforce EU law.
All NCAs must also coordinate to ensure effective monitoring by ESMA, the regulator said.
"As the UK plays a prominent role in the EU single market, the relocation of entities, activities and functions following the UK’s decision to withdraw creates a unique situation which requires a common effort at EU level to ensure a consistent supervisory approach to safeguard investor protection, the orderly functioning of financial markets and financial stability," ESMA said.
NCAs need to prepare for the extra work that this will involve, ESMA said. A forum called the Supervisory Coordination Network will be set up for NCAs to report on and discuss cases, to help promote consistent decisions, while ESMA will issue question and answer documents, provide additional opinions, and conduct peer reviews, it said.
ESMA will now develop further guidance in areas including asset managers, investment firms and secondary markets to provide sector specific details, it said.
Financial services regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com said: "The opinion provides a timely reminder of the responsibilities of NCAs when assessing whether or not they should grant authorisation to a third country business, which, unless and until a different deal is struck is what the UK will be following Brexit."
"NCAs should be looking for a genuine business being established in the jurisdiction and apply properly rigour to assessing any application rather than being motivated by a desire to increase market share. UK businesses seeking to set up in an EU27 jurisdiction should approach the process expecting to be fully assessed without any fast-tracking or special treatment. This means that businesses need to be thinking of submitting applications in the next six to nine months to allow time for the relevant NCA to make their assessment," she said.