ESMA sticks to Brexit flight opinion

The regulator’s sector-specific guidance continues to ‘state the obvious’ according to one regulatory lawyer.

The European Securities and Markets Authority has maintained its firm stance on private fund firms relocating as a result of Brexit in further advice to EU regulators.

The bloc’s regulator urged countries to enforce the ‘substance’ requirements of the Markets in Financial Instruments Directive, to avoid firms benefiting from an EU presence without the required commercial activity, in a document published on Thursday.

Regulators were also told to cast a more critical eye over due diligence and operations being outsourced.

“ESMA has said that UK firms cannot be allowed to establish letter box entities. It's stating the obvious, really,” Chris Dearie, regulation partner at MJ Hudson, told pfm.

Building up

The document builds on ESMA’s nine-point statement on firm relocation, issued in May, that said businesses must be able to justify a relocation to another member state on business grounds, and that regulators should not automatically recognize the authorization given by the UK regulator as a right to operate in their member state.

Law firm Debevoise and Plimpton argued the statement went beyond what was required by the Alternative Investment Fund Managers’ Directive.

“The AIFMD does not require objective reasons for relocation or require that an enhanced level of scrutiny be applied to applications where an applicant intends to carry on a majority of its activities in Member States other than its home Member State,” it said.