Brexit safeguards to stop asset managers in Britain running “shell” investment funds in the European Union to retain access to its markets should be hardwired into EU law, the bloc’s securities watchdog said on Wednesday.
After Britain voted in 2016 to leave the EU, the European Securities and Markets Authority (ESMA) issued guidance on minimum “substance” or senior boots on the ground at EU funds typically domiciled in Dublin and Luxembourg and whose portfolio management has been “delegated” to London.
“Moreover, in light of the withdrawal of the UK from the EU, delegation of portfolio management functions to non-EU entities is likely going to further increase,” ESMA said in a letter to the bloc’s financial services chief Valdis Dombrovskis.
ESMA said there was merit in providing “clearer legal drafting” in the bloc’s laws on substance and delegation requirements in line with its earlier Brexit guidance.
The EU may want to back up the “qualitative” criteria on substance with clear quantitative criteria, or provide a list of core or critical functions that may not be delegated at alternative and mutual funds, ESMA said.
“Put simply, this is an attack on London,” said Jake Green, a financial regulatory partner at Ashurst law firm.
“It is also doubtful that Luxembourg and Ireland will be happy with this as it could materially impact their fund offerings,” Mr. Green said.
A pending review of EU alternative fund rules that cover hedge funds and private equity funds was an opportunity to consider “greater harmonisation” with regulations governing mutual funds known as UCITS, ESMA said.
Alternative funds must report exposures to real estate and corporate debt to enable authorities to assess if they have enough liquidity in a market crisis.
ESMA said it was “sub optimal” that it does not have access to similar data on UCITS without extensive ad hoc data requests that slow down analysis.
ESMA is already checking on liquidity at UCITS.
“This assessment should be based on the analysis of how funds have reacted since the onset of the COVID-19 pandemic and their current situation, and on an estimation of their resilience to a future shock,” ESMA said.
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