The European Securities and Markets Authority (“ESMA”) foresees regulatory and arbitrage risks in Brexit and a potential “race to the bottom” as certain national regulators jostle for and grab UK market share. On 31 May 2017, ESMA delivered an Opinion on achieving a common approach to supervision among regulators in EEA member states in the context of Brexit.
ESMA concedes in the Opinion that “the UK plays a prominent role in the EU Single Market” and predicates the Opinion on the fact that the relocation of financial firms, activities and functions following the UK’s decision to withdraw from EU creates what it describes as “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.”
UK based financial market participants planning for a worse case “hard” Brexit scenario whereby UK becomes a “third country” and UK participants lose their passporting rights, are giving serious consideration to setting up an affiliate in one of the EU27 countries in order to retain passporting rights through and beyond Brexit, but not relocating lock, stock and barrel to EU27. ESMA acknowledges that UK participants will seek to minimise the transfer of the effective performance of those activities to the EU27 by relying on the outsourcing or delegation of certain activities to UK participants.
On 13 July, ESMA issued a further three opinions focussing on regulatory risks in collective investment management (i.e. UCITS and AIFS), MiFID investment firms and trading venues, respectively, putting flesh on the bones of the May Opinion.
All four Opinions assume a “hard” Brexit and no special bespoke deal with UK on Single Market access.
The May Opinion enumerates nine principles, broadly: