* Securities watchdog seeking to avoid “race to bottom”
* Secondary trading decisions can’t be outsourced to London
* Regulators should not employ fast-track authorisation
* Asset managers brought into line with hedge funds
(Adds comment from French regulator)
By Carolyn Cohn and Maiya Keidan
LONDON, July 13 (Reuters) – Regulators should prevent
investment firms from setting up shop in one jurisdiction to
avoid stricter controls in their home state, the European
Union’s markets watchdog said, as centres such as Dublin,
Frankfurt and Paris vie for business.
EU authorities are concerned about a “race to the bottom” as
financial services firms shift operations after Britain leaves
the bloc in 2019, amid reports businesses are being set up that
are effectively no more than postal addresses to take advantage
of more lenient rules in some countries.
Ireland has complained to the European Commission that it is
being undercut by rival centres, Reuters reported in March.
National securities regulators should “mitigate the risk of
letter-box entities and ensure that any relocation is
effective”, the European Securities and Markets Authority (ESMA)
said in an ‘opinion’, or formal guidance, on Thursday.
Regulators should ensure senior management are based in the
home jurisdiction of the firm and that “board members and senior
managers in the EU27 have effective decision-making powers, even
where the investment firm is part of a group”, ESMA said.
If regulators believe that investment firms, such as
broker-dealers including the trading arms of banks, are not
genuinely operating in their home jurisdiction, “this may
provide grounds for not granting or withdrawing authorisation”,
ESMA said.
ESMA also said regulators should not design “fast-track”
authorisation processes.
Financial professionals have said the speed with which they
can set up in various jurisdictions has contributed to their
decision-making on EU operations after Brexit.
“I think that the fast-track prohibition is targeted at the
French – the AMF have offered UK-based fund managers a quick
authorisation process if they move from London to Paris,” said
Neil Robson, a partner at law firm Katten Muchin Rosenman.
France’s AMF regulator has launched the “2WeekTicket” (TWT),
a fast-track pre-approval process for firms already authorised
by Britain’s Financial Conduct Authority.
“ESMA is saying that a quick authorisation to leave the UK
cannot be acceptable and that there are formal mandated
authorisation processes that have to be followed,” Robson said.
The AMF said the TWT was “not a licence or an authorisation”
but a first-review service aimed at identifying whether there
was any major obstacle to doing business in France.
“It does not substitute the normal complete authorisation
process for asset managers willing to establish in France,
whether they were previously located in the UK or not,” a
spokeswoman said. “To our knowledge, there is no specific
concern from ESMA regarding the TWT.”
Lawyers also said the guidance risked a lessening of
national regulators’ powers.
“Is there some form of disintegration of the (regulators’)
ability to make rules in relation to their own jurisdiction, and
govern their own authorisation process?” said Monica Gogna,
funds lawyer at Ropes & Gray.
SECONDARY TRADING
In a separate opinion on secondary trading, ESMA said
decision-making for designing, controlling and monitoring
trading systems’ operations should not be outsourced outside the
EU.
The broker-dealer trading arms of banks in Britain have
previously asked EU regulators whether their entities in the
other 27 EU states will still be allowed to outsource operations
to London once Britain leaves the bloc.
“ESMA considers it necessary that conditions for outsourcing
activities to UK-based entities do not generate regulatory and
supervisory arbitrage risks,” the watchdog said.
In a third opinion, ESMA said regulators should also prevent
asset managers from setting up letter-box operations, bringing
them into line with rules applying to hedge funds.
“It is a big development because the ‘letter-box’ concept is
only a … hedge fund idea,” said Leonard Ng, co-head of the EU
financial services regulatory group at law firm Sidley Austin,
adding legislation for other asset managers “has not previously
been as prescriptive”.
ESMA said regulators should keep a close eye on investment
managers who set up operations with fewer than three full-time
staff.
“Granting authorisations to relocating entities should not
result in a situation in which these entities could continue to
perform substantially more portfolio management and/or risk
management functions for the relevant funds in their original
member state,” it said.
Chris Cummings, chief executive of Britain’s Investment
Association, said he supported ESMA’s setting of “robust
standards” for UK investment management firms doing business
with the EU after Brexit.
(Additional reporting by Simon Jessop; Editing by Keith Weir
and Mark Potter)
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