Last week, the European Commission issued a proposal for a new regulation which, if enacted, will mark a renewed commitment to centralise the supervision of EU-regulated asset managers.  (For our detailed Client Update on the topic, click here.)  Parts of the proposal are clearly motivated by a fear that, in anticipation of the UK’s withdrawal from the EU, British-based managers will establish EU-authorised entities to benefit from the freedoms of the single market, while delegating almost all significant decision-making functions to a UK (or other non-EU) entity.  If the co-legislators approve it, the regulation will move significant power away from national regulators – who, the Commission appears to believe, will not police EU law effectively – and put it into the hands of the Paris-based supervisor, ESMA.  

One of the Commission’s most important proposals would give ESMA – the European Securities and Markets Authority – jurisdiction to intervene in any case where a prospective alternative investment fund manager (AIFM) seeks a new authorisation and the AIFM intends to delegate significant functions outside the EU.  The local regulator will be unable to confirm authorisation until it has received ESMA’s assessment of the conformity of the proposed arrangements with EU law.  And, although ESMA will not have direct power to force a national supervisor to comply with any recommendations it makes, the domestic regulator will be obliged to explain itself in the event that it does not.  ESMA will also have similar powers when an existing AIFM seeks to delegate more functions outside of the EU. 

Whatever ESMA’s formal powers of coercion, the result of this change – if accepted by the Council and the Parliament – would undoubtedly be a more consistent application of the rules on delegation across the EU.  And although it would not change the law, which already requires significant substance in the Member State in which an AIFM is located, ESMA’s new oversight power would limit the ability of a national regulator to interpret the law in a minimalist way.

In a further attempt to centralise financial services oversight, the Commission has also proposed that any EU-labelled products that are directly subject to EU regulation – most notably, the EuVECA (venture capital regulation) and ELTIF (the long-term investment fund) – should be directly supervised by ESMA.  This apparent attempt to oust the role of national regulators in what may become increasingly important regulatory wrappers has previously been mooted by the European Parliament but, until now, it has not had significant support elsewhere.  Whether it survives the legislative process this time will be a good test of the willingness of the Member States to accept ESMA’s increasing role – an outcome that seems more likely now that the UK does not have a seat at the table.