knowledge 27 September 2017 |

ESMA’s Proposed New Powers - Implications for Funds and Fund Managers

In particular:

• ESMA will have a more direct impact on the authorisation and supervision of funds and their managers, particularly in the areas of outsourcing, delegation and risk transfer; 
• the private sector, including funds and their managers, will be expected to partially fund ESMA and the two other European Supervisory Authorities, namely the EBA and EIOPA. 
• ESMA will be appointed as the sole supervisory authority in respect of the EuSEF ¹ , EuVECA ², and ELTIF ³ Regulations; and
• the product intervention powers set out in the Markets in Financial Instruments Regulation 600/2014 (“MiFIR”) will be extended to cover UCITS Managers and Alternative Investment Fund Managers (“AIFMs”).

Authorisation and Supervision

One of ESMA’s key objectives is the convergence of supervisory practices in the EU, through the promotion of an EU supervisory culture. The Commission is proposing to amend Regulation 1095/2010, which establishes ESMA, to equip ESMA with additional tools to achieve this objective. The proposed amendments include the power to set an over-arching Strategic Supervisory Plan (“SSP”), and to coordinate supervisory action in the delegation and outsourcing of activities as well as risk transfers.

The Strategic Supervisory Plan (SSP)

ESMA will be empowered to set EU-wide supervisory priorities and objectives in the SSP.  Each of the National Competent Authorities (“NCAs”), including the Central Bank of Ireland, will then be required to submit its draft annual work programme to ESMA for consideration, specifically stipulating how that draft programme is aligned with the SSP.  Each NCA will also be required to transmit a report to ESMA on the implementation of its annual work programme.

Delegation, Outsourcing and Risk Transfers

ESMA will be given additional powers to effectively coordinate supervisory action both when an NCA is authorising or registering an undertaking and as part of an ongoing review of supervisory practices. This includes, in particular, additional powers to ensure coordinated supervisory action in the areas of delegation and outsourcing as well as in relation to risk transfers.

Under the Commission's proposed amendments, an NCA must notify ESMA if:

1. it intends to authorise or register a financial market participant to benefit from the EU passport; and
2. the relevant participant intends to perform substantial activities or functions outside the EU.

ESMA may then issue an opinion to the relevant NCA if it is of the view that the notified authorisation or registration does not comply with EU law or guidelines, recommendations or opinions adopted by ESMA. This opinion must be issued at the latest within 2 months of the receipt of the relevant notification.

Each financial market participant will also be required to notify its relevant NCA when it intends to outsource or delegate a material part of its activities or any of its key functions and/or the risk transfer of a material part of its activities, to another entity or its own branch established in a third country.  Each NCA will then have to inform ESMA of such notifications on a semi-annual basis.

It appears that in each case ESMA will be able to issue recommendations to the NCA concerned, including recommendations to review a decision or to withdraw an authorisation, on a comply or explain basis.

Funding 

Currently ESMA is funded by a general contribution from the EU General Budget, contributions from the NCAs as well as supervisory fees paid by the entities that it supervises directly.

The Commission is proposing to replace the funding from the NCAs with direct contributions from financial institutions and financial market participants and to adopt a delegated act specifying how these contributions will be calculated. According to the Commission, the delegated act will provide for:

• the distribution of the total amount of the annual contributions among the different categories of financial institutions and market participants; and
• objective criteria providing for the calculation of the individual annual contribution to be paid by each financial institution and market participant – individual contributions will be determined on the basis of the size of the relevant institution/participant and will be subject to a de minimis threshold.

EuSEF, EuVECA and ELTIF Regulations

The EuVECA and EUSEF Regulations introduced specialised fund structures with the objective of making it easier for market participants to raise and invest capital in innovative small and medium-sized enterprises and social undertakings throughout the EU. The ELTIF Regulation introduced the European Long-term Investment Fund, or “ELTIF” which targets investments in the real economy, such as infrastructure projects, with an enhanced focus on long-term investing.

Currently, the NCAs are primarily responsible for the authorisation and supervision of the above types of investment funds and their managers. The European Commission is proposing to amend the EuSEF, EuVECA and ELTIF Regulations to transfer the NCAs’ powers to ESMA so as to ensure a uniform application of the rules, with the aim of allowing “managers to lower transaction and operational costs and strengthen investor choice.”

MiFIR Intervention Powers

MiFIR will introduce product intervention powers for ESMA and NCAs on 3 January 2018. These powers can be applied to firms authorised under the MiFID II Directive 2014/65 and credit institutions authorised under the Capital Requirements Directive 2013/36.

The Commission is proposing to amend MiFIR to explicitly extend the product intervention powers to UCITS Management Companies, UCITS investment companies and AIFMs.

Next Steps

This Commission’s proposal is still at the initial stages of the legislative process and must be considered by both the European Parliament and the Council of Ministers before progressing to trilogue negotiations.  This process can take some time. Moreover, as the Commission’s proposals are controversial in a number of respects and will result in a relatively significant extension of ESMA’s powers, as well as those of the two other ESAs, they could well be watered down during the legislative process.  For the moment, therefore, it's business as usual for ESMA, the Central Bank and other supervisory authorities.