Brexit Relocations - All Together Now

Efforts to attract Brexit relocations have prompted certain commentators to warn against a race to the bottom on the part of some member state regulators. In response, ESMA has published an Opinion (here) intended to promote regulatory and supervisory convergence. The Opinion emphasises the need for an effective authorisation process and to avoid establishing “letter-box” entities. It is consistent with the Central Bank of Ireland’s ("Central Bank’s") recent public statements in relation to its approach to relocations.

ESMA’s Relocation Principles

The Opinion sets out nine general “relocation principles” to be applied by member states’ national competent authorities ("NCAs") when considering authorisation applications from entities relocating in response to Brexit (and other third country applicants) ("entities"). The relocation principles have two key objectives, namely to ensure:

  • new authorisations are granted in full compliance with EU law and in a coherent manner across the EU; and
  • outsourcing or delegation arrangements from EU authorised entities to third country entities are strictly framed and consistently supervised.

ESMA intends to develop sector-specific opinions in areas such as asset management, investment firms and secondary markets.

While there is some degree of overlap between the various principles, they provide a number of take-aways for entities regarding both the authorisation process and the need to avoid letter-box entities.

The Authorisation Process

Each entity will need to undergo an efficient and rigorous authorisation process and should approach the relevant NCA as early as possible. While an NCA cannot automatically recognise an existing authorisation granted by a third county regulator, it can take some aspects of that regulator’s assessment into consideration, for example with respect to fitness and probity requirements.

An entity will be expected to provide the relevant NCA with a detailed programme of operations. This programme should provide a clear justification for relocating to the proposed member state of establishment and provide the relevant NCA with a clear view on the geographical distribution of planned activities from the perspective of targeted clients and/or services.

Any entity that intends to conduct the greater part of its activities in other member states should expect to be asked to satisfy the NCA of the member state of establishment that it has chosen that member state for reasons other than to evade stricter regulatory standards in force in other member states.

Letter-box Entities

An entity must employ key executives and senior managers of EU authorised entities and dispose of decision-making powers in the member state of establishment. While an entity may outsource or delegate certain functions, it cannot do so to the extent that it becomes a “letter-box entity.” Nor can it outsource or delegate its responsibilities for those functions. In particular the entity must retain the ability to direct and control those functions, which includes having the technical knowledge and the capability to request the necessary changes to outsourced or delegated services, to monitor the relevant deployment and to assess the quality of those services provided.

In certain sector specific circumstances, an entity will not be able to outsource important functions without threatening the entity’s activities and its effective supervision. These functions comprise internal control functions, IT control infrastructure, risk assessment, compliance functions, key management functions and sector-specific functions. Moreover, each entity must ensure that the substance of its decision-making is present in the EU and it cannot seek to outsource or delegate this substance outside the EU.


The Central Bank’s current approach to authorisations is largely consistent with ESMA’s relocation principles.

As the Central Bank has repeatedly stressed, the authorisation process forms an important part of its supervisory model and the Central Bank is committed to providing a clear, consistent, open and transparent authorisation process, while ensuring a rigorous assessment of the applicable regulatory standards. The Central Bank has also frequently emphasised the need for applicants to demonstrate substance in Ireland.

According to the Central Bank’s recently published Annual Performance Statement, it expects to receive a number of Brexit related applications from UK entities. Key elements that will form part of any authorisation process include:

  • the expectation that the business will be run from Ireland, the board and effective management of the entity will be located here and that commercial and business decisions will be taken here.  This flows through to the Central Bank’s expectations regarding the entity’s staffing arrangements;
  • the entity’s own understanding of the risks to its business, how they are managed by local management and mitigated;
  • ensuring that the customer’s interests are central to the business proposition; and
  • ensuring that there are strong controls and oversight in place for outsourcing arrangements that are in line with sound practices. While the activity may be outsourced, responsibility may not and must remain with the Irish firm.

Any entity that meets the Central Bank's regulatory standards can expect to be authorised in Ireland. We expect the Central Bank will, of course, perform its own analysis on the impact of any of the principles on its existing authorisation requirements although we do not expect any material adjustments will be necessary.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.