Existing cross-border business models are being called into question as three separate debates coalesce: supervisory convergence, third-country provisions and “Brexit”. Firms should plan for the rules and the supervisory approaches looking different in 2020 than today.
ESMA’s 2017 Supervisory Convergence Work Programme aims to promote sound, efficient and consistent supervision across the European Union. It commits itself and the national regulators to eight cross-cutting activities and seven thematic activities, one of which covers fund management and another the third-country regimes.
Will those national regulators that currently allow such share classes amend their approach, and if they do not, what will be the reaction of other regulators?
A recent example of ESMA’s supervisory convergence work was its guidance that hedged UCITS share classes (other than for currency) should not be allowed but instead should be separate funds or sub-funds. Any such existing share classes should be closed for investment by new investors by the end of July 2017 and for additional investment by existing investors by July 2018. Will those national regulators that currently allow such share classes amend their approach, and if they do not, what will be the reaction of other regulators?
Steven Maijoor, ESMA’s chair, has stressed to European Parliamentarians the need for greater supervisory convergence within the EU. He highlighted the fact that because the provision of cross-border financial markets services is relatively easy, a substantial share of national supervision concerns cross-border activities. The question is whether national regulators sufficiently assess and address the risks that their supervised entities might be creating outside their jurisdiction? Mr Maijoor also took the opportunity to observe that the UK’s decision to leave the EU results in increased risks to consistent supervision, urging national regulators not to compete on regulatory and supervisory treatment.
There is a diversity of third country provisions under different EU legislative texts and some have no “equivalence” regime. The provisions in MiFID II, AIFMD and the UCITS Directive are all quite different, for example. ESMA is calling for clarification and consistent approaches at EU level. Meanwhile, the industry awaits equivalence judgements under MiFID II and the Commission’s decision on the AIFMD non-EU passports.
Mr Maijoor went further and called for a fundamental review of the current patchwork of third country provisions in EU legislation, which is not fit for purpose. There is no generic framework. There are different arrangements in different pieces of legislation – which are a mixture of equivalence, endorsement, recognition or passporting – or no arrangement at all. Also, the framework is time and resource-intensive, requiring detailed assessments of other countries’ regimes and lengthy negotiations if a country is not initially adjudged equivalent.
It remains to be seen how quickly and in what way the co-legislators will respond to this call for an overhaul of the system. Certainly, it would be a major drafting and practical task to bring about greater consistency of approach. Political pressures, in Europe and beyond, may provide momentum. In the meantime, firms and market entities need to consider that the delegation and third-country provisions of today may look rather different by 2020, and plan accordingly.
Julie Patterson is the Head of the Regulatory Centre of Excellence for Investment Management Regulation. Prior to joining KPMG in 2014, Julie spent 15 years at the Investment Management Association and its predecessor (AUTIF). On the creation of the IMA in 2002, she established the regulatory function, covering investment management regulation, buy-side dealing, segregated mandates, capital requirements and operations. In recent years, she has focused on directing IMA’s work across all aspects of collective investment funds – product regulation, distribution, fund administration and financial reporting, tax and legal. Through many years of working with the European Federation (EFAMA), Julie has acquired a broad knowledge of the different fund and distribution structures around the EU.
Julie Patterson will be presenting and moderating a number of discussions on regulatory changes at the upcoming FundForum International, taking place in Berlin 12-14 June 2017.