What are the key points and considerations to note for the fund industry?

Background

European legislation has previously been dominated by Directives, which can be adopted using a variety of measures. Although Directives are useful as they cater for national differences in legal systems across EU Member States, flexibility in their application can lead to divergences in national rules which in some cases may result in regulatory arbitrage. The single rulebook aims to provide a unified regulatory framework for institutions across the EU with the intention of promoting and protecting the single market.

The European Supervisory Authorities’ (ESA) Founding Regulations were reviewed in 2019 and amended in January 2020. However, the COVID-19 pandemic and the departure of the UK from the EU have since dramatically altered the financial landscape. In this context, the Capital Markets Union (“CMU”) Action Plan published on 24 September 2020 requires the European Commission (“EC”) to both review the framework for supervising European capital markets as well as take further steps towards achieving the single rulebook by Q4 2021.

Key points                                                                              

Expanding the existing toolkit

The EC looked at the effectiveness and scope of the ESAs’ existing supervisory toolkit. While common supervisory actions (“CSAs”) and the new process for Peer Reviews were positively received, The European Securities and Markets Authority (“ESMA”) noted that the new processes for Q&As and No Action Letters have not been fit for purpose.

Increasing direct supervisory powers

The controversial issue of a potential expansion of ESMA’s supervisory responsibilities and powers was also tackled.

Currently, most asset managers are already regulated at an EU level by the UCITS or AIFM Directives. ESMA makes the case that direct supervision could help to mitigate the risk of regulatory arbitrage often associated with the extensive use of cross-border delegation.

Another strong proposal is to have ESMA stand as a gatekeeper to the EU market, in particular vis-à-vis non-EU entities servicing the European market. ESMA also believes that the best outcomes will be achieved if supervision  and enforcement work hand in hand.

On the other hand, national competent authorities (“NCAs”) are well-established in supervising asset managers in their jurisdictions, due to their knowledge of and proximity to local markets. Furthermore, the daily operations of a management company are often governed by local rules and laws. As such, granting additional direct supervisory power to the ESAs may risk the ESAs and NCAs being drawn into conflicts.

Applying flexibility for the timelines to develop technical standards and guidelines

The ESAs are often not given sufficient time to consult on technical matters, resulting in Level 2 and 3 outputs that are rushed. Increasing the timelines and adjusting the granularity and sequencing of Level 1, 2 and 3 regulatory changes would allow the ESAs to provide more relevant and appropriately detailed responses for asset managers.

What’s next?

Only 18 months have lapsed since the ESAs’ Regulations were updated and any assessments of, or changes to, the single rulebook and supervisory powers may be premature. While any changes may not be applicable in the immediate future, the path to convergence is expected to be winding, in particular where reforms would meddle in national prerogatives. 

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