ESMA Signals Close Monitoring of Non-EU Branches Post-Brexit

As a hard Brexit is becoming likelier ESMA signals its intentions to closely observe the conduct of EU with branches

The European Securities Markets Authority (ESMA) is very much focused on the ongoing Brexit preparations. As the official Brexit date is getting closer, both sides of the English Channel are yet to agree on a deal. In the meantime, the ESMA is monitoring the situation closely.

A hard Brexit is getting closer to reality, and the ESMA is signaling its intentions to closely observe the conduct of European companies with branches in the UK. The EU’s supra-national regulator published a document which outlines its intentions on the supervision of non-European Union (EU) branches of EU firms that provide investment services and activities.

The document is aimed to facilitate the conduct of national regulators which should be monitoring the establishment by EU firms of branches in non-EU countries. A  cooperation agreement between the ESMA and the FCA should facilitate the process. Both sides already reached a deal regarding clearing of financial instruments.

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Reporting and Data Collection

Companies that are planning to open a subsidiary outside of the EU have to inform relevant national regulators about their intentions. The move is targeted at subsidiaries in the UK but provides guidelines to national regulators about non-EU branches in general.

Ongoing activities of non-EU branches including reporting and collection of information should be well monitored. Therefore the ESMA urges national regulators to obtain information from their regulated entities.

Firms should provide their home supervisors in their EU Member State with all the relevant information on any new non-EU branches that they plan to establish. 

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After that information is provided, the relevant national regulators are to examine the applicant’s programme of operations. Firms also are required to state “objective reasons on which the establishment of non-EU branches is based,” and to make sure that they comply with all the legal requirements stemming from the relevant EU legislation.

The ESMA also states that firms will need to elaborate on how the EU head office will be able to monitor and manage any non-EU branches arrangements. To ensure that competent authorities have full access to all information, they need to fulfill their supervisory function.

Implications Beyond the UK

The guidance which is published by the ESMA is focused on Brexit but doesn’t specify the UK as the location for new branches. Instead, the terminology used by the EU’s supra-national financial regulator is non-EU.

Technically offshore subsidiaries are included in this definition and firms might have to take into account some of their subsidiaries in non-EU jurisdictions beyond the UK. Recent trends in the industry suggest that a number of clients from the EU have been choosing to trade offshore.

That said, it is unlikely that the ESMA’s announcement should be interpreted outside of the impending Brexit event.

While the ESMA has no authority to mentor firms outside of its jurisdiction, it might choose instead to focus its attention on assessing the number of clients of domestic brokers that chose to open accounts outside of the EU.

Close monitoring of financial firms by the ESMA is nothing new. That said, the extent to which it intends to oversee the dealings of newly registered companies outside of the EU is news. In the meantime, as the clock keeps ticking, UK financial authorities are getting extra powers to be able to deal with a hard Brexit.

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