EU Regulatory Update

Author: Clerkin Lynch LLP

Date Published 07/07/2022

ESMA focus on cross border provision of services

Different elements of the provision of services in cross border scenarios have been the focus of attention by the European Securities and Markets Authority (“ESMA”) in recent months.

ESMA published its peer review report on the supervision of cross-border activities of investment firms on 10th March 2022. Along with this peer review, ESMA also issued Article 16 recommendations directed to the Cyprus Securities and Exchange Commission (CySEC). This is the first time ESMA has issued such recommendations to a National Competent Authority (NCA).

The peer review included an assessment on how NCAs supervise the investment services that investment firms and credit institutions provide to retail clients on a cross-border basis using a MiFID II passport. This exercise focused on the AFM (Netherlands), BaFin (Germany), CNB (Czech Republic), CSSF (Luxembourg), CySEC (Cyprus) and MFSA (Malta) in light of the significance of their domestic firms’ cross-border activities. It is interesting to note that Ireland was not included in this.

In the peer review ESMA emphasised the need for home NCAs to significantly improve their approach in the authorisation, ongoing supervision and enforcement work, relating to investment firm’s cross border activities. This includes calibrating their supervisory work to the nature, scale and complexity of those firms’ cross-border activities and the risks they pose.

In addition to the peer review recommendations addressed to the NCAs, ESMA also issued two specific recommendations to CySEC under Article 16 of the ESMA Regulation. These recommendations aim to increase the human resources dedicated to the supervision of cross-border services of Cypriot investment firms, and to strengthen CySEC’s supervisory activities to effectively monitor, promote and enforce compliance by authorised firms.

Next steps

It is expected that ESMA will carry out a follow-up assessment in future years but in the meantime NCAs are expected to review their policies and procedures and upgrade them in accordance with this guidance. In practice this may mean new procedures for firms operating from Ireland.

Tied agents under MiFID II

Separately ESMA published a Supervisory Briefing in February 2022 regarding the supervision of firms using tied agents, in particular those based outside the EU.

The supervisory briefing sets out the common understanding of both ESMA and the National Competent Authorities’ (NCAs) on the supervision of firms using tied agents to provide investment services and/or activities and is aimed at ensuring convergence across the European Union (EU). The publication of this briefing has clearly been driven by considerations pertaining to Brexit. ESMA even notes that it’s monitoring of the activities of market participants from the United Kingdom (UK) inside the EU has illustrated that such a briefing will contribute to the development of a convergent EU supervisory culture and foster improved investor protection.

  • The briefing covers the following topics:
    supervisory expectations when firms appoint tied agents, and
  • supervisory expectations on firms using tied agents for on-going activities.

The briefing provides guidance for market participants regarding MiFID II provisions relating to tied agents and related requirements for compliance. There is a specific focus in the guidance to models where tied agents are legal persons and also where the tied agents are controlled by or have close links to other entities, including third-country entities.  Consultation on notifications for cross-border marketing and management of funds

The ESMA has also issued a consultation to stakeholders on the information and templates to be provided, and used by firms, when they inform regulators of their cross-border marketing and management activities under both the UCITS Directive and the AIFMD.

The purpose of the draft ITS and RTS is to facilitate the process for notifying cross-border marketing and management activities in relation to related funds (UCITS and AIFs). Defining harmonised information to be notified to competent authorities and determining common templates to be used by parties responsible for making the notifications, i.e. management companies, UCITS and AIFMs respectively, will facilitate this and accordingly this is the end goal of the consultation process.

The closing date for responses to the consultation is 9 September 2022. Relevant stakeholders include alternative investment fund managers, internally managed AIFs, UCITS, management companies, internally managed UCITS, and their trade associations, as well as investors investing into UCITS and AIFs and their representatives and associations.

Draft RTS and ITS will be finalised and submitted to the European Commission following the consultation period to be finalised.