EU watchdog flags harder line on cross-border funds management

Brexit safeguards to stop asset managers in Britain running “shell” investment funds in the European Union to retain access to its markets should be hardwired into EU law, the bloc’s securities watchdog said on Wednesday.

After Britain voted in 2016 to leave the EU, the European Securities and Markets Authority (ESMA) issued guidance on minimum “substance” or senior boots on the ground at EU funds typically domiciled in Dublin and Luxembourg and whose portfolio management has been “delegated” to London.

“Moreover, in light of the withdrawal of the UK from the EU, delegation of portfolio management functions to non-EU entities is likely going to further increase,” ESMA said in a letter to the bloc’s financial services chief Valdis Dombrovskis.

ESMA said there was merit in providing “clearer legal drafting” in the bloc’s laws on substance and delegation requirements in line with its earlier Brexit guidance.

The EU may want to back up the “qualitative” criteria on substance with clear quantitative criteria, or provide a list of core or critical functions that may not be delegated at alternative and mutual funds, ESMA said.