In order to mitigate the potentially highly damageable consequences of a no-deal Brexit for the financial markets, and in particular the investment fund industry, the European Securities and Markets Authority (ESMA) and the European securities regulators have agreed the text of two Memoranda of Understanding (MoUs) with the Financial Conduct Authority (FCA) of the United Kingdom (UK).

The MoUs form part of authorities’ preparations should the UK leave the EU without a withdrawal agreement, the no-deal Brexit scenario which the markets wish to avoid as much as possible. The MoUs will therefore only take effect in the event of a no-deal Brexit scenario. The MoUs are inspired from those already concluded on the exchange of information with many third-country supervisory authorities.

The first MoU, to be entered into between ESMA and the FCA, concerns the exchange of information in relation to the supervision of credit rating agencies (CRAs) and trade repositories (TRs). This MoU will allow ESMA to continue to discharge its mission and meet its mandate regarding investor protection, orderly markets and financial stability in the EU.

The second MoU, a multilateral MoU, concerns the EU/EEA securities regulators and the FCA and covers the supervisory cooperation, enforcement and information exchange between individual regulators and the FCA, and will allow them to share information relating to, amongst others, market surveillance, investment services and asset management activities. This, in turn, will allow certain activities, such as fund manager outsourcing and delegation, to continue to be carried out by UK based entities on behalf of counterparties based in the EEA.

The Luxembourg regulator, the Commission de Surveillance du Secteur Financier (CSSF), as well as the other actors of the Luxembourg fund industry, are also preparing themselves to the no-deal perspective.

The CSSF has thus recently reminded the fund industry stakeholders under its supervision that legal provisions in Luxembourg fund legislation already permit the delegation of investment management/portfolio management and/or risk management activities to undertakings in countries outside the European Union under specific conditions. In the particular context of a “no deal” Brexit, the Luxembourg laws governing UCITS, AIFs and AIFMs, as well as SIFs and SICARs, allow for such delegations to undertakings in the United Kingdom, which would gain the status of a third country in case of a “no deal” Brexit, provided that (i) these undertakings are authorised or registered for the purpose of asset management, (ii) are subject to prudential supervision and that (iii) cooperation between the UK FCA as supervisory authority of these undertakings and the CSSF is ensured. The CSSF endeavours that the required cooperation between the UK FCA and the CSSF shall be in place on 29 March 2019 in the event of a “no deal” Brexit. On this basis, da elegation of investment management/portfolio management and/or risk management to UK undertakings shall continue to be possible without any disruption post-Brexit, under the condition that the UK delegatee continues to fulfil all applicable requirements.

(source: ESMA and CSSF press releases January 2019)