In a post-Brexit context, national financial regulators have allowed, in some cases, a wide use of delegation agreements. This is the finding of the European Securities and Markets Authority (Esma) in a peer review report published on 8 December. In this regard, Esma also noted that several financial institutions have relocated to the EU with limited technical and human resources.

In reviewing the supervision of fund governance by supervisory authorities in Luxembourg, France, the Netherlands and Ireland, the Esma-led review panel concluded that the supervisory practices of the Commission de Surveillance du Secteur Financier (CSSF) fall short of expectations. The report states that the CSSF “has authorised applicant firms for which the overall number of senior management and human and technical resources appears insufficient.” The point of attention is the same for all the authorities assessed, except for France which comes out positively on this point.

In addition, the four authorities examined do not meet supervisory expectations with regard to delegation agreements, noted Esma. In particular, the report points out that none of the supervisory authorities “carried out a full review of delegation arrangements, in particular the objective reasons for delegation and compliance with due diligence requirements.”

A right of reply

And that is not all. As regards the supervision of “white label” funds, investment structures built from a mix of underlying funds in order to provide multi-manager exposure and asset class diversification, the assessment committee indicated that the CSSF “did not specifically monitor this sector during the review period (...) and was not able to provide precise information on additional Brexit-related activities.” On the other hand, the report highlighted that the CSSF conducted a survey in the second quarter of 2021 on fund managers providing “white label” services.

Contacted, the CSSF said it had “intense exchanges” on the content of the report with Esma. However, as a consensus could not be reached on all the points, the CSSF wished to make use of its right of reply in the report. Indeed, the CSSF regretted that the document “does not reflect in all cases in a factual way the organisation in place of the selected fund managers and that it contains assumptions.”

“No impact” for the financial centre

Particularly with regard to “white label” funds, the CSSF refuted the conclusions and recalled that the Luxembourg sector has been subject to specific supervisory work, inter alia through the examination of licence extensions and on-site controls. The CSSF added that the increase in the activity of “white label” funds as a result of Brexit was only marginal. Overall, the CSSF expressed “strong disagreement with both the overall process and some of the individual conclusions.”

Finally, the CSSF explained to Delano’s sister publication Paperjam that the Esma report is only a “snapshot in time.” It also pointed out that it has a regulatory framework “ahead of many other European countries,” through the introduction in 2018 of “strict requirements in terms of substance and internal organisation for alternative investment fund managers.” As a result, the financial sector regulator believed that "the report will not affect the reputation of the financial centre,” which is heavily dependent on its delegation model.

This story was first published in French on . It has been translated and edited for Delano.