ESMA guides on passporting of financial services across the EU
Pan European financial regulatory body ESMA has published a Supervisory Briefing to ensure convergence across the European Union (EU) in the supervision of the cross-border activities of investment firms.
ESMA said that the free provision of services in the EU rests on the supervision of the home national regulators (NCAs) and on the cooperation between home and host supervisors. To this end, the briefing covers the following areas:
- authorisation of firms with cross-border plans;
- processing of passport notifications and their impact on the supervisory approach applied to firms;
- arrangements in place to carry out ongoing supervisory activities;
- carrying out of ongoing supervision; and
- carrying out of investigations and inspections.
Given the importance of the provision of investment services across the EU under MiFID II, and concerns that emerged in the past on instances of cross-border activities provided to the detriment of investors’ interests, the Board of Supervisors of ESMA decided to launch in 2021 a peer review on the supervision of cross-border activities of investment firms.
On 10 March 2022, ESMA published a peer review report on the supervision of cross-border activities of investment firms. In its report, ESMA identified the need for home supervisors to significantly improve their approach in the authorisation, ongoing supervision and enforcement work, relating to investment firm’s cross-border activities to retail clients. This includes calibrating their supervisory work to the nature, scale and complexity of those firms’ cross-border activities and the risks they pose.
Effective supervision of cross-border activities by home NCAs is crucial to ensure that retail clients benefit from the same level of protection regardless of where the firm providing those activities is based. In light of the pursuit of developing an effective European capital market, and retail investors increasingly accessing investment opportunities across the EU, ensuring investor protection and the proper functioning of the single market is a key mission for ESMA and NCAs. The supervisory briefing has been designed for supervisors as an accessible introduction to the supervision of cross-border activities to retail clients by investment firms in accordance with MiFID II. It summarises the key elements of the rules and also includes indicative questions that supervisors are expected to ask themselves, or a firm, when assessing the approach to the supervision of cross-border activities to retail clients of investment firms.
The content of the briefing is not exhaustive and does not constitute new policy. It has been designed to be used in the way that best fits with supervisors’ methodologies (whether distributing the briefings internally, or passing them to external bodies, such as auditors, for example). When supervising cross-border activities to retail clients, NCAs may consider the nature, scale and complexity of their firms’ cross-border activities and the risks they pose in prioritising any engagement in application of this supervisory briefing. However, ESMA is of the view that, to apply a risk-based approach in relation to the supervision of cross-border activities to retail clients, there are certain minimum steps/actions that need to be taken by the supervising NCA. This includes, at authorisation stage, assessing whether a firm has cross-border plans and whether it is fit to carry them out. It also means collecting minimum data on firms’ cross-border activities to retail clients on a regular basis (extent, complaints linked to cross-border activities, for example)
As part of their ongoing supervision, it also entails i) ensuring that specific cross-border risks are sufficiently captured in the general risk-based approach that the NCA applies and, ii) when performing investigations / inspections on overall firms’ activities, ensuring adequate representation of firms providing cross-border activities in the sample of firms selected and/or through samples relating to firms’ cross-border activities (e.g. selection of files of foreign clients) based on their nature, scale and complexity.
For instance, based on the information collected, the supervising NCA would need to then increase the focus on cross-border activities in its monitoring and/or investigations/inspections if it found out that firms are substantially active on a cross-border basis. The supervising NCA may also choose to prioritise its monitoring of certain types of cross-border activities depending on their scale and/or if they tend to target mostly retail clients or if they relate to complex and/or risky products.
The full ESMA Supervisory Briefing can be downloaded here.