In an effort to harmonise investor protection across the EU and ensure effective market competition, a framework has been established for financial institutions, funds and market infrastructure established outside the EU to access European investors and markets. Under certain key pieces of current and proposed EU legislation, such access generally will require the determination of the "equivalence" of the local regulatory system governing the non-EU institution. Further, co-operation agreements may need to be put in place between the third country and a EU member state or ESMA. This note sets out the requirements for different types of market participants to gain access to the EU markets.
Currently, access to Europe for most sectors of the financial markets is based on national laws concerning marketing to customers and the so-called "regulatory perimeter." Such national laws differ quite drastically within Europe. For example, the UK's "overseas persons exclusion" allows a considerable amount of cross-border business to be done with regulated financial institutions and large corporates within the UK. It has been cited as one of the main reasons why the city of London has retained its status as a major financial centre for international business. In contrast, the position in much of continental Europe is unfavorable to foreign institutions wishing to deal with customers without local registration. A variety of European measures are aiming to provide a greater deal of consistency for the access of third country institutions. In this client note, we consider the position of institutions outside of Europe wishing to do cross-border business under proposed and recently published European legislation. Much of this legislation is either not yet in force or remains to be invoked so, in the interim, the existing maze of national laws remains to be navigated.
For third country financial sector participants to access the EU markets, in addition to being properly authorised and supervised in their own country, there are various requirements relating to the legal and regulatory regime of that country that will need to be fulfilled. Those requirements relate to the "equivalence" of the third country regime to the EU regime, co-operation arrangements between the third country and EU countries or the European Securities Markets Authority ("ESMA") and the anti-money laundering and tax regimes implemented by the third country. Although there may be variation in the requirements for EU market access for different sectors and even for different types of entity within the same sector, a number of commonly imposed requirements have emerged for the recognition of third country regulatory regimes.
Equivalence Determination: the country in question must be deemed to have a legal system and a supervision regime that is equivalent to the EU regime. That determination involves ESMA providing technical advice to the European Commission on how the third country's laws and regulations compare to the corresponding EU requirements. The European Commission then puts its proposed decision, based on the technical advice, to the vote of EU member states. For financial services legislation, the European Commission has limited ability to adopt a decision that is not approved of by member states, unless delaying adoption of a decision would create a risk to the financial interests of the EU as a result of fraud or other illegal activities. An equivalence determination may be "conditional" rather than full, meaning that certain EU legislative provisions will only be disapplied for the specific area determined to be equivalent.
In relation to central counterparties ("CCPs"), in its letter to the International Organization of Securities Commissions ("IOSCO") in December 2013 concerning the equivalence decisions necessary for CCPs established outside the EU, the European Commission stated that the equivalence process "involves identifying any differences between our respective legal and supervisory arrangements and assessing whether similar regulatory outcomes are nonetheless achieved; namely the reduction of systemic risk in the financial markets."1
Co-operation Agreements: third country regulators must enter into co-operation agreements with either the relevant national regulator of a member state or with ESMA, depending on the type of market participant. The agreements provide for the exchange of information and methods for co-operation and communication. In recent years, such co-operation agreements have become more commonplace worldwide. The agreements are the basis for increased co-operation between regulators in the supervision of financial institutions as well as enforcement actions against those falling short of the standards.
FATF Status: the country in question must not be on the Financial Action Task Force ("FATF") list of Non-Cooperative Country and Territories ("NCCT") for having inadequate anti-money laundering and counter-terrorist financing regimes in place and therefore posing a risk to the international financial system.
Tax Agreements: the third country must enter into tax agreements with the relevant EU member state which provide for exchange of information on tax matters. Usually the agreements are required to comply with the standards set out in the OECD Model Tax Convention on Income and Capital.
The table below is a sector-specific summary of the proposed key requirements for mutual recognition or third country access in Europe (as of August 2014).
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