Uncertainty over the outcome of Brexit negotiations may impact new powers granted to the pan-European regulator ESMA, which has laid out its plans to ensure an EU-27-wide approach to handling the fallout of the UK’s departure from the European Union.
In its 2020 Work Programme published on Tuesday (1 October), ESMA said that Brexit will "have a significant impact upon the EU's financial markets" and it may therefore need to "adapt some of its activities in 2020 to new developments regarding Brexit".
As a result of a joint decision of European regulatory bodies, from next year ESMA will have a raft of new powers including broader use of direct supervision of member states, investor protection, relations with third countries and sustainability.
However, the regulator warned that due to the uncertainty regarding whether the UK will leave the EU with or without a deal, either outcome poses questions as to how it can pursue its goals with its new powers.
It explained: "The decision of the UK to leave the European Union is changing financial markets in Europe and ESMA will continue to prioritise responding to the risks and challenges posed by Brexit.
"As the specific actions that may need to be taken are uncertain, this work could potentially have an impact on ESMA's other planned priorities."
With regard to firms relocating from the City to European domiciles, ESMA said it would "carry on monitoring relocations to the EU27" until six months after the UK's withdrawal from the EU, in efforts "to foster a common approach in handling the authorisation requests".
It said this was in efforts to address "potential shortcomings in the supervisory overview [national regulators] may have post Brexit.
ESMA explained that it may be difficult for national regulators to "fully monitor" relocating firms - "in particular investment firms" - and it will therefore "provide a framework" for them "to facilitate the setting up of voluntary colleges in the interest of even closer co-operation".
In this way, ESMA said it would "build common supervisory approach on NCAs' handling of Brexit relocation and beyond".
It added: "The impact of Brexit on ESMA as an organisation requires strong internal co-ordination to prepare and adapt to the changes in ESMA's external environment, as well as communication with institutional and market stakeholders on relevant issues arising out of the Brexit negotiations and/or market developments.
"Following the possible departure of the UK, 2020 will require significant work to manage the relationship between the EU27 and the UK in the field of financial services, which will be a source of risk and opportunity."
In the event the UK leaves the EU without a deal on 31 October, ESMA said it intends to "focus on ensuring the immediate risks and issues are managed", while in the case a withdrawal agreement is in agreed, "ESMA will engage with the EU equivalence process".
This will see ESMA provide input in the adoption of equivalence decisions on the UK - what is needed to ensure continued access to EU markets - as well as monitoring of those decisions and "ensuring appropriate supervisory convergence within the EU."
It said: "ESMA [will] work to ensure appropriate regulatory and supervisory coverage of third-country entities post-Brexit…[and] ensure risk assessment and relevant mitigation across all Brexit-related workstreams, including on ESMA as an organisation.
"[ESMA will ensure] regular communication with market participants and other stakeholders, including close co-ordination and co-operation with relevant EU institutions and bodies."