European regulator warns firms on Brexit relocation

European regulator warns firms on Brexit relocation

The European Union’s financial services regulator has issued guidance for firms seeking to relocate onto the continent as it prepares for Brexit.

The European Securities and Markets Authority has said it expects an influx of financial services firms moving across the Channel as Britain leaves the European Union.

But, setting out nine principles which national regulators should follow, it has warned firms they will not get away with setting up “letterbox entities” to save their access to the EU.

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It has also warned firms they will not be able to use Brexit to game the system and avoid their regulatory requirements.

Steven Maijoor, chairman of Esma, said: “The UK plays a prominent role in EU financial markets and the relocation of entities, activities and functions to the EU27 creates a unique situation requiring a common effort, at EU level, to safeguard investor protection, the orderly functioning of financial markets and financial stability.

“The EU27 have a shared interest in building a common approach to dealing with relocating firms that wish to continue to benefit from access to EU financial markets.

“Firms need to be subject to the same standards of authorisation and ongoing supervision across the EU27 in order to avoid competition on regulatory and supervisory practices between member states.”

As part of preparations for Brexit, national regulators have been warned to expect an increase in activity relating to authorisation and supervision.

To ensure consistency in how relocating UK firms are dealt with, Esma will establish a forum for national regulators.

Among the principles Esma has set out is that there will be no automatic authorisation, with UK firms treated like those from any other “third country” outside the EU.

Regulators should also be able to “verify the objective reasons for relocation” and should be rejected if a company is moving to avoid regulation.

This includes if it has chosen to move to a particular country with looser rules but intends to carry out most of its business in another country.

Referring to letterbox companies, Esma said it would not tolerate company shell or paper branches in the EU while “essentially performing all substantial activities or functions outside the EU27”.

Figures released by the Financial Conduct Authority last year showed more than 5,400 UK firms use passports to do business in Europe, leaving them at risk from Brexit.

Fund management giant M&G has already confirmed plans to establish a base in Luxembourg along with AIG.

Meanwhile Lloyd’s of London plans to open a subsidiary in Brussels and JP Morgan has indicated that it will move hundreds of people from London to Frankfurt, Dublin and Luxembourg.

HSBC’s chairman Douglas Flint has said 1,000 jobs could be moved to Paris if the bank lost its passporting rights.