Photographer: Krisztian Bocsi/Bloomberg

Bankers Warned Against ‘Letterbox’ Offices in EU After Brexit

  • ESMA publishes guidance on oversight, authorization of firms
  • Market regulator says ‘arbitrage risks’ loom between nations

The European Union’s financial-markets regulator sought to stop the bloc’s member states from loosening oversight to attract business after Brexit, warning that firms shouldn’t be allowed to set up shell offices in the EU that still conduct critical business in London.

The European Securities and Markets Authority on Wednesday published guidance to the 27 countries that will comprise the EU after the U.K. quits the bloc in an effort to root out “supervisory arbitrage risks” that could result if consistent and rigorous standards aren’t maintained. These are necessary to prevent entities from setting up “letterbox entities” in an EU country that in reality outsource or delegate significant business to London.

“The U.K. 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,” Steven Maijoor, chair of ESMA, said in a statement.

Global banks are preparing to move London-based operations into new or expanded bases in the EU after British Prime Minister Theresa May began the formal process of quitting the 28-nation bloc. Executives at banks including Morgan Stanley, Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co. have said they are considering moving staff and operations out of Britain to service their EU clients.

ESMA’s statement echoes similar warnings from key euro-area policy makers. Executive Board member Andreas Dombret, for example, has said the Bundesbank won’t accept accept “empty shells” in Germany.

“There is a legitimate concern that regulatory standards may drop as member states vie to win new business from the U.K., and ESMA is making clear where lines have to be drawn by regulators and firms alike,” said James Perry, a regulation partner at law firm Ashurst. “As far as U.K. firms are concerned, some clear but predictable messages emerge: if you have existing infrastructure, and political and regulatory relationships, in a particular EU country, you’ll be much better placed.”

ESMA also said it will establish a forum, dubbed the Supervisory Coordination Network, for EU country regulators to discuss oversight of firms relocating from the U.K.

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