EU wants a ban on UK firms setting up Brexit shell companies

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A view of a mural by artist Banksy of a workman removing a star from the EU flag which appeared yesterday near the ferry terminal in Dover, Kent.
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Gareth Fuller/PA Wire/PA Images

LONDON – UK-based firms seeking access to Europe’s financial markets will face a tough assessment before they are allowed to set up on the continent, one of the European Union’s top regulators said.

European regulators must police new authorisations rigorously and crack down on “letterbox entities” that don’t have their “critical functions” based in Europe, the European Securities and Markets Authority said.

“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,” Steven Maijoor, ESMA chairman, said in a statement.

“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. Effective and efficient supervision are essential to support the Capital Markets Union,” he said.

ESMA published nine principles for regulating new authorisations after Brexit, including “no automatic recognition of existing authorisations,” which may mean companies with EU branches may have to reapply.

Maijoor’s comments on market access mirror those from the European Central Bank on lenders seeking to set up new subsidiaries in Europe to maintain access to clients in the 27-nation bloc.

Earlier this year, Sabine Lautenschlager, vice-chair of the Frankfurt-based SSM, a unit of the European Central Bank, said applications for European licences will be scrutinised closely.

“It is the ECB that grants licences in the euro area. And to be clear: we will only grant licences to well-capitalised and well-managed banks,” she said.

“We will not accept empty shell companies. Any new entity must have adequate local risk management, sufficient local staff and operational independence.”

Prime Minister Theresa May is seeking to end freedom of movement for EU citizens and pull the UK out of the single market, likely putting an end to Britain’s financial passport.

The passport is a system of common financial rules that allow UK based financial firms to access customers and carry out activities across Europe. The Financial Conduct Authority (FCA) said last year that 5,500 UK companies rely on passporting rights, with a combined revenue of £9 billion.

As a result of the threat to passporting, most major financial firms are looking at establishing or extending European offices to cope with the looming rule changes. Executives from HSBC, UBS, JPMorgan, and Goldman Sachs have all publically suggested that jobs will be moved away from Britain as a result of Brexit.

The direction of talks, and the SSM’s regulatory stance prompted Deutsche Bank’s chief regulatory officer to warn that the bank may be forced to move up to 4,000 staff from the UK to Europe as a result of Brexit.

Sylvie Matherat, who joined the German lender in 2015 from the French central bank, said that client demands and pressure from regulators could combine to force almost half of Deutsche’s 9,000 UK staff to relocate to Europe.