Firms’ relocations in the spotlight
• EU markets regulator says ‘letter-box’ financial companies set up shop in one jurisdiction to avoid stricter controls in home state
Regulators should prevent investment firms from setting up shop in one jurisdiction to avoid stricter controls in their home states, the EU’s markets watchdog said, as centres such as Dublin, Frankfurt and Paris vie for business.
Regulators should prevent investment firms from setting up shop in one jurisdiction to avoid stricter controls in their home state, the EU’s markets watchdog said, as centres such as Dublin, Frankfurt and Paris vie for business.
EU authorities are concerned about a “race to the bottom” as financial services firms shift operations after Britain leaves the bloc in 2019, amid reports businesses are being set up that are effectively no more than postal addresses to take advantage of more lenient rules in some countries.
Ireland has complained to the European Commission that it is being undercut by rival centres, Reuters reported in March.
National securities regulators should “mitigate the risk of letter-box entities and ensure that any relocation is effective”, the European Securities and Markets Authority (Esma) said in an opinion, or formal guidance, on Thursday.
Regulators should ensure senior management members are based in the home jurisdiction of the firm and that “board members and senior managers in the EU 27 have effective decision-making powers, even where the investment firm is part of a group”, Esma said.
If regulators believe investment firms, such as brokerdealers including the trading arms of banks, are not genuinely operating in their home jurisdiction, “this may provide grounds for not granting or withdrawing authorisation”, Esma said. It also said regulators should not design “fast-track“authorisation processes.
QUICK AUTHORISATION
Financial professionals have said the speed with which they can set up in various jurisdictions has contributed to their decision-making on EU operations after Brexit.
“I think the fast-track prohibition is targeted at the French — the AMF have offered UK-based fund managers a quick authorisation process if they move from London to Paris,” said Neil Robson, a partner at law firm Katten Muchin Rosenman.
France’s AMF regulator has launched the “2WeekTicket”, a fast-track pre-approval process for firms authorised by Britain’s Financial Conduct Authority.
“Esma is saying that a quick authorisation to leave the UK cannot be acceptable and there are formal mandated authorisation processes that have to be followed,” Robson said.
Lawyers also said the guidance risked a lessening of national regulators’ powers.
“Is there some form of disintegration of the [regulators’] ability to make rules in relation to their own jurisdiction and govern their own authorisation process?” asked Monica Gogna, funds lawyer at Ropes & Gray.
In another opinion on trading, Esma said decisionmaking for designing, controlling and monitoring trading systems’ operations should not be outsourced outside the EU.
The broker-dealer trading arms of banks in Britain have previously asked EU regulators whether their entities in the other 27 EU states will still be allowed to outsource operations to London once Britain leaves the bloc.
“Esma considers it necessary that conditions for outsourcing activities to UK-based entities do not generate regulatory and supervisory arbitrage risks,” the watchdog said.
In a third opinion, Esma said regulators should also prevent asset managers from setting up letter-box operations, bringing them into line with rules applying to hedge funds.
“It is a big development because the ‘letter-box’ concept is only a ... hedge fund idea,” said Leonard Ng, co-head of the EU financial services regulatory group at law firm Sidley Austin, adding legislation for other asset managers “has not previously been as prescriptive”.