UK-based financial market participants should not be allowed to create “letterbox” entities in European Union member states when relocating post-Brexit, according to the European Securities and Markets Authority (ESMA).

The principle is one of nine that the European supervisory authority set out in a note to national supervisory authorities about the approach they should take to UK financial firms seeking to relocate parts of their operations.

Steven Maijoor, ESMA chair, 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.”

ESMA said relocating UK-based market participants might try to rely on outsourcing or delegating certain activities or functions back to UK-based entities, but warned that this must not be allowed to create supervisory arbitrage risks.

Delegation and outsourcing to third countries should only be possible under strict conditions, according to ESMA.

Another principle it set out is that national supervisory authorities should be able to verify the “objective reasons” for relocation.

ESMA said it would establish a forum to help national regulators report on and discuss cases of relocating UK market participants. It also planned to develop more detailed guidance in relation to sectors such as asset management.

In a workshop aimed at UK asset managers thinking about relocating to Germany, the German financial regulator BaFin will later this month set out its approach to some of the issues covered in ESMA’s opinion.

The UK regulator, meanwhile, has written to some 20 UK asset managers about their plans in relation to Brexit.

According to a report in the Financial Times, the Financial Conduct Authority (FCA) has set out 30 questions for managers. These include whether UK-based asset managers are planning to relocate staff or operations to the EU, or whether they have applied for new licences from foreign regulators.

An FCA spokesperson told IPE: “It is important for us as supervisors to understand the plans that our regulated firms have regarding Brexit.

“To help firms prepare for these conversations, we shared the details of the questions we would be asking. This was not a formal data request and was not asking firms to undertake any further work. These conversations are to help us understand what work firms are already doing to prepare for Brexit.”

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