On Thursday, the region’s regulators warned that banks that want to have access to the European Union after Brexit are required to set up more than an “empty shell” in the bloc, a demand that could trigger a bigger shift in business and jobs from London.
In its first official statement on potential Brexit movers, the European Banking Authority (EBA) warned against giving banks a foothold in the European Union with letterbox-style operations.
The proposals of the EBA address one of the biggest issues for international banks in London, many of whom are already establishing bases in Dublin or in continental Europe to maintain access to the European Union once Britain leaves.
It shows that regulators in Paris, Dublin, or Frankfurt want to make sure that banks move substantial operations instead of token offices, raising the costs for banks that shift.
Banks that are currently based in the financial centre of London have already been unnerved by sluggish progress in European Union divorce talks between Brexit Secretary David Davis and the EU’s Michel Barnier.
The stakes for Britain are high since financial services are the biggest source of tax revenue in the country.
The EBA stated: “Existing authorisation standards should not be lowered,” reiterating a similar precondition imposed by the European Central Bank. “’empty shell’ companies should not be authorised.”
The hardline stand is possible to upset banks that are planning to establish small offices in cities including Frankfurt after Brexit – many are considering such plans currently and weighing up how much of their business to relocate.
“Firms should provide a clear explanation of the choices they are making in terms of the substance of the incoming entity,” stated the EBA, which involves supervisors from the ECB and around the 28-country European Union.
The EBA also eliminated the booking of trading that takes place in London, for example, in Frankfurt without safeguards, including moving substantial capital, to cope with any losses.
Some financial firms are hoping to depend on some form of “equivalence” of rules in Europe and Britain to continue serving customers of the European Union from London and avoid the cost of establishing new hubs in the bloc.
Equivalence is a regime that is run by the European Union, which determines if the financial rules of a non-EU country are aligned to those in the bloc in order to allow market access.
While imperfect, Brussels can withdraw equivalence with only a month’s notice, it is perceived as an option for some firms.
But the EBA stated that the equivalence regime for investment firms that are outside the bloc, such as London after Brexit, was “suboptimal” and that they might be required to hold more capital.