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Watchdog warns City on using shell companies to access EU

Watchdog warns City on using shell companies to access EU

By Caroline Binham in London

Report dashes investment firms’ hopes to use equivalence rules after Brexit

The City of London has been put on notice by the EU’s top banking watchdog that it cannot retain access to the single market after Brexit by using mere shell companies based in the bloc.

The warning on Thursday could prompt a wider City exodus after the European Banking Authority said that it would not tolerate regulations being watering down by national watchdogs as EU27 countries rush to attract companies relocating from London. 

In its first Brexit opinion paper, the EBA — which is the supervisor of supervisors across the EU, making sure regulations are implemented evenly — emphasised that companies lining up to be authorised should have substance. There should be proper risk management based in a particular EU country, and sufficient capital held locally to cover an EU entity that wanted to book so-called back-to-back trades with one of its other group entities based outside the EU.

Bob Penn, a lawyer at Cleary Gottlieb Steen & Hamilton, said the EBA’s proposal “may cause a degree of friction as many firms simply will not be able to put in place the resources to risk-manage positions in Europe on a standalone basis by March 2019.

”In what will be a blow to UK companies — including London units of US investment banks — that are relying on “equivalence” rules to apply once the UK leaves the EU in March 2019, the EBA also said that the system of evaluating access for overseas broker-dealers is “suboptimal” and urged the European Commission to look at redrafting legislation.

“The commission should consider ensuring that, when investment firms are established in third countries, they be subject to appropriate conditions for access to the single market including a robust assessment of the equivalence of the prudential standards applicable to them,” the EBA’s 69-page paper reads, calling for tighter standards. “The prudential standards against which such an equivalence assessment would take place are only ... limited.”

The City hopes to use equivalence rules as a way to retain access to the single market after Brexit even if financial companies lose their ability to “passport” their goods and services.

Equivalence is a Brussels-determined way of permitting certain firms to trade in limited areas across the EU if their home countries follow equivalent rules. The problem is that key areas of the financial sector such as banking and general insurance are not covered, and a declaration of equivalence can be revoked under EU legislation with 30 days notice.

So far, only 1,500 job relocations from the UK have been confirmed, according to EY, the consultancy, and most banks have not given details of their personnel plans.

The EBA’s diktat against brass-plate companies is broadly in line with its sister authority that oversees securities markets, which published a similar opinion in July.

The EBA also recommended giving the European Central Bank supervisory powers over more banks, rather than just the largest as now. This is already being discussed in Brussels.

A proposal is expected from the commission in the next few weeks to bring big broker-dealers operating within the banking union under direct ECB supervision.

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