The European Banking Authority issued an Opinion in October 20171, dealing with a number of policy issues related to the expected relocation of certain businesses from the U.K. into other EU member states prior to Brexit. The EBA Opinion is based upon an assumption that the U.K. will become a third country following Brexit. It addresses a number of areas of relevance for national regulators, namely the authorization process, the prudential regulation and supervision of investment firms, internal models, outsourcing, internal governance, risk transfers via back-to-back and intragroup operations, and resolution and deposit guarantee scheme issues. The EBA Opinion stresses to EU national regulators that existing authorization standards should not be lowered and that the same procedures and standards that have always applied should continue to do so. Firms wishing to establish in EU member states should be ready to provide a clear explanation of the choices they are making in terms of the substance of the incoming entity and the EBA emphasises that "empty shell" or "letter-box" entities should not be authorized.

The European Securities and Markets Authority has also issued a cross-sectoral Opinion2 aimed at fostering consistent authorization, supervision and enforcement action in relation to entities, activities and functions relocated to the EU from the U.K. The ESMA Opinion warns national regulators not to authorize entities in the EU that amount to "letter-box" entities that outsource or delegate substantial amounts of their business back to London. It sets out nine general principles that national regulators should apply when handling authorization requests in their member states:

  1. There is no automatic recognition of existing U.K. authorizations;
  2. Authorizations granted by EU27 national regulators should be rigorous and efficient, involving strong scrutiny of governance structures, human and technical resources and the geographical distribution of a firm's activities as well as outsourcing and delegation arrangements;
  3. National regulators should be able to verify objective reasons for relocation in their member state, including ensuring that the member state was not selected for the purpose of evading stricter standards in another member state;
  4. Outsourcing and delegation to third countries is only possible under strict conditions, including in some cases the existence of co-operation agreements signed between the national regulator and the third country authority;
  5. National regulators should ensure that substance requirements are met;
  6. National regulators should ensure sound governance of EU entities—key executives and senior managers of EU authorised entities should be employed in the member state of establishment and should work there to a degree proportionate to their envisaged role;
  7. National regulators should be in a position to effectively supervise and enforce European Union law; and
  8. National regulators should coordinate with each other regarding market participants seeking to relocate— ESMA proposes to put in place a Supervisory Coordination Network in order to promote consistent decision- making.

ESMA built on its cross-sectoral Opinion in July 2017 with the publication of three sector-specific Opinions covering investment firms3, investment management4 and secondary markets5.

The European Insurance and Occupational Pensions Authority has also made an announcement to similar effect on this topic6.

Footnotes

1 Available at http://www.eba.europa.eu/documents/10180/1756362/EBA+Opinion+on+Brexit+Issues+%28EBA-Op-2017-12%29.pdf.

2 Available at https://www.esma.europa.eu/sites/default/files/library/esma42-110-433_general_principles_to_support_supervisory_convergence_in_the_context_of_the_uk_withdrawing_from_the_eu.pdf.

3 Available at https://www.esma.europa.eu/document/opinion-support-supervisory-convergence-in-area-investment-firms-in-context-united-kingdom.

4 Available at https://www.esma.europa.eu/document/opinion-support-supervisory-convergence-in-area-investment-management-in-context-united.

5 Available at https://www.esma.europa.eu/document/opinion-support-supervisory-convergence-in-area-secondary-markets-in-context-united-kingdom.

6 In July 2017, EIOPA issued its Opinion on supervisory convergence in light of the United Kingdom withdrawing from the European Union. The Opinion is available at https://eiopa.europa.eu/Publications/Opinions/EIOPA-BOS-17-141%20Opinion_Supervisory_Convergence.pdf.

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