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EU regulator warns against ‘letterbox entities’

June 01, 2017

The European Securities and Markets Authority (ESMA) has warned national watchdogs against companies hoping to set up thinly staffed "brass plaque" entities ahead of Brexit.

In an advisory statement aimed at national EU regulators, the EU securities and markets regulator issued guidelines for avoiding "regulatory arbitrage" between the 27 countries that will be left in the EU after the UK leaves the bloc.

ESMA said local regulators in the EU should "reject any relocation request creating letterbox entities."

This would include a company looking to set up an EU operation to gain passporting rights while "essentially performing all substantial activities or functions outside the EU27", ESMA said.

Paris-based ESMA works with the European Insurance and Occupational Pensions Authority and the European Banking Authority to promote "supervisory convergence" across the EU.

In its document, ESMA chairman Steven Maijoor 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.

"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 noted it expects senior executives in newly established EU units to be actual decision-makers. The regulator said that even when the entity is part of a bigger corporation, local board members and senior managers must be employed in the country they move to.

ESMA also urged financial services firms to hurry up with Brexit relocation plans.

"The authorisation process takes time," the watchdog noted. ESMA recommended companies approach local regulators "as early as possible" to ensure efficiency.