Euro Watchdog Warns Against Shell Companies Post-Brexit

Fund managers seeking a presence in mainland Europe after the U.K. leaves the E.U. have been told their operations on the continent must be real businesses.

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British fund firms won’t be permitted to set up shell companies to get around losing mainland Europe distribution rights, according to Europe’s cross-border regulator.

Asset managers, wealth managers and discretionary investment managers have been considering establishing operations on the continent in case the U.K. loses the right to sell its products on the mainland after it leaves the trading bloc in 2019. In a statement Wednesday, issued alongside a new set of principles for firms relocating services from the U.K., the European Securities and Markets Authority warned that outsourced arrangements should not result in “letterbox entities.”

The U.K.’s decision to leave the European Union will require the remaining 27 countries to make a “common effort” to safeguard investor protections, according to Steve Maijoor, chairman of the ESMA.

“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 E.U. financial markets,” Maijoor said in the statement. “Firms need to be subject to the same standards of authorization and ongoing supervision across the EU27 in order to avoid competition on regulatory and supervisory practices between member states.”

The ESMA statement also made clear that U.K. corporate offshoots currently based in mainland Europe, which enjoy the right to sell their funds across the European Union, would not necessarily be entitled to authorization once the U.K. leaves the trading bloc.

Despite this, Pierre Gramegna, Luxembourg’s Minister of Finance said firms shouldn’t be too concerned, in an address to the ICMA annual conference in Luxembourg earlier this month.

“If you lose automatic access it doesn’t mean you cannot do business,” he said. “Take Switzerland. Does that prevent the major Swiss banks from doing business in the European Union? Not at all.”

Gramegna added that Swiss banks have “opened up many subsidiaries in European hubs,” including Luxembourg, using such centers to “build and capitalize on the European single market.”

The ESMA confirmed it will provide further Brexit-related guidance to asset management and investment firms, with plans to provide sector-specific details on the principles released Wednesday.

At the start of May, Institutional Investor reported that ESMA was planning on charging firms outside of the E.U. for conducting regulatory assessments of risks they may pose to economies inside the European trading bloc.

Jersey, an island off the south coast of England, has already negotiated terms to distribute products into the European Union because the E.U. views the channel island as a separate jurisdiction to mainland Britain. Jersey Finance — the trade group representing the international units of asset managers, such as BlackRock, Brevan Howard and Invesco, that operate from the crown dependency — is willing to offer advice based on its own experience navigating “third country rules” for doing business with the E.U.

“We are where the U.K. will want to get to be but obviously, we are so much smaller,” Geoff Cook, chief executive officer of Jersey Finance, said in an interview. “What we have achieved is the standard third-country approach, which the U.S. and China have achieved.”

Cook said Jersey Finance is offering help through an international regulatory strategy group that recognizes the U.K. will want to seek its own terms.

“Clearly, Britain will look for its own individual arrangement but, if it was helpful to understand how we have arrived at equivalent status, we can tell you the check points that we have had to go through,” he said.

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