European financial regulator warns on letter-box entities over Brexit relocation

The European Securities and Markets Authority (ESMA) has set out a principles rule book for the supervisory approach to company relocations from the UK as the country leaves the EU and stressed that special attention should be granted to avoid letter-box entities in the EU27.

In order to ensure that insurers can continue serving clients in the European Union after Brexit, many companies are creating subsidiaries in the EU 27.

The re/insurance sector in the UK has been particularly worried about the possibility of losing its passporting rights. The mechanism provides a company authorised in one member state the ability to conduct cross-border business without being required to apply for any additional authorisation or hold assets locally.

But observers have signalled that the creation of such subsidiaries is likely to involve the transfer of only a limited number of employees.

The European Securities and Markets Authority (ESMA) has published an opinion setting out general principles aimed at fostering consistency in authorisation, supervision and enforcement related to the relocation of entities, activities and functions from the UK.

UK-based market participants may seek to minimise the transfer entities, activities or functions to the EU27 by relying on the outsourcing or delegation of certain activities or functions to UK-based entities, including affiliates, ESMA suggested. It is therefore necessary to ensure that the conditions for authorisation as well as for outsourcing and delegation do not generate supervisory arbitrage risks.

The principles set out by ESMA include the recommendation to national competent authorities (NCA’s) to grant special attention to avoid letter-box entities in the EU27. The organisation also noted that NCA’s should not give automatic recognition of existing authorisations. NCA's should be able to verify the objective reasons for relocation, according to the statement. Outsourcing and delegation to third countries should only be possible under strict conditions.

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