The European Union's market watchdog is investigating ways to stop national regulators competing unfairly with each other as they try to attract firms from Britain after Brexit in a beauty parade of financial centres.
The European Securities and Markets Authority (ESMA) told Reuters it is studying the risk of "regulatory arbitrage" - where some EU states might offer financial firms lighter supervision than other member states in return for the jobs and high tax revenue they would bring.
While the issue concerns business coming from any non-EU country, ESMA's move is an early sign of how some regulators believe there may be a particular need for precautionary measures for when Britain leaves the bloc.
However, the risk is that some EU states might be tempted to break ranks and allow such front operations after Brexit. The issue is particularly likely to affect asset management; Britain is the second largest centre for this after the United States, managing 5.7 trillion pounds ($7 trillion) on behalf of clients, many of them in continental Europe.
Financial firms in the UK, worried they will lose access to the bloc's capital market, are deciding whether to move some operations and staff to new bases on the continent or in Ireland.
A spokesman for Paris-based ESMA said its inquiries concerned issues that a national regulator in the EU may face when financial firms from another country show an interest or make an application for a licence.
"It is not focused on efficiency issues of different financial centres, but rather looking at issues around outsourcing and delegation which could lead to regulatory arbitrage," an ESMA spokesman said.
Outsourcing and delegation refers to when key functions of operations in an EU state are being carried out in a country outside the bloc, such as in fund management. Worries could centre around, for example, a firm being granted a licence to operate a subsidiary in an EU country but being allowed to run much of unit's operations from its office in Britain.
EU rules require safeguards to ensure continuity of service and clear lines of management responsibilities.
Financial watchdogs have told banks they will have to have a certain amount of capital, senior staff on the ground and approved risk models to get a licence to operate across the EU.
About the author
Research Associate at Center for Islam and Global Affairs (CIGA) at Istanbul Sabahattin Zaim University