On 12 October 2017 the European Banking Authority (EBA) issued an Opinion on issues related to the departure of the United Kingdom from the European Union.
The UK’s decision to withdraw from the EU includes the UK leaving the European Single Market. Institutions active in the UK may decide to move parts of their activities into the EU. Thus the EBA decided to provide guidance on supervisory expectations and to address regulatory and supervisory arbitrage risks that arise as a result of entities seeking to relocate to the EU27 within a relatively short period of time.
Most of the recommendations are focused on the period prior to the departure when EU rules continue to apply also to UK institutions. From March 2019 onwards, the situation will depend on the likely future status of the UK after Brexit. The EBA in its recommendations prudently assumes that the UK will become a third country for the purposes of EU law. The EBA notes that the EU legislative framework already provides for rules relating to third country institutions operating within the EU, however the degree of economic and financial integration between the UK and the Member States will remain still high after Brexit which was not assumed in the legal framework. Therefore, the EBA identified the areas concerning interactions with third countries which would benefit from a legislative update.
The EBA covers the areas of relevance for competent authorities, namely the authorisations process, equivalence access for the provision of investment services, internal model approvals, internal governance and risk management – in particular when it comes to outsourcing and risk transfers using back-to-back (back-to-back trading allows an institution to offer its clients complex trading instruments, since all the underlying risks are effectively transferred to another institution of the group, which manages these transactions as part of its own trading portfolio) or intragroup operations – and resolution and deposit guarantee scheme issues. The EBA also stresses that the empty shell companies are not allowed as they do not meet sound governance arrangements.
For instance, when assessing applications for authorisation, registration, notifications etc. confirmations or previous or existing authorisation decisions granted by another competent authority are not sufficient. Firms should provide clear explanation of the factors supporting their choice of jurisdiction, particularly that they have not chosen a jurisdiction for the purposes of evading stricter standards.
The EBA will monitor developments, including relocation intentions, and will assess the extent to which the recommendations in its Opinion have been adhered to.