Thought leadership

On 29 March 2016 the Theresa May declared “We are leaving the EU, but we are not leaving Europe”.  Since that date the UK has been in a difficult position – we are leaving the EU but are still bound by the rules of the EU.  In the meantime, we continue to implement the full raft of EU directives, regulations and guidelines and fully expect to continue doing so after Brexit, in the short term at least.

So why did the European Banking Authority (EBA) publish guidelines on issues related to the departure of the UK from the EU in October 2017?  The prime driver, it seems, was the perception that certain EU members were relaxing their authorisation requirements in a bid to attract UK-based banking operations.  The concern is not completely groundless. We are frequently asked to provide clients with comparative studies on different EU jurisdictions. These studies often include comment on the pragmatism and ‘flexibility’ of individual regulators. 

Across Europe, Mazars works closely with other regulators and the differences in approach are plain to see. But are those differences emerging as a push to attract UK banks looking for an EU hub? There have always been differences and the ‘level-playing field’ is not always particularly level. There are, and will continue to be, differences in the way EU regulators supervise their firms.  There are multitude of reasons for this, not least culture, sophistication of the local financial services market, and the degree of skills and expertise within the supervisor itself.

The key message from the EBA is twofold. There is a need to ensure supervisors do not allow ‘empty shells’, as well as a requirement to ensure the incoming firm has real substance. The EBA suggests outsourcing and risk transfer arrangements using back-to-back or intragroup operations should be scrutinised carefully. It could be argued that many of the points being raised in the EBA opinion do not just arise as a result of Brexit – they should have been given greater focus and scrutiny before.  There are countless models that rely on outsourcing / risk transfer-type arrangements already in existence within the EU, and these are waived through without issue. Will those now attract additional scrutiny?

The EBA opinion recognises there are already rules on the interaction with third countries but states the degree of economic and financial integration between the UK and the remaining EU27 will be significantly greater than any other third country. One would have thought that the level of UK integration would have been a plus point, and have negated many of the risks of allowing a third country to access the EU market via a third country branch. However, it would appear the opposite is true. The level of integration means there are increased risks.

Sarah Ouarbya

Many argue the UK itself has the toughest regulator in the EU, and so to suggest that aspects of UK regulation may not be equivalent immediately post-Brexit is particularly baffling. EU banks with UK branches also find themselves in a difficult position.  They want to prepare for Brexit but what do they do? There are two main options open to them – become a third country branch or seek to set up a UK subsidiary. The later provides more certainty but is costly. The former seeks to maintain the status quo but is shrouded in uncertainty. How do you make an application to become a third country branch when you do not currently come from a third country? Assuming the UK does leave the EEA the UK will only become a ‘third country’ on the date of departure.

It seems that greater supervisory convergence is back in fashion and the idea of an EU super regulator is on the rise. The idea is not without its merits and would go some way in addressing the ‘uneven playing field’ that currently exists between EU member states. It would allow the EU to concentrate expertise within one body so that lack of access to talent in parts of the EU will be less of an issue. It would also go some way to increasing the probability that issues in one country or region are identified and acted upon before it is too late. 

The EU super regulators are unlikely to be in place before Brexit happens, and so for banks in the UK looking to set up hubs in the EU27 the question of local supervision is still a very real consideration.  In the short term, the political benefits of attracting prized financial services business from the UK far outweigh the potential kick back from the EBA. As long as there is no EU super regulator controlling member states supervisory authorities the uneven playing field will continue. 

Sarah Ouarbya
Partner, Mazars LLP

+44 (0)20 7063 4450
sarah.ouarbya@mazars.co.uk 

www.mazars.co.uk