LONDON (Reuters) - Regulators should prevent investment firms from setting up shop in one jurisdiction to avoid stricter controls in their home state, the European Union's markets watchdog said on Thursday.
EU supervisory authorities are concerned about a "race to the bottom" as financial services firms shift operations after Britain leaves the bloc in 2019.
National securities regulators should "mitigate the risk of letter-box entities and ensure that any relocation is effective", the European Securities and Markets Authority (ESMA) said in an 'opinion', or formal guidance.
Regulators should ensure senior management are based in the home jurisdiction of the firm and that "board members and senior managers in the EU27 have effective decision-making powers, even where the investment firm is part of a group", ESMA said.
If regulators believe that investment firms, including the trading arms of investment banks, are not genuinely operating in their home jurisdiction, "this may provide grounds for not granting or withdrawing authorisation", ESMA said.
In a separate opinion on secondary trading, ESMA said decision-making for designing, controlling and monitoring trading systems' operations should not be outsourced outside the EU.
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The broker-dealer trading arms of banks in Britain have previously asked EU regulators whether their entities in the other 27 EU states will still be allowed to outsource operations to London once Britain leaves the bloc.
"ESMA considers it necessary that conditions for outsourcing activities to UK-based entities do not generate regulatory and supervisory arbitrage risks," the watchdog said.
In a third opinion, ESMA said regulators should also prevent asset managers from setting up letter-box operations, bringing them into line with rules applying to hedge funds.
"It is a big development because the 'letter-box' concept is only a...hedge fund idea," said Leonard Ng, co-head of the EU financial services regulatory group at law firm Sidley Austin, adding that legislation for other asset managers "has not previously been as prescriptive".
(Reporting by Carolyn Cohn and Maiya Keidan; Editing by Keith Weir)
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