The European Securities and Markets Authority (ESMA), issued an aggressive Opinion on the 31 May 2017, aimed at dashing the hopes of letterbox subsidiaries in the EU. The Opinion also sought to govern growing competition between EU Member States for business relocating as a result of Brexit.

The central aim of the Opinion, seems to be a warning that UK firms would not be able to use ‘letterbox’ subsidiaries in the EU to gain access to the single market. Banks and Financial services authorised by relevant UK regulatory authorities cannot circumvent the requirements of the EU Internal Market once the UK is outside the Community by resorting to “window dressing” their operations by routing EU business transacted in the UK through letter box subsidiary operations in Continental Europe.

In the Opinion, ESMA details nine principles ESMA would wish its members to adhere to:

1. No automatic recognition of existing authorisations;
2. Authorisations granted by EU Member States should be rigorous and efficient;
3. National Competent Authorities (NCAs) should be able to verify the objective reasons for relocation;
4. Special attention should be granted to avoid letter-box entities in the EU27;
5. Outsourcing and delegation to third countries is only possible under strict conditions;
6. NCAs should ensure that substance requirements are met;
7. NCAs should ensure sound governance of EU entities;
8. NCAs must be in a position to effectively supervise and enforce Union law; and
9. Coordination to ensure effective monitoring by ESMA.

What is important to note, other than the implicit warning to UK businesses wishing to use a letterbox approach, is that this Opinion was addressed to the ESMA members, the remaining 27 EU Member States. ESMA’s concern, after abuse by UK firms of the EU’s passporting rules, is in their words the fear that the “conditions for authorisation as well as for outsourcing and delegation do not generate supervisory arbitrage risks”. Another way of interpreting that is that ESMA are keen to avoid a race to the bottom and regulatory competition between their Member States, those Member States being keen to absorb departing UK business.

It is interesting to note the timing of the Opinion, implying that ESMA felt the need to issue such an Opinion after reported warnings from the Irish Government that Member States were using regulatory arbitrage to attract business, as financial institutions in particular relocate certain functions and divisions into the EU.

It will remain to be seen whether the UK issues a similar protectionist measure, to ensure that EU businesses do not have letterbox entities to try and gain access to the UK financial market.

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