This analysis is by Bloomberg Intelligence analyst Sarah Jane Mahmud. It appeared first on the Bloomberg Terminal.
With Brexit's transitional period coming to a close on Dec. 31, and the likelihood of any extension slim, financial-services companies looking to relocate to the EU for easier market access, but which haven't moved yet, risk disruption in 2021.
The relocation process is far from simple as regulators crack down on regulatory arbitrage.
From Jan. 1, when the Brexit transitional period ends, financial-services companies in the U.K. could struggle to serve EU clients if they haven't acted on plans to relocate operations to a country within the EU. They need a fully authorized EU entity in place. Yet, it can take as long as 12 months to secure the requisite licenses. If the chosen country is in the euro zone, the ECB weighs in too, potentially extending authorization times. The process takes so long because regulators are keen to crack down on regulatory arbitrage.
For U.K.-based banks, asset managers and insurers, moving to the EU is time-consuming, complex and expensive, more so for those that adopted a wait-and-see approach. Approval isn't automatic -- each application is assessed on its own merits. Companies must provide local agencies with a great deal of material, often in the local language. Germany's BaFin requires over 100 pieces of information, and while French regulators have simplified their process, it's fintech firms not banks that are the main beneficiaries.
Relocating companies need to accelerate sending staff abroad to avoid logistical problems that could slow business from Dec. 31 when the transitional period ends, we believe.
Companies must satisfy regulators that the relocated entity is a genuine operating business, not just a brass plate on a wall. As such, they'll need sound governance arrangements in place -- executives and senior staff employed in the chosen country in a degree proportionate to the role, if not on a full-time basis, with real decision-making power.
Source: Bloomberg
Local risk management and operational independence is essential for companies relocating to the EU. The ECB doesn't favor back-to-back booking models and may expect banks to establish local trading capabilities and trade and hedge risks with diversified counterparties. While outsourcing and delegation will be limited, we believe an exemption will be made in 4Q for asset managers licensed under the UCITS and AIFMD rules -- akin to the relief regulators agreed to in 2019 in case the U.K. had left the EU without a deal.
Banks and insurers seeking to convert an EU branch into a subsidiary or establish a new company in the bloc in order to gain a single-market access will need to secure internal model approval from the relevant local regulator. As Dec. 31 nears, more requirements on companies may augment pressure and lengthen the authorization process. The ECB and local regulators, however, have said companies could use U.K.-approved models while awaiting fresh EU-27 approval, yet this will cease on June 30, 2022.
Frankfurt is proving popular among banks. Standard Chartered, Nomura, Deutsche Bank and Mizuho are among those that relocated operations and/or secured licenses for EU subsidiaries ahead of Brexit.
