ESMA has issued a warning to EU member states not to begin a “race to the bottom” to attract business when the UK leaves the bloc.

UK-based financial institutions won’t be allowed to set up “letterbox entities” in EU countries to maintain their access to the European single market after Brexit, ESMA said. The prohibition was contained in ESMA’s guidance laying down the ground rules for EU countries competing to attract UK banks.

The opinion, published by ESMA, aims to “support supervisory convergence” as financial players potentially seek to relocate from the UK post-Brexit. It notes that businesses may try to set up “letterbox entities” in one of the remaining 27 member states to take advantage of the EU status, while in reality keeping most activities in the UK.

“The UK plays a prominent role in EU financial markets and the relocation of entities, activities and functions to the EU27 creates a unique situation requiring a common effort, at EU level, to safeguard investor protection, the orderly functioning of financial markets and financial stability,” said ESMA’s chair Steven Maijoor.

Outsourcing and delegating tasks to third countries, which will include the UK, following its departure from the bloc – should be “strictly framed and consistently supervised”, the opinion added.

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