Europe’s markets regulator has warned EU banks and fund managers not to bypass new post-Brexit rules on cross-border dealing after it found “some questionable practices” used by the industry to trade with London.
The statement from the European Securities and Markets Authority on Wednesday underscored authorities’ efforts to create a hard split between EU and UK financial markets following the UK’s departure from the single market.
Investors and bankers on both sides of the Channel are adjusting to new trading arrangements following the UK's exit from the bloc at the end of December. Financial services were omitted from the trade talks and Brussels is seeking to lessen its reliance on the City.
It has refused to grant “equivalence” rulings to most sectors of Britain’s financial services industry — a designation that recognises the quality of UK regulations and smooths cross-border trading. The tough stance has starkly split European markets into UK and EU entities and barred London banks from soliciting clients based in the bloc.
One way around the ban is a loophole known as reverse solicitation, when institutional investors formally ask for advice and services from providers outside the EU.
One example Esma raised was companies including general clauses in their terms of business or using online pop-up “I agree” boxes for the client to confirm deals are done on the “exclusive initiative of the client”.
Esma said any customer advertising its services in the EU “should not be deemed as a service provided at the own exclusive initiative of the client”. “This is true regardless of any contractual clause or disclaimer,” it warned.
However, bank executives say they have been sparing in using reverse solicitations as marketing or selling directly into Europe since those activities could incur heavy penalties or even criminal proceedings.
Among the communications Esma considers for potential solicitations include press releases, internet advertising and brochures as well as phone calls and face-to-face meetings.
Investment banks and brokers in London have had to adjust to new working arrangements, with some using EU-based “chaperones” — colleagues on calls or chat rooms — to avoid breaching rules on soliciting clients from outside the bloc.
One UK-based fund manager complained that he could no longer trade risky corporate bonds through his usual investment bank in Paris and had to trade through London, meaning he received a worse price for his deal.
“I don't think all large asset managers are doing this,” he said, referring to the way in which the trade was routed. “It's just the interpretation of the regulation, it isn't clear.”