Brussels plans to apply a patchwork of national arrangements that will allow banks outside the EU to sell services to the bloc, inflicting a blow on lenders in London who rely on the arrangements to dampen the impact of Brexit.
The proposal would stop almost all cross-border sales from non-EU countries in the bloc’s internal market. Banks are keen for cross-border access to the EU because it is cheaper and simpler to trade from their main international centers rather than moving capital and staff.
The cross-border restriction is part of an effort to streamline how global banks work in the EU, with Brussels also wanting to give regulators more power to allow banks to convert from some branches to more closely supervised branches.
It is part of the European Commission’s Capital Requirements Directive, which will provide a legal basis for the latest global bank capital standards and end the inconsistencies in what different national regulators allow. This has yet to be agreed by the European Parliament and Council.
European Central Bank officials have been concerned about a recent sharp increase in the post-Brexit use of national arrangements and waivers to conduct cross-border business as banks continued to serve EU customers from London. Cross-border permits have long been used by banks in the US, Switzerland and Asia for some of their activities in the EU.
Edouard Fernandez-Bollo, a member of the ECB’s supervisory board, warned in September that banks should not use cross-border regimes “as a way of turning large volumes of EU activity into a business-as-usual environment. ”.
“The direction of travel since Brexit was clear that the European authorities want more hands on supervision and financial services and banking activities within the EU,” said Peter Bevan, a lawyer at Linklaters. “There is clearly a growing skepticism about services provided from the UK.”
He said it was “difficult to see” how national regimes granting cross-border access could be compatible with the commission’s proposals.
The new measure proposed by Brussels limits cross-border activity of non-EU countries to ‘reverse recruitment’, where a customer approaches a bank without any marketing by the institution.
“Most of Western Europe has some kind of cross-border licensing regime,” said Caroline Dawson, a lawyer at Clifford Chance. The new measure would “recall all of them,” she said, adding that reverse recruitment is difficult to prove and cannot be done on a scale.
She said that Brussels’ proposed restrictions would be to “reduce people’s options and thus reduce the volume of business that people will do”.
A manager at a major international lender said that although his bank could use its subsidiaries and branches to replace the cross-border arrangements, the way the measure was put in place made them nervous about the unpredictability of EU policy-making. “It was not impact-evaluated or consulted,” he said.
Brussels’ proposals reinforce a general requirement under the EU’s existing rules that non-EU banks must have either a branch or a legal entity in a Member State where they want to do business.
The national access regimes in Ireland and Luxembourg are among the most flexible in the EU, Dawson said. Luxembourg usually only requires a license if the service provider is physically in the country. Ireland allows most activities on a cross-border basis as long as it does not involve retail customers.
Luxembourg’s regulator did not respond to a request for comment. Ireland’s central bank said it was reviewing “all aspects” of the European banking package.
The Swiss Bankers’ Association said that “cross-border market access to the EU is granted to Swiss financial institutions. . . contributes to open and integrated markets and is therefore in the interest of EU investors and thus ultimately in the interest of the EU.
“The European Parliament and the Council of the EU can amend the new rules,” the SBA added. “We will carefully analyze the possible impact of the proposals with our members. At this stage it is premature to have a final view. ”
The European Commission declined to comment.