By Marc Jones and Huw Jones
LONDON (Reuters) - UK-based banks that want to operate across the European Union after Brexit must set up genuine operations, not 'empty shells' in EU countries, a Bundesbank official said on Friday.
Andreas Dombret, the Bundesbank board member responsible for supervision, warned banks not to try to trick regulators as they seek ways of preserving their access to the EU after Britain leaves in two years' time.
"We will not accept any empty shells or 'letterbox companies' where the business effectively continues to be done out of London," he said at a London conference organised by zeb, a financial services consultancy.
"I urge banks not to spend their time inventing strategies to circumvent these requirements," Dombret said. "This includes seemingly creative solutions such as 'fly-and-drive' banking, where bankers fly in daily from London, or 'dual hatting', where transactions are booked on the EU subsidiary but in fact executed in London."
Under EU rules, banks licenced in one member state have 'passporting' rights to offer services across the entire bloc, but the chances of UK-based lenders retaining this access without shifting some operations from London are "dim", the German central banker said.
They should not put great hope into the "equivalence" regime - agreeing to apply rules that are as strict as those in the EU - or a free trade agreement, he said. Even a transition period between Britain and the EU would be difficult to negotiate.
"For the financial industry, this means that the current model of using London as a gateway to Europe is likely to end."
DECISION TIME
Dombret said banks in London would be deciding in the first half of this year whether to relocate some activities.
"I expect London to remain an eminent global financial centre," he added. "Nevertheless, I also expect a number of UK-based market participants to move at least some business units in order to hedge against all possible outcomes of the negotiations."
Financial firms are the biggest tax contributor of any sector to UK government coffers. UBS and HSBC have said they could each move about 1,000 jobs out of London after Brexit.
Dombret said he had personally seen no evidence of regulators across Europe trying to undercut each other by offering "discounts" or incentives to banks to relocate operations from London to their country.
"There are market participants talking about this, I don't have any direct evidence... What I want is the same high standards everywhere. We should simply exclude it as a possibility," he told reporters.
"We will not give any discounts to anybody," he said, adding that nobody had asked for any.
Britain is set to formally trigger divorce talks with the EU next month, and UK policymakers say the EU should work with Britain to avoid undermining financial stability.
But Dombret said banks will be able to adapt to whatever the new trading terms are, and therefore there won't be any "pressing" risk to financial stability.