Close scrutiny of UK financial firms' European Union outposts will continue indefinitely, the bloc's securities watchdog said, as regulators begin a round of new checks on how they are operating.
Hundreds of trading and investment firms from the City of London have set up shop in the EU to avoid disrupting business with the bloc by relocating staff and assets.
The costly investment was vindicated by an UK-EU trade deal that left UK financial services largely cut off from the continent after Britain left the EU's orbit on Dec. 31.
The European Securities and Markets Authority (ESMA) had checked the licence applications from new hubs in case national regulators were offering sweeteners.
ESMA Chair Steven Maijoor said the watchdog has now begun reviewing how the licences are working on the ground in a process that will continue indefinitely to ensure sufficient activity and senior staff.
"How you structure your business between the UK and the EU, that will be an ongoing issue. There will be new business models, there will be new questions around how can you organise that," Maijoor told Reuters.
"Although it will not be done in the context of Brexit, the UK and EU will continue to be very interconnected markets and so there will be on a continuous basis questions around how do you ensure proper supervisable entities in the EU."
The close scrutiny will test post-Brexit relations between Britain and the bloc, already strained by clashes over Northern Ireland and Covid-19 vaccines.
Both sides aim to agree a cooperation pact in financial regulation by the end of March, a first step in restoring trust and potential UK market access further down the road.
A former regulator in the Netherlands, Maijoor is due to step down from ESMA after 10 years at the helm, having overseen a watchdog that has steadily increased its powers and reach.
There is no need for a U.S.-style super-regulator but it would be "very logical" for ESMA to build on the Brexit checks to become the EU regulatory gateway for market participants from any part of the world that want to operate in the bloc.
"If market participants can choose 27 member states to locate themselves then there is obviously a high risk of regulatory competition," Maijoor said.
EU policymakers breathed a sigh of relief when there was no market disorder in January due to severing most of the City's access to the bloc.
Maijoor said assessments by UK and EU regulators of risks to market stability ahead of Brexit had proved to be on the mark. EU curbs on City access led to swathes of euro stock and swaps trading leaving London for the bloc and New York without a hiccup.
Regulators focused on stability, not on avoiding splits in markets, he said.
"With Brexit comes fragmentation, that is what Brexit is about, it's a decision by the UK to leave the EU."