The EU on Wednesday unveiled plans for sweeping new powers over foreign financial firms in Europe that would give the bloc strict oversight over the London financial hub after Brexit.
The draft law, presented by European Commission vice-president Valdis Dombrovskis, is intended to toughen EU financial rules and better coordinate national regulation on banking and trading in Europe.
"In the context of Brexit, we had to ... ensure that there is not a supervisory race to the bottom to attract business from London," Dombrovskis told a news conference in Brussels.
The proposal tightens the oversight of non-EU financial companies that are allowed to operate in the bloc under so-called equivalence regimes -- special bilateral arrangements already used by Wall Street, Japan and China whereby they agree to meet EU rules to keep access to the bloc's single market.
Though Brexit negotiations are still ongoing, insiders expect that Britain and its London financial hub will mainly function in Europe under this regime once the EU divorce is completed, officially in March 2019.
"We want to make cross border operations easier for companies, more effective to monitor for supervisors, and more trustworthy for consumers," Dombrovskis said.
The proposal addresses fears that London firms after Brexit will take advantage of fragmented national rules in the EU to seek out member states with lighter touch regulation.
The new rules complement an earlier proposal by Brussels to deny London the right to host banking "clearing houses" that deal in euros after Brexit that angered Britain.
Under the new plan, the Paris-based European Securities and Markets Authority will win vast new powers to oversee all financial services operating under the equivalency regime, including on-site spot checks to ensure compliance.
Financial firms would pay for the beefed up watchdog, according to the proposal.
The reform plan will need the approval of the EU member states as well as the European Parliament, a process that could take months to achieve.