The chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, issued a warning to the City of London on Monday: the EU has entered a “completely new area of supervisory convergence” to avoid unfair competition.

The advent of financial service firms from London to Frankfurt, Paris, and Amsterdam has been heralded as positive news. The ESMA knows that no single European city can succeed London as the financial capital of Europe. Several are stepping in to fill different niches. The one concern is whether London will retain a backdoor to the Single Market, post-Brexit.

The ESMA has intervened in 230 relocations of financial firms from London to EU member states to ensure that the new offices of British-based firms have transferred the substance rather than the retail part of their activity, Reuters reports.

One of the big battles is over brokering, that is, the matching of buyers and sellers for a commission. For instance, a broker matches a Romanian manufacturer of car spare parts to a Finnish car service centre, collecting a commission. The idea is that the broker has a deeper knowledge of the market than any individual firm and adds value by ensuring the transaction is effectively risk-free.

Luring such business requires knowledge and networking, that means people. Many cities are trying to lure firms and talent, initially offering a plethora of “regulatory sweeteners” in places like Frankfurt, Dublin, Luxembourg, Paris, and Madrid.

The key is “back-to-back” trading.

“Back-to-back” trading is about allowing securities to be physically traded in Europe while doing all the value-added work such as risk management and the transactions from London. That could litter Europe with “empty shell” offices, which are run from London. In 2017, the Spanish regulator (CNMV) toyed with the idea of allowing dealers 100% back-to-back trade. Germany’s Bafin considered back-to-back as an interim measure. The ESMA wants to avoid it altogether.

The ESMA admits that Brexit will inevitably bring market fragmentation. For example, UK share trading platforms have already opened EU hubs for trading within the EU27 market after Brexit. Maijoor is calling for fundamental changes, post-Brexit, not least the redefinition of what constitutes a “green bond,” to avoid so-called “greenwashing” or unsubstantiated claims about the environmental benefits of a product.

Besides the ethical or normative dimension of the battle at hand, the main point is that the UK will become a rule-taker of financial regulation. Until 2016, the UK had a firm grip over the European Commissioner for Financial Services and the European Banking Authority (EBA). Now, the EBA is in Paris and UK can go nowhere near the EU’s financial regulator.

Being in the EU cannot be like being outside, or indeed in the current limbo.

Fighting London’s corner, the Bank of England Governor Mark Carney has called for a “mutual recognition” regulatory system. In practice, what is suggested is that the EU opens its market to London on the basis of “global rules,” complete with a dispute resolution mechanism governed by “independent” and -for-profit regulators. What Europe gets in return is a “deep and liquid” market. In certain European capitals, the notion that Europe will change to accommodate the City appears “fanciful.” The regulator openly and explicitly accepts the cost of fragmentation.