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“In particular, [national regulators] applied different interpretations of proportionality when it came to substance requirements,” the EU’s markets watchdog said. “This led in certain cases to some smaller firms relocating with only very minimal set-ups.”

Esma has previously issued warnings about international banks and fund managers skirting their regulatory obligations after Brexit by using techniques such as ‘chaperoning’ — where a token EU-authorised individual becomes involved in transactional discussions. Esma has also highlighted ‘brass plating’, where UK firms continue to sell to EU clients despite having only skeleton controls in the region.

The 8 December report found that regulators in EU states have been permissive over “an extensive use of outsourcing/delegation arrangements”.

Esma now wants EU countries to improve their assessments relating to the adequacy of firms’ internal control function, the extension of outsourcing and delegation, as well as firms’ governance arrangements.

READ Banks face final push to staff up EU hubs as ECB ramps up post-Brexit crackdown

The report is the latest move in an ongoing battle from EU regulators to ensure more financial services business moves back to the bloc after the UK’s split with the EU.

The European Central Bank is due to issue notices to international lenders forcing them to move key staff or change their trading models in early 2023, Financial News reported earlier this month.

Meanwhile, the EU Commission has proposed a new set of rules that would force EU firms to keep “active accounts” and place a minimum amount of business with EU clearing houses as the bloc looks to bulk up capacity for when its equivalence deal with the still-dominant London market expires in 2025.

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