BRUSSELS (Reuters) - The European Commission on Wednesday proposed transferring some powers to oversee the financial sector from national capitals in a move to extend the EU’s grip on the industry as the bloc prepares for the departure of London, its main financial hub.

European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium June 14, 2017. REUTERS/Francois Lenoir

The proposal is part of a broader long-term plan that could lead to common supervision of the European financial sector and widely expand European Union regulators’ clout over foreign firms that operate in the EU.

“What we are proposing is a gradual approach,” the commission’s vice president Valdis Dombrovskis said.

He said the move was ambitious but realistic. “Eventually we could arrive at a single European capital markets supervisor,” he told a news conference in Brussels. The commission’s proposals need the backing of EU states and lawmakers.

EU states have been traditionally reluctant to give away supervisory powers, but the decade-long financial crisis has allowed major changes, with the European Central Bank taking oversight of the euro zone’s largest banks.

The strengthening of EU supervision on capital markets was made more urgent by Britain’s vote to leave the EU, which will deprive the EU of its main financial center in London.

“Finance in Europe is changing due to the departure of the UK from the EU,” Dombrovskis said, adding this had increased the need for a convergence of supervisory practices to avoid so-called “regulatory arbitrage”, whereby EU countries try to attract firms from Britain with legal sweeteners.

MARKET ACCESS

The commission also proposed to further strengthen EU powers over foreign financial firms allowed to operate in the EU when their countries’ legal systems are deemed equivalent to the bloc’s rules.

The move is expected to have an impact on Britain-based financial firms after Brexit, as they may be subject to a stricter oversight and higher possible risks of abruptly losing access to the EU market.

Among the European industries that, under the proposal, would immediately be subject to direct EU supervision are critical financial benchmarks such as the Euro Interbank Offered Rate (Euribor), used to price billions of euros worth of derivatives and, in some countries, to determine the interest rates on mortgages.

Insurers will also be more strictly supervised by EU regulators in devising their internal models to calculate risks.

Regulated funds that are allowed to be sold across the EU, including venture capital funds and long-term investment funds, will also fall directly under the oversight of the European Securities and Markets Authority (ESMA), which will be beefed up to deal with expanded tasks.

The commission shied away from proposing the merger of the other two EU financial regulators, the European Banking Authority (EBA) and the Frankfurt-based European Insurance and Occupational Pensions Authority (EIOPA).

It had earlier suggested the merger, as the EBA will leave London after Brexit, but opposition from EU states, who are wrangling to host the relocating agency, forced the EU executive to drop the proposal.

The ESMA will also be granted powers to directly monitor transaction data in markets.

AFME, a lobbying group for the European financial industry, broadly welcomed the plans to increase supervisory convergence but was cautious on data oversight.

“The idea of ESMA receiving transaction data directly from market participants is to be supported to the extent it does not lead to additional reporting burden or duplication,” Simon Lewis, AFME Chief Executive, said.