By Francesco Guarascio and Huw Jones
BRUSSELS/LONDON (Reuters) - The European Commission is seeking to crack down on states using regulatory shortcuts to lure business from Britain and said on Tuesday it is considering a more powerful securities watchdog to counter fragmentation after Brexit.
As Britain, now the European Union's biggest financial center, prepares to leave the bloc, its major continental rivals are scrambling to attract relocating firms and staff.
Ireland complained to the EU executive that it was being undercut by centers competing to host financial firms looking for an EU base outside London after Brexit.
"It would be important to avoid ... member states blaming each other," Commission vice president Valdis Dombrovskis told reporters on Tuesday, announcing a consultation on reforming the powers of EU bodies that supervise finance.
The EU executive wants to put an end to "the perception that member states may be using supervisory practices as a competition tool," he said, noting that a stronger mandate for supervisors would help in applying similar rules across the EU.
Although banks face strict supervision under the European Central Bank in the euro zone, there is no similarly powerful regulator for insurers and other financial players, leaving decisions on factors such as the size of a local operation to individual countries.
The EU's system of financial supervision is mainly based on three agencies covering securities, banking and insurance.
The European Securities and Markets Authority's (ESMA), which supervises only credit rating agencies and trade reporting bodies, may be the first agency to see its powers boosted. It is already considering ways to stop unfair competition among regulators ahead of Brexit.
"A possible extension of ESMA's powers could be considered in market segments in which there is a strong need to support more integrated, efficient and well-functioning financial instruments markets," the consultation paper said.
Consultation will take two months and the commission will make legislative proposals by the end of 2017, Dombrovskis said.
Brexit has sped up plans to carry out the overhaul, the commission said in its paper.
As part of the process, the London-based European Banking Authority will have to find another home inside the EU, a move that Dombrovskis said should happen before the end of two-year Brexit negotiations due to start on March 29.
The move could be bundled together with a merger of EBA and the European Insurance and Occupational Pensions Authority (EIOPA), Dombrovskis said.
EIOPA is based in Frankfurt, meaning that the merged authority could be relocated in the German city, beating competition from other EU financial centers, such as Paris.
(Editing by Keith Weir and Alexander Smith)