Concerns have been raised about how Britain’s exit from the Union could affect financial passporting rights post-Brexit; a system exclusive to the European Union’s financial services and banking sector. The passporting system was introduced in the EU in 1995 and it authorises financial services firms of member states to do business freely throughout the EU, based purely on their home state authorisation. This system is built on the Union-wide assumption that financial services firms in member states have met the same service standards as required under EU law. This law sees financial firms treated abroad as if they were locally authorised.
There are nine passports that cover various aspects of the financial services sector. These include a passport for core banking functions, such as lending; market banking, which includes sales and trading; asset management; payments services and electronic money services. Where a firm may offer complex services that cover various facets within the industry, it may obtain multiple passports in order to do so.
Non-EU firms, or ‘third countries’, face costly and complex barriers that limit their rights to provide services within the EU. These legislations mean that a non-EU country wishing to provide financial services within the Union may only do so in the state in which its branch is established. In their paper ‘What is “passporting” and why does it matter’, the British Bankers Association states that these regimes offer a limited number of services into the EU if their ‘home country regulatory regime is accepted by the EU as being equivalent to EU standards.’ However, these are much less secure than the passporting rights in place for members of the Single Market.
Outside of the EU, Britain could face the same barriers and restrictions as third countries do, unless granted equivocal access and rights. These are special bilateral treaties that are established on an individual basis between two trading countries.
Problems
One of the options Britain has in order to retain market connection with the Union would be to turn to the national licencing regimes of individual member states. Relying on this as means to do business instead of utilising the exclusive passporting rights of member states is likely to be complex and exorbitant. In any event, the result of multiple agreements with individual state members would not be uniform in nature, meaning that some trade relationships would be less favourable than others.
Beyond this, EU customers would also become restricted in their ability to contract with UK-based banks. UK banks based in EU states may be reverted to foreign status and would be obliged to operate under third country rules. In principle, the same would apply for EU banks based in the UK. Many EU branches have been established to help EU markets access UK capital, so the impact of such would be hugely damaging.
Reduction of such services and limited access, if any, to the financial services market across the EU would mean that jobs and the services that clients rely on will need to be reviewed and restructured.
There are currently a limited number of market regimes offered by the EU that the UK could take advantage of. These regimes aren’t comparable to the Union’s current passporting rights in terms of benefits.
Equivalence
Prime minister May has specified that the UK will not be a member of the Single Market after its exit. An alternative would be for London-based organisations to establish individual subsidiaries within EU states that have passporting rights. This in itself hosts various issues. The problem, says the Financial Times, is that ‘this would be inefficient [for banks], both increasing regulatory complexity and requiring them to put additional capital—and liquidity—behind the business.’
It seems that the most forward approach to preserving links between Britain and the EU post-Brexit besides the current passporting rights, would be ‘equivalence.’ Simply put, this would mean that one jurisdiction can offer financial services to another on the basis that their standards and regulations are broadly similar. These agreements could give the UK access to the Single Market through bilateral agreements without having to abide by EU law. The issue with this method is that there isn’t an agreed definition of ‘equivalence’ and it is easily revocable. According to the Financial Times, equivalence can be revoked with just a 30-day notice period. An agreement would need to be established prior to exit from the EU to protect the UK’s rights.
How the financial services sector will be affected by the loss of financial passporting rights post-Brexit will depend heavily on the exit arrangements. Despite concerns, Moody’s, a major provider of credit ratings, research and analysis of global capital markets, has said that withdrawing membership from the Single Market will have ‘limited’ impact for most rated UK banks. ‘We consider that the equivalence provisions within MIFID 2, the complexity of (quickly) unwinding the status quo and the desire to minimize the initial impact on European domiciled banks will lead to the preservation of most cross-border rights to undertake business,’ said Simon Ainsworth, Moody’s senior vice-president. He continued, ‘other critical factors such as capital and liquidity, which are largely determined by global standards, are unlikely to face material changes due to Brexit per se.’