Brexit will inevitably affect the way services are traded between the UK and the continuing Member States of the EEA. However, to what extent, is a question mostly unanswered, particularly given the amount of speculation around UK based firms passporting into EEA countries.
What is passporting?
The European Union currently utilises a passporting system for EEA financial services firms to trade freely without minimal additional authorisation. These passports are the basis of the single market in financial services and are used to enable a steady flow of trade in financial services across the EU.
Regardless of whether there is any transition period and deal, passporting in its current form will end for the financial firms currently using it in the UK. Therefore, Financial Services firms, will need to consider if or how they will be affected and what steps they can take to minimise any disruption.
Legal experts have evaluated that the likely outcome for financial services firms in the UK post Brexit can be evaluated in the following 7 points:
1) There will no longer be a passporting regime.
However draft UK legislation proposed by the UK government has revealed a “Temporary Permissions regime” (TPR) which will allow EEA businesses to continue to operate in the UK for a set period, ensuring continuity in financial services.
2) Passporting firms must either be authorised in the UK or find another legal basis for their activities.
To benefit from the TPR, authorisation must be obtained by informing both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
3) There will be deadlines for obtaining authorisation.
The FCA and PRA must be informed by the 29th March 2019 and authorisation must be in place by 20 March 2022.
4) Some firms passporting via branches must set up standalone UK subsidiaries.
5) Losing the passport will result in tougher regulation in the UK.
Currently, EEA firms operating in the UK under passporting in the UK have matters reserved to the home state regulator and so UK regulators only get involved to a limited extent. This will change, and businesses may be required to have their entire business model examined.
6) EU equivalence regimes may be of limited assistance.
Currently, “equivalence” allows non-EEA firm to access EEA markets where their home regulatory regime is deemed to be equivalent to the EU. The UK government would like to build on this as the basis for the future relationship with the EU, however there is no sign that the EU will agree to this.
7) UK domestic law is liberal (but unclear) on cross-border access without a passport.
Without passporting, UK law allows a level of cross border access however any permanent presence in the UK will require authorisation.
Gerry Collins, Managing Partner at Ecovis Wingrave Yeats, comments that “this whole passporting issue could be one of the most important and negative impacts for the City post Brexit. Will the City still be the leading Financial Services hub without passporting rights? I am really concerned that we will not be”.