On 23 June 2016 the United Kingdom (UK) held a referendum as to whether it should remain a member of the European Union or leave the European Union (EU). The UK´s decision to leave the EU challenges London´s status as the financial hub in the world due to the effect it will have on passporting rights.
What are passporting rights?
Passporting rights refer to the rights that allow banks, companies and financial services firms to operate their business in any EU or European Economic Area (EEA) country, without being subject to further authorisation from each country. These rights are regarded as a valuable asset, especially for multinational companies, given that they make it easier to establish branches in an EU country without facing additional costs. In fact, once established in one EU country a bank, company or financial service firm can apply to provide their services throughout the EU or to open branches in other EU countries with fewer additional authorisation requirements. The aforementioned authorisation is commonly known as the passport, and is not available to third countries (countries that are outside the EU and EAA).
How will Brexit affect passporting rights?
When the UK leaves not only the EU, but also the EAA, it will become a third country. The third country status implies the loss of these passporting rights for UK-based companies operating in the EU or the EEA.
In November 2018 a report by the Financial Conduct Authority, the key independent public authority that regulates finance in the UK, indicated that 5,476 UK firms have passports to carry out business operations in the EEA. Additionally, it noted that approximately 8,008 EEA firms have passports to carry out business operations in the UK. When the UK leaves the EU and the EEA, these passporting rights will cease to apply. The effect for both EEA and UK firms is that banks, companies or financial services firms could lose the ability to carry out cross border business operations. Therefore, the loss of these passporting rights would create a number of operational risks and could lead to a fragmented market because of the fact that both UK and EEA firms would no longer be able to utilize the same pool of liquidity.
On a more practical scale, the loss of passporting rights means that EEA firms based in the UK would effectively have to move out of the financial hub of London in order to continue to carry out their business transactions. Furthermore, these EEA firms would have to find a different city to effectively carry out said business operations. Some European cities, including Madrid, Paris or Dublin are already attracting these firms as new possible locations.
As for the UK firms based in the EEA, there are already EU legislation and regimes that allow third countries to offer a limited number of services in the EU. However, these regimes are considered less secure than the passporting scheme, even if accepted by the EU as being equivalent to their standards. In any case, the UK´s ability to provide financial services in the EEA would depend on whether this equivalence is granted.
Whilst the UK is yet to depart the EU formally, it is clear that the loss of passporting rights poses a challenge to London’s status as the financial hub of the world. At the same time, a growing need to incorporate these businesses in EU countries is arising.
Serena Fernandes & Alberto Álvarez
This article is not considered as legal advice