Series 7 Back to Brexit Basics - Passporting

Jul 03, 2018

In Series six, we looked at Common Transit procedures which simplify customs procedures when goods move through a number of countries to reach their final destination. In this series we explore some of the elements of EU passporting for financial services

What is EU Passporting?

Passporting was introduced by the EU in 1995 meaning that the freedoms and rules of the EU’s Single Market were extended to trade in financial services. 

In accordance with the rules of the Single Market, there is a single EU rule book for financial services.  Financial regulation and supervision standards are therefore harmonised across the EU.

The EU passporting system for banks and financial services companies enables firms that are authorised in any EU or EEA (Norway, Iceland, Lichtenstein) state to trade freely in any other state with minimal additional authorisation using passports.

Financial services firms typically passport by either selling the services cross-border from an EU home ('freedom of services' basis) or by establishing a branch in another EU member state ('freedom of establishment' basis).

Types of passports

There are several different passports that banks and financial service providers rely on in order to sell core banking services to businesses and customers across the EU.  Each of the passports is embedded in a particular EU directive or Regulation establishing basic rules for that activity.  Many banking services involve activities covered by more than one passport.

Each Member State signs up to the required passport(s) and applies that regulatory regime into their own national law so that firms can follow these rules.

Passports are based on EU rules so are not readily available to firms based in countries outside of the EU/EEA.  Non-EU/EEA firms may face regulatory barriers therefore when trying to provide cross border banking and investment services to customers in the EU.

Two important features of passporting:

  1. It enables banks and financial services firms to sell products and services across EU borders on the same basis as if they were present in the market of sale.
  2. It enables banks to establish branches in other EU/EEA countries on preferential terms.EU national authorities are required to treat branches of EU/EEA countries as if they were locally authorised. For example, this has enabled the UK based banks to establish networks of branches in financial centres across the EU and many banks from the EU to establish operations in UK.