Series 8 Back to Brexit Basics – What losing passporting rights might mean for the UK

May 08, 2018

Last week, as part of Series 7 Back to Brexit Basics, we looked at some of the elements of EU passporting for financial services.  This week we examine what a loss of passporting rights might mean for UK financial services companies.

What is the risk for the UK in terms of passporting?

When the UK leaves the Single Market, it is likely that it will lose its passporting rights.  The EU has been clear throughout the Brexit process that there can be no cherry picking on aspects of Single Market membership.

What does this mean for the UK?

Once the UK leaves the EU and the EEA, it will become a third country for passporting purposes and there may be restrictions to the UK’s access to EU markets for providing financial services.  This will affect:

  • the ability to passport out of the UK into the EU
  • the ability to passport into the UK from the EU

The loss of a passport for existing UK-based financial service entities may result in those financial groups having to establish authorised or licensed entities in another EU territory if they want to continue selling their services to EU customers across the Single Market.

Likewise, EU entities passporting into the UK would likely have to set up an entity in the UK to provide financial services in that jurisdiction.

Retaining its passport, joining the EEA (which is unlikely given the current debate) or obtaining regulatory equivalence with EU rules (discussed next week as part of Back to Brexit Basics) are two of the ways that UK financial services companies operating in the EU can continue to operate as they have been after Brexit.

Applying the rules – how passporting works

As noted in Series 7 of our Back to Brexit Basics, there are several different passports that banks and financial services providers rely on in order to provide core banking services to businesses and customers across the EU. 

Broadly for example, the banking passport relies on two key pieces of EU legislation: the Capital Requirement Directive (CRD) IV and the Markets in Financial Instruments Directive (MiFID).  CRD ( IV) allows banks to provide deposit-taking, lending and payment services, while MiFID allows them to provide advisory services, investment services and portfolio management.

Once a bank is established and authorised in one EU country, it can generally apply for the right to provide certain services throughout the EU or to open branches in other countries across the EU with relatively few additional authorisation requirements.

When the UK leaves the EU, branches of UK banks in the EU will revert to being foreign bank branches.  Branches of EEA/EU banks in the UK could also lose their own passporting rights.  For EEA countries that are only in the UK, this could mean losing their entire access to the EU.

Practical example of how passporting works

A company in Spain wants to raise funds to upgrade its wholesale operations in Germany and expand.  It looks to a UK based bank for assistance for the funding of the plans.

A UK bank uses its CRD passport to provide advice on securing a loan from a group of UK based banks.  The UK based bank uses is MiFID passport to assist the Spanish company sell investments to increase the funds available to them to fund some of the planned expansion

The UK bank uses its CRD passport to provide foreign exchange services (Sterling/Euro transactions).

The bank uses its MiFID passport to help hedge FX exposure on the Sterling.  And also hedge interest rate exposure on Euro/Sterling elements of financiering.

Without passporting or any form of equivalence to EU standards, the UK bank would not be able to sell financial services to the Spanish company from the UK based bank.  The Spanish company would have to seek financing elsewhere outside of the UK and within the EU.  For the UK bank, this means a loss of business.  The UK bank could choose to locate in the EU to provide the services in the EU – but this will be costly.

It’s important to note that passporting isn’t necessary in wholesale markets. As passporting only grants the rights to sell, a Spanish bank in the example above could still buy an interest rate hedging product from London.  But banks in the UK would not be able to actively sell and advertise in the EU – they would rely on the Spanish bank calling them up. 

Tune in next week the next in our series of Back to Brexit Basics.

Read all of our Brexit updates and Back to Brexit Basics on the dedicated Brexit section of our website.