Brexit Bites, 27 April 2018

Apr 26, 2018

In a week of debates about whether the UK should stay in or out of a customs union with the EU, it’s been reported that the EU Brexit Negotiator Michel Barnier will travel to the border region in Ireland next week. Also next in our series of getting Back to Brexit Basics, we look at some of the elements of EU passporting for financial services.

The border issue 

Despite reports over the past week that the EU has rejected the UK’s proposals for a frictionless border on the island of Ireland, UK negotiator David Davis told the Commons Brexit Committee on Wednesday that this was not the case. Mr Davis said that the UK’s proposals on the Irish border had not been ruled out by the EU and insisted that the EU was setting out an opening position on the border in the talks.  

Mr Davis told the Committee that the technology to operate a frictionless border already existed and that the UK government had begun the process of talking to potential suppliers about the operation of number-plate recognition and electronic pre-authorisation systems. 

When questioned about the likelihood of a ‘no deal’ Brexit, Mr Davis said such an outcome would be “unlikely” and that some form of agreement should be reached.

The UK Prime Minister Theresa May has ruled out the UK joining a customs union but faces opposition to this from the other UK parties.  A debate on this issue took place in the House of Commons this week. 

Michel Barnier to visit the border region 

EU Chief Brexit negotiator Michel Barnier is expected to travel to the border region on the island of Ireland next week. Mr Barnier will meet the Taoiseach and discuss the current stalemate in the Brexit talks over the border on the island of Ireland.

No special deal for UK financial services?

During a speech in Sofia this week, Michel Barnier said that the EU is “ready to handle the costs” caused by the UK’s decision to leave the EU.  On the subject of financial services, the EU negotiator said that the EU does not need the City of London stating “Some argue that the EU desperately needs the City of London, and that access to financing for EU27 business would be hampered – and economic growth undermined – without giving UK operators the same market access as today. This is not what we hear from market participants, and it is not the analysis that we have made ourselves.”

In an apparent rebuff to the UK Prime Minister’s please for a special deal for the UK’s financial services sector, Mr Barnier said “I can perfectly see the UK's logic and interest in pleading for a system of “mutual recognition” and “reciprocal regulatory equivalence”. This is, indeed, what the Single Market achieves! "Everything must change so that everything can stay the same", to paraphrase Lampedusa. But this will not work.”

Back to Brexit Basics

Last week we looked at Common Transit procedures which simplify customs procedures when goods move through a number of countries to reach their final destination. This week 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. 

Tune in next week for an examination of what a loss of passporting rights might mean for the UK in the next in our series of Back to Brexit Basics.

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