BY JAMES CAMPBELL
You will have heard the term ‘passporting’ a great deal in the media of late. The concept is not easy to understand for those not involved in the policy work and there is much dispute about its importance to UK-based businesses. There has been some welcome clarification in a letter from Andrew Bailey (Chief Executive, Financial Conduct Authority) in a letter to Andrew Tyrie MP, (Chairman of the Treasury Select Committee) published on that Committee’s website. The letter defines a passport as follows…
“A passport is a mechanism through which firms may exercise their right to provide services and their right to establishment. With a passport, an entity’s authorisation to do business in one EU Member State (and under certain directives in EEA states, too) is recognised by all other Member States as an authorisation to do business in their territory as well. As such, a passport obviates the need to obtain separate authorisations from other Member States. For UK firms, the competent authority providing an authorisation will generally be the FCA or the PRA.”
The letter shows that 5,476 financial services firms had outbound passports (i.e. could passport from the UK into EU Member States) and 8,008 had inbound passports (i.e. passport from another Member State into the UK). Depending on a firm’s business activities, it may need to hold more than one passport.
There were 336,420 outbound passports and 23,532 inbound passports. These numbers illustrate the importance of the passporting issue. If passporting is lost, firms wishing to continue doing business in other Member States (or in the UK, in case of inbound passports) would need to seek new authorisation in another Member State (for UK based firms) and in the UK (for firms in the remaining 27 Member States).
In practice, some passports may not be used and some may be used to a very small extent so the number of authorisations needed would be much smaller than these numbers would suggest – but they are still so substantial as to be very difficult if not impossible for the regulatory authorities to handle.
Key facts as of October 1st 2016:
- The City: 5476 financial institutions in the UK use European financial passporting. Andrew Bailey specifies that 336 421 passports are used by companies based in the UK vs 23 532 for 8008 companies in Continental Europe who want access to the UK market. A gap explained by the fact that to deal in 3 different Continental Europe markets, you currently need 3 passports.
- In the Guardian, the Bundesbank president declared the UK won’t benefit from passporting if they are not at least part of the European Economic market.
- Lloyd’s of London is planning on opening subsidiaries in Dublin, Paris and Frankfurt once article 50 is notified.
At stake is conserving a key motor of the British economy that contributes about 10 percent of gross domestic product. Finance executives have threatened to move staff out of the U.K. if Prime Minister Theresa May’s team of Brexit negotiators doesn’t secure a deal allowing them to serve European clients from London.
Global investment banks such as JPMorgan Chase & Co. and Morgan Stanley have the most to lose as they operate European business out of London and don’t have the same links to the continent as local lenders such as Societe Generale SA and Deutsche Bank AG. The British Bankers’ Association warned that leading lenders are poised to press “the relocate button” in early 2017.
With negotiations due to begin before the end of March, pressure has been mounting for the government to provide more clarity, particularly to banks, to avoid a possible exodus of business from the City of London.
The government’s stock response has been that it does not intend to provide a running commentary on its thinking though there has been a charm offensive to improve communication and reassure the finance world that its interests won’t be ignored.
Brexit Minister David Davis announced in parliament that Britain will have leverage in talks with the European Union over so-called “passporting” rights.
“Actually, we issue more passports than we seek,” Davis said citing figures used by another lawmaker earlier in a parliamentary debate. “As a result, our negotiating leverage in this area is at least reasonable.”
Warning financial firms against “rashly” pre-empting the outcome of Britain’s EU negotiations by moving staff overseas, he said the finance ministry had been considering alternative arrangements to allow the sale of financial services across EU borders.
“The Treasury has already had a roundtable on specifically this issue and looked very clearly at mutual recognition and various mechanisms of mutual recognition as a fallback on passporting,” he said.
Watch this space.