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In these August days there is currently a lull in the Brexit negotiations but talks will resume in the autumn after the summer recess and the UK Conservative party’s conference. From a banking perspective, not enough attention is being paid to the important issue of how the financial world will deal with the potential loss of passporting’ rights for London, writes Dmitry Leus.

London’s status as the financial hub for the rest of Europe has been in part due to a regulation in the EEA (the European Union plus Iceland, Liechtenstein and Norway) which allows a bank to locate a fully regulated entity on one EU member state and operate across other states without the need for additional local regulation in the other countries. This is commonly called “passporting”.

Brexit will change all of this unless passporting is replicated in any deal cut with the remaining 27 members of the EU. This raises the possibility that the Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA), could face additional responsibility to regulate those firms operating in the UK who were, pre-Brexit, covered by passporting.

The Deputy Governor of the Bank of England, Sam Woods, has been quite outspoken about the strain this will place on the Bank and PRA’s ability to regulate the financial sector. Mr Woods said he feared a “material extra burden” on the PRA if the organisation must police more financial firms post-Brexit.

It is estimated that around 70 firms rely on passporting to operate in the UK and it is they who will need to be regulated by the PRA if there is no deal to replicate passporting after Brexit.

Is there a way to avoid this loss of passporting rights? One option would be for the UK to remain in the single market by joining the EEA and thereby having a similar status to Iceland, Liechtenstein and Norway. But would the UK really do this, given that being part of the EEA means accepting free movement as well as the authority of the European Court of Justice, which the UK leadership is against.

An alternative to passporting is equivalence. This is where cross-border trading is possible due to countries recognising each other’s standards.

Back in the 1990s this occurred between the UK and the USA regarding mutual access to derivatives markets. Could equivalence be a possible mechanism for the UK post-Brexit? It is not impossible, given that some EU legislation accepts the principle of equivalence. But the EU legislation on this is not complete. Equivalence in commercial banking and primary insurance are not yet covered by EU legislation. If the equivalence route were to be pursued, the UK would need to have a detailed agreement as a framework for resolving any future disputes as well as what would happen in cases where rules differed between markets.

Until this gets resolved, it seems understandable that the Bank of England would indeed be very concerned about the regulatory strain likely to be placed upon the PRA post-Brexit. It is unlikely to get resolved quickly, partly because the EU insists first on a financial deal, resolution of the Ireland border issue, the rights of EU citizens in the UK and vice versa, before addressing other issues. But it seems clear from the Bank of England’s statements that this is an issue which needs to be a priority.