Passporting is widely talked about as a big money-maker for the UK and likely to be a major loss for the UK as part of its divorce deal with the European Union. The banking industry in London as long been envied by other countries and passporting is at the heart of this.
The European Union’s chief negotiator in the Brexit talks, Michel Barnier, did not sugar-coat his words on this topic when he spoke in November in Brussels: “The UK will lose the benefits of the Single Market. This is a legal reality.” He has made it clear that the UK’s financial services sector will lose its passporting rights once the country exits the bloc. Echoing the UK Prime Minster’s own language, he added: “Brexit means Brexit everywhere”. He emphasised that: “The legal consequence of Brexit is that UK financial services providers lose their EU passport.”
Passporting allows a bank to be registered in one country in the European Union but to provide its services to corporates and financial institutions in another country in the EU without having to set up permanently and be regulated in that other country. This is a system that has been especially important in wholesale and commercial banking and there are fears about what will happen post-Brexit.
The loss of passporting is of serious concern to the banking community in London. And with good reason: more than 5000 UK companies rely on these rights to bring in over 9 billion (UK sterling) each year. If we consider the tax generated on that revenue, it is clear this should be of concern to the wider public too. There is a big potential blow for the UK economy.
Is there an incentive for both the UK and the EU to find a post-Brexit solution? It is clear that of course the UK wants to find a solution, but what about those on the other side of the negotiating table? We should remember that European firms are going to want to continue to access the services that London provides. For the financial world, London will still be London.
It seems clear that the EU will want to have some sort of influence and a dialogue about how any services in London are regulated. This is where we find some common ground. What goes on in the UK financially will still be of crucial importance to the economies of European Union countries. It’s not just the UK that needs a positive solution to this. The European Union does too.
The British Chancellor, Philip Hammond, told the Treasury Select Committee that after the UK loses passportingrights, some form of what is called ‘enhanced equivalence’ will be put in place.
The Chancellor said: “Most people in the sector accept that passporting is not going to be the future route, that some form of enhanced equivalence within a framework that recognizes international standards and that gives businesses appropriate levels of certainty is going to be the way forward.”
So will the savior be this word ‘equivalence’? And what does that really mean? The idea is that the UK continues to adopt that same standards as the European Union so that the EU regulator may continue to allow UK-based firms to keep operating the way they do now. It does seem a good solution for both sides. It seems Michel Barnier is at least partially open to this solution. In his recent speech he said that that the EU would be able to judge some of the UK’s financial rules as equivalent to its own. Under equivalence the EU can decide that another jurisdiction’s regulations are similar enough to its own that its institutions can continue to do business within the bloc. This would not be entirely new territory for the European Union. Equivalence is often used to allow US firms to conduct business in the EU. But we should be aware that agreeing equivalence can be a lengthy process
Despite Michel Barnier’s positive hints, as yet there is no certainty that the EU will accept this. Given this uncertainty, of course companies are having to make contingency plans. This is why we are seeing premises being taken in continental Europe. Banks are covering their bases in caser they are forced to move their operations post March 2019. We are also seeing them move some of their people and look at hiring locally in continental Europe.
There is a great deal at stakes and so London’s financial community is watching very closely as Brexit negotiations move on to trade.