The impact of Brexit on “passporting”

Harry Bengough, Tim Littler  and Nicolas Groffman are solicitors in Cheltenham, specialising in Banking

Is the potential loss of passporting rights causing banks to flee the UK?

Wells Fargo have recently indicated that they will not wait for the UK to trigger the exit from the EU before taking steps to lessen the impact on their business. They have indicated that they will move 900 jobs out of the City and move their operation elsewhere in the EU to mitigate the risk of the loss of passporting rights.

What is passporting?

In our view passporting is one of the most economically important aspects of the UK’s membership of the EU.Passporting allows banks and other regulated financial institutions (“Financial Institutions”) that are established in one EU Member State to provide regulated financial services to all other EU Member States without the need for to obtain separate authorisations in each of those jurisdictions.

It is important to note that, while we refer to this principle as simply ‘passporting’  there is no single European passport that allows Financial Institutions to trade within the EU. There are instead many different passports depending on what services the Financial Institution is offering, each with its own set of rules. As of August 2016 there were 336,421 passports held by only 5,476 different UK firms.

Does the City have to lose passporting rights?

One of the consequences of Brexit may be that UK Banks lose their passporting rights and therefore their ease of access to the EU market.  It is this ease of access that has attracted many US, Japanese and Swiss banks to have an establishment in the UK in order to exploit the passporting benefits.

Post-Brexit, the governor of the Bank of France has said that the UK will not be able to use the current passporting system while the president of the Bundesbank has indicated that the only way the UK could retain full passporting rights is to adopt the ‘Norway option’ and remain a part of the EEA.

If the UK were to follow the Norway precedent, it would be required to:

  • • fully accept EU law;
  • • allow free movement of people; and
  • • contribute to the EU budget.

This option is unlikely to be acceptable to the current government because the UK would be required to contribute to the EU budget and no longer have any say about law making, or how the budget is spent.

All other options available to the UK will, in effect, reduce the UK’s ability to conduct business as easily within the EU.

Life after Brexit and third country rights

Whilst passporting is a useful tool, losing it will not signify the end of cross-border banking for the City. Moody’s have recently announced that the “impact of losing ‘passporting’ rights under EU law would be manageable for rated banks”. 

They do not consider it likely that the UK will lose all its passporting rights and instead look towards the incoming rights within the MiFIR regulation and MIFID 2 EU directive.

Under MiFIR, the UK may be deemed a ‘third country’ to the EU and thereby provide firms with an alternative means of accessing the single market. For example a UK bank will be able to conduct regulated business with a retail client in an EU Member State so long as the bank has established a branch in that Member State.  This could provide a smooth transition out of the EU however, it relies upon a European Commission judgment which is a political decision over which the UK will no longer have a say.

Passporting and the City

The City of London Corporation has been heavily involved in ensuring the voice of financial and professional services firms is heard in helping to shape the future relationship between the UK and the EU. They plan to maintain single market access on the same terms via a bespoke British option including passporting and keeping euro clearing in London. With both France and Germany facing elections in 2017, it is yet uncertain who the UK will be negotiating with, let alone how these negotiations may proceed.

For further advice on the issues raised in this article, please contact Nicolas Groffman, Partner in the Corporate Team  on 01242 216 177 or ngroffman@hcrlaw.com

Harrison Clark Rickerbys has 400 staff and partners based at offices, who provide a complete spectrum of legal services to both business and private clients, regionally and nationwide. To contact our teams, click on the links below for our:

 

Author
Harry Bengough
Partner, Head of Banking
Direct Dial: +44 (0)1242 246411
Mobile: +44 (0)7715 060 351
Email: HBengough@hcrlaw.com
Author
Tim Littler
Partner, Head of Banking (Cheltenham)
Direct Dial: +44 (0)1242 246497
Mobile: +44 (0)7725 242 593
Email: tlittler@hcrlaw.com
Author
Nicolas Groffman
Partner, Head of International
Direct Dial: +44 (0)118 945 0161
Mobile: +44 (0)7816 592 934
Email: ngroffman@hcrlaw.com