Out-Law News 2 min. read
23 Sep 2016, 3:57 pm
This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing business and sign up to receive our 'What next?' checklist.
A further 8,000 firms based in the EU or EEA have been granted passports to market and sell their products in the UK according to the figures, which were supplied by the FCA following a request by the Treasury Select Committee (7-page / 308KB PDF).
Committee chair Andrew Tyrie said that the figures provided "an initial idea of the effects of losing full access to the single market in financial services".
"The business put at risk could be significant," he said.
However, a report published this week by ratings agency Moody's said that most UK and EEA firms would find the loss of passporting rights following the UK's formal withdrawal from the EU to be "manageable". The ratings agency is anticipating at least a short-term impact on firms' profitability if they have to move some of their activities into the EU in order to continue to benefit from passporting, but said it was "unlikely that all permissions granted to financial firms will be lost".
"This is because, even without a formal arrangement, EU law already provides for limited recognition of non-EU regulatory regimes for the purpose of undertaking investment and banking business," said Moody's senior vice president Simon Ainsworth.
"In particular, we consider that the third country equivalence provisions contained within the incoming MiFID II EU directive may provide firms with an alternative means of accessing the single market. The complexity of (quickly) unwinding the status quo and a desire to minimise the initial impact on European domiciled banks will likely lead to the preservation of most cross-border rights to undertake business," he said.
Passporting arrangements enable firms based in one EU member state to trade anywhere in the bloc without having to seek multiple authorisations. The UK's financial services industry has made it clear that its preferred option as part of the Brexit process would be for the UK to seek access to the single market, and to continue to benefit from passporting rights.
However, numerous reports have suggested that this type of single market access would almost certainly require the UK to agree to freedom of movement of EU workers and to comply with relevant EU regulations, which campaigners have said would undermine the Brexit process. Some financial contribution to the EU is also likely to be required, as is currently the case for Norway and the other non-EU countries that form part of the EEA.
Some, but not all, of the EU directives contain 'equivalence' provisions for non-EU countries. However, this will only be granted on a case-by-case basis and depends on a decision by the European Commission.
"Care needs to be taken in thinking that equivalence is a panacea," said financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com. "There are significant process hurdles to be met and the decision is not permanent. A change on either side of the equation can remove the equivalence status."
According to the FCA figures, 5,476 UK-registered firms hold at least one of 336,421 passports, allowing them to do business in another EU or EEA member state. Similarly, 8,008 firms from elsewhere in the EU or EEA hold at least one of 23,532 passports allowing them to conduct business in the UK.
The majority of these passports have been issued for cross-border investment services under the Markets in Financial Instruments Directive, or under the Insurance Mediation Directive. Passports have also been issued under a further nine EU directives. The number of passports issued does not necessarily reflect the value of business conducted under those passports, according to financial regulation expert Elizabeth Budd.