Brexit Q&A: Passporting
In this Brexit Q&A Edward Chapman provides details surrounding the topic of Passporting. This includes the end of the current passporting regime and the risks associated with Brexit.
What are the implications of passporting?
Passporting allows firms registered in any member state of the European Economic Area (EEA) to do business across the whole EEA without obtaining further approvals or consents from each individual EEA member state. This is particularly valuable for companies operating across borders and the financial services industry; in all there are around 5,500 passporting registrations in the UK and up to 35,000 jobs that depend on an equivalent regime being implemented after Brexit.
Why does that matter?
Passporting allows companies to operate smoothly across the whole EEA and makes it simpler to open offices and provide services across the region. It also reduces barriers to entry by reducing the amount of regulatory red-tape, which is particularly useful for the UK’s burgeoning FinTech sector. The financial services sector is a key part of the UK economy and access to the passporting regime is one of the elements that has ensured London remains one of the global financial centres.
What are implications and risks associated with Brexit?
Whether there is a deal or no deal Brexit the current passporting regime will end. The base position is that UK firms lose their passporting rights and the UK becomes a ‘third country’, and this would happen immediately in the cliff edge scenario of a no deal Brexit. The loss of passporting rights puts thousands of jobs at risk, and it has been well publicised that major banks and other financial firms may move jobs from London to other EEA member states (France and Germany being the preferred options). If there is a deal it is likely to include a transitionary period. In such a period the UK may be able to circumvent the loss of passporting rights through regulatory equivalence. It should be noted the FCA has introduced a temporary permissions regime to mitigate the loss of passporting rights, and this will allow EEA firms that currently provide services into the UK to continue to do so, even in the event of a no deal Brexit. An equivalent arrangement may be agreed for UK firms operating across the EEA but this is far from guaranteed.
What can companies do now?
UK based firms with a passporting registration should look into establishing a subsidiary company or a branch office in another EEA member state. Favoured jurisdictions for this are Ireland and the Netherlands. It should be noted that there will be costs associated with setting up these entities and authorisations will still need to be obtained from the relevant regulator. Firms based outside the UK but elsewhere in the EEA should look at incorporating a UK subsidiary company or branch office to ensure services can continue to be provided following Brexit.