Data from the UK’s Financial Conduct Authority (FCA) shows that around 5,500 UK-registered financial services firms rely on ‘passporting’ to do business in European Union (EU) countries, revealing the potential impact an exit from the single market will have on the City of London.
On the European side, the FCA says some 8,000 firms rely on passporting to do business in the UK.
Passporting is issued under various EU directives and the nature of the passporting mechanism means that a firm can hold multiple passports under one directive and/or multiple passports to operate cross-border into different member states. It allows firms to operate and sell their services within the bloc without needing additional local licences.
The total number of passports held by companies from both sides is 359,953 – highlighting the scope of cross-border services that could be affected.
“The business put at risk could [if the UK leaves the EU] be significant,” says chairman of the Treasury Committee, MP Andrew Tyrie, to whom the FCA data was sent upon request.
“None of the current off-the-shelf arrangements can preserve existing passporting arrangements, while giving the UK the influence and control it needs over financial services regulation as it develops. This issue needs to be right at the top of the in-trays of the chancellor, the governor of the Bank of England, and the UK’s lead negotiators.”
Earlier in the week, ratings agency Moody’s said it believes the loss of passporting would be “manageable” for UK banks and financial services. The agency points out that incoming European rules, Mifid II, will allow Brussels to recognise similar markets with regulatory frameworks of the same standard. This recognition would allow many institutions to keep key European operations in London.
“We consider that the equivalence provisions within Mifid II, the complexity of [quickly] unwinding the status quo and the desire to minimise the initial impact on European-domiciled banks will lead to the preservation of most cross-border rights to undertake business,” says senior vice-president at Moody’s, Simon Ainsworth.
However, he acknowledges that third-country equivalence provides less certainty for firms than passporting, as it depends on a European Commission (EC) judgment – a political decision that could take time to make and faces being withdrawn at a future date.