A significant proportion of institutions regulated by the UK
Financial Conduct Authority enjoy 'passport' rights under
one of the EU single-market financial services directives, allowing
them to provide services or establish a branch on cross-border
basis in other EEA member states, without having to obtain fresh
licences in those 'host' states.
The decision to leave the EU now poses a major question for
these firms that is whether their passport rights will be
maintained and how they might provide services to clients or
operate in the rest of the EU.
The current passport rights include:
The Markets in Financial Instruments directive
('MiFID'), in respect of investment managers,
The Undertakings in Collective Investments in Transferable
Securities ('UCITS') Alternative Investment Fund Managers
directives ('AIFMD'), for fund managers;
The Capital Requirements directives ('CRD') and
regulation ('CRR'), for banks;
The Solvency directives, in respect of insurers.
Consumer credit providers are not entitled to a passport, so a
lender from another EU member state who currently wants to offer
loans to borrowers in the UK would need to set up a UK
establishment and apply for authorisation from the FCA.
It appears that the majority of UK MPs are acutely aware of this
potential risk, and are considering voting on a cross-party basis
for the UK to remain a member of the European Economic Area
('EEA'), in the event that it leaves the European Union.
Current members of the EEA who are not also members of the European
Union are Iceland, Liechtenstein and Norway. These countries are
not represented in the European Parliament, European Council or
European Commission, but are bound to implement directives which
have EEA-effect, and thereby enjoy the benefits of the single
market and its passport.
The EEA Agreement guarantees citizens of EEA member states the
following 'four freedoms':
The free movement of goods;
The free movement of services;
The free movement of capital; and
The free movement of persons.
The EEA Agreement does not cover the following EU policies:
Common Agriculture and Fisheries Policies (although the
Agreement contains provisions on various aspects of trade in
agricultural and fish products);
Common Trade Policy;
Common Foreign and Security Policy;
Justice and Home Affairs; or
The direction of the debate that was being pursued by the leave
campaign suggests that, although leaving the EU would not
necessarily mean that the UK must leave the single market, it might
choose to do so. In particular, the Leave Campaign's focus on
controlling immigration – i.e., the ability of the UK to
restrict the right of citizens from other EU countries to visit,
live and work in the UK, would only be achievable by imposing
restrictions on immigration from other EEA member states, meaning
that the UK would need to leave the single market.
If the UK were to also leave the single market following a
Brexit, then UK firms would cease to enjoy passporting rights on
the same basis, since it would be a 'third-country' (i.e.,
not an EEA member state). Given the importance of financial
services to the UK's economy, it is very likely that the UK
government would seek to negotiate an equivalency passport for UK
firms, akin to that already set out in AIFMD (which envisages a
passporting regime for firms established in third countries,
although this is not likely to become available until October 2018
at the earliest).
However, this form of passport depends on those third countries
applying broadly equivalent rules and protections to those
available in EEA member states. The UK might therefore be in a
position where it would need to continue to implement EU directives
in its legislation in order to benefit from passporting rights,
without having a say in the drafting of those directives.
There are clearly significant potential risks for financial
services firms following a Brexit vote, and many will be
considering now how much contingency planning they should do. With
many factors in play, this is far from straightforward and
Withers' financial services regulatory team is available to
answer any questions you may have on this issue.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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