Financial services regulation: legal implications of Brexit for your business

A single market for financial services

Many European Community measures have been adopted to encourage the proper operation of the single market in the financial services sector, not least those aimed at harmonising banking, insurance, markets in financial instruments, alternative investment fund management, retail funds, payment services, e-money, consumer credit, mortgages, and so on. Equally, the EU has implemented a number of money laundering and counter-terrorist financing measures.

The passporting right

One feature that almost all of these harmonisation measures have in common is the so-called passporting right: the right for a person authorised in one Member State (the home state) to provide services on a cross-border basis in another Member State (the host state) or to do so from an establishment in that host Member State, in either case in reliance upon that person’s authorisation in its home state without the need for separate authorisation in the host state.   

This is similar to the right of individuals to move freely within the EU using their passport. There are some processes and qualifications around this passporting right: often, the exercise of the passporting right gives rise to local notification and reporting obligations in the host state. In addition, regard must be had to the host state’s consumer protection anti-money laundering laws. However, the authorisation and prudential supervision in the home state is largely respected.

Will passporting survive Brexit?

Following Brexit, the key question is whether this passporting right will continue to exist, such that UK firms would still be able to passport into other EU or European Economic Area (EEA) countries?

• The passporting right is of fundamental importance to financial services: its loss would affect banking, insurance, markets in financial instruments, alternative investment fund management, retail funds, payment services, e-money, consumer credit, and mortgages, amongst other things.
• Passporting rights will NOT automatically survive Brexit; they will need to be agreed as part of the exit arrangements.
• This could either be specific to the UK (unlikely given intimations from other EU Member States) or along the lines agreed with the three non-EU EEA states of Iceland, Lichtenstein and Norway (quite possible, as the framework already exists).
• Absent any arrangements, and even with them (as they will provide inferior rights), all those financial services firms currently passporting throughout the rest of the EU – for marketing as well as provision of services – will need to completely re-think their strategy and approach towards the European market.

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