The FCA have advised, in a letter to the Treasury Select Committee (published in November 2016), the implications for banks and other regulated firms in relation to their exercise of the ‘passporting’ rights in the event of UK leaving the single market.
The letter explains that under the single market ‘passporting’ regime, an entity’s authorisation to do business in one Member State is recognised by others as an authorisation to do business in their territory as well, subject to notifying the ‘home regulator’, without further authorisation. It clarifies that there is no single passport available across all financial services sectors and firms can seek specific permission through notification to provide cross-border financial services (directly cross-border or via a branch) as detailed in the relevant single market legislation. Where such passporting is not available (for example, there is no ‘consumer credit’ passport), firms choose to seek authorisation in the Member State in which they wish to do business or rely on their direct rights under the Treaty on the functioning of the European Union (TFEU) to operate on a cross-border basis from the UK.
If the UK were to leave the single market and no Free Trade Agreement with the EU was in place, its financial services sector would no longer have access to the passport mechanism and would ‘default’ to the access governed by the World Trade Organisation (WTO) protocols. WTO’s existing financial services schedule does not cover the UK as a country outside the EU and, in the absence of ‘passporting’ rights, UK firms would need either to seek access under ‘equivalence’ frameworks to be able to use ‘third country’ passports where available under specific pieces of legislation. The specific process leading to establishment of ‘equivalence’ can take time to work through and a decision on this may also require that the third country can provide an effective reciprocal mechanism for offering access to EU entities. Other alternative for firms would be to seek authorisation from each regulator of the jurisdiction into which they aim to do business.