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EU passporting – will the “transition period” create an opportunity for the UK?

What is Passporting?

Passporting is a legal mechanism that allows financial services companies, which are based and regulated in one EU country (or the EEA) and authorised under one of the EU’s single market directives, to do business in the other member states. Passporting prevents these firms from having to set up costly subsidiaries, which can keep capital in the country of residence, something these firms are facing as a result of Brexit.

Transition period

European leaders have signed off on a transition period which would effectively extend the UK’s membership of the EU until December 2020. The transitional period will last from 29th March 2019 to 31st December 2020, and has been described as an “orderly withdrawal.”

Will the “Transition Period” create an opportunity for the UK?

A co-ordinated statement from the Bank of England and Financial Conduct Authority announced that the financial services firms based in the EU that currently use passporting arrangements to access the City of London can continue to do so throughout the transition period.

In addition, the Bank of England stated that investment banks based in the EU that access the City of London through branches would be facilitated post Brexit through a regulatory licence system similar to those used by Japan and the US.

Perhaps this olive branch of sorts from the UK to the EU will create a moment of reflection among EU regulators. Will they be as accommodating as the UK? Unless EU regulators can repay the courtesy that the UK has paid them, there will a high risk of jobs and business moving to an EU member state where they can maintain their passporting rights.

“The impetus is now on EU regulators to follow suit, and for both sides to work together on cross-border models of supervision that businesses on both sides of the channel can rely on throughout the (transition) period.” Stephen Jones – Chief executive of UK Finance

Two possible Options

There are two possible options available to the UK if it wants to keep its passporting after Brexit.

Option one: The UK could join the EEA, much like Norway and Iceland, and remain in the single market. This would mean that the UK would have to give up some of its regulatory power to the European Court of Justice, a situation many within the British cabinet do not want, PM Theresa May included. “We’re not looking for passporting because we understand that it is intrinsic to the single market, which we would no longer be a member of. It would also require us to be subject to a single rulebook over which we would have no say,” UK PM Theresa May.

Option two: UK based businesses could set up subsidiaries in the EU which would have passporting rights. However, this could be inefficient for UK banks, with some saying that they would be better off moving their entire operations. These subsidiaries cannot be ‘brass plate’ entities, they must have a physical presence and employees.

Whether or not the EU will return the gesture regarding passporting to the UK remains to be seen. It looks doubtful though.

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