Will UK financial services suffer from losing passporting rights after Brexit?
What are ‘passporting rights’?
Currently a UK business are able to provide a range of financial services anywhere in the EU, and in the wider European Economic Area (EEA), while being based in the UK and regulated by UK authorities. This is because businesses offering financial services have ‘passporting’ rights which allow them to offer financial services to the rest of the EEA (28 EU members plus Norway, Iceland and Lichtenstein) while only having to follow one set of regulations.
Businesses can do this either by offering their services under an ‘establishment’ passport which allows them to set-up braches in EEA countries, or by offering services remotely across borders under a ‘services’ passport.
This can save companies the substantial costs of having to set up headquarters in each country across the EU, and having to show compliance with regulations in each country that they choose to provide services. It also means that companies can more easily offer services remotely, meaning they do not even need to have an office in a country to operate there.
The financial services sector accounts for about 8 per cent of the UK economy, 3.4 per cent of jobs and about 10 per cent of UK exports. This means that any significant impact on the sector is likely to have a noticeable impact on the UK economy.
What will happen if there is a Brexit?
As with most discussions about the UK post-brexit, what happens to passporting rights and how it will impact on UK financial services will depend on how the UK exit the EU.
As passporting rights are part of an EEA agreement, any EU exit where the UK remained in or re-joined the EEA would see no impact on the right of companies to operate across EEA countries as they currently do.
If the UK leaves the EU without retaining EEA membership then there are two options in terms of passporting, some level of bilateral agreements (as exists with Switzerland) or no passporting agreement. Both of these options ould have a negative impact on the ability of UK firms to provide services to the rest of the EEA.
Switzerland currently has a series of bilateral agreements covering there trading relationship with the UK. They current have an agreement that allows Swiss general insurers to set up establishments in order to provide limited financial services across EEA countries.
As the UK is a significant provider of financial services there is a chance that some agreement may be reached. However the Swiss agreement requires establishment passports, which means businesses would still have to set up offices within the EU if the UK leaves. Also as with the Swiss agreements, the services which they are able to provide under a passport may well be far more limited.
Despite this, London’s status as a global financial centre, its influence in helping to set financial regulation globally and the fact it is currently compliant with EU directives on financial services, makes it likely that the UK is in a better position to reach an agreement so EU businesses can also retain access to the UK’s financial services. This means any agreement could well be different and more comprehensive than the Swiss bilateral arrangement.
Though, as the UK is a net exporter of Financial Services, there will also be less incentive for EU countries to reach an agreement with the UK as without an agreement it will reduce competition for other EU countries financial services sectors.
If the UK leaves the EU with or without a trade agreement but no agreement to allow passorting, then a Brexit could have a fairly damaging impact on the financial services, an impact which without future agreement could permanently reduce UK access to the EU financial services sector. The reduction in access and the cost of relocating some services to another EU country in order for businesses to maintain the same level of services in the EEA are, other than economic uncertainty, likely to be the two biggest impact’s on UK financial services.
Though financial services are likely, after the initial shock of uncertainty, to continue to grow and be a significant part of the UK economy, the reduced access, and the moving of some services will mean that compared to remaining in the EEA (whether or not we stay in the EU) to contribution of financial services to the UK economy will be smaller.
A report by PwC estimated that cost of relocating services alone could have a -0.4 per cent impact on UK GDP by 2030 and the barriers to trade cause by the loss of passporting rights could reduce the contribution of financial services by between 0.6 and 2.2 percent. This is turn could mean between 70,000 and 100,000 less jobs in the short run, and 10,000 to 30,000 less jobs by 2030.
A Strong Sector
Despite the impact of passporting, the strengths of the UK financial sector and its standing as a global financial centre, means that, with the exception of having to set up subsidiaries within the EU, financial firms are likely to keep headquarters and much of their operations within the UK. It also means that, as the UK has been central to determining financial regulation at an international level through the G7 and OECD following the 2008 crisis, financial regulation is unlikely to significantly diverge from the EU. This means that outside of passporting rights, significant services trade barriers are unlikely to arise. So after the initial shock of exiting the EU and having to make adjustments to keep access to EU markets, the financial maker sector is likely to continue to grow and be a significant part of the UK economy.
Summary: Financial services are likely to suffer the biggest impact of UK business sectors but this will depend heavily on the exit arrangement. Passporting rights will be lost in the event of no EEA access or a specific bilateral agreement, the sector will contribute less to GDP, and companies will incur the cost of setting up subsidiaries.
However, London is a powerful global financial centre and is an important European asset. The UK has been influential in setting regulatory standards which would ease access to the single market. In all likelihood companies will retain a base in the UK even if they have to set up subsidiaries to gain access to the EEA.
- Justin Protts – EU Research Fellow
Photo: Mariano Mantel