Playing Abroad?

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2 July 2018

Carrying out financial services in other countries, and how it might change post-Brexit.

The nations of Europe and the rest of the world are currently engaged in fierce battle as the World Cup in Russia continues. However, in recent years a strong spirit of co-operation has been evident amongst the different countries of Europe when it comes to financial services and their regulation.

The current 28 European Union member states, plus the European Economic Area (EEA) countries of Iceland, Norway and Liechtenstein, operate a system of ‘regulatory harmonisation’, ensuring that each member state’s financial rulebook is equally stringent. The Markets in Financial Instruments Directive (MiFID), the Insurance Mediation Directive (IMD) and the Mortgage Credit Directive are all examples of significant regulatory changes that were driven by the EU, with a view to harmonising standards across different states.

Because the 31 EU/EEA countries ensure that rules and standards are aligned in this way, and because the free movement of services is one of the ‘four freedoms’ that are fundamental to the way the EU operates, financial services firms in one EU/EEA member state are free to operate in any other EU/EEA member state without requiring separate authorisation from each national regulator. So, a UK-based firm would need authorisation from the Financial Conduct Authority (FCA), but once this had been obtained, it could trade in France, Norway, Italy or anywhere else on the continent simply on the basis of its UK permissions. This system is known as the ‘passporting’ regime.

Instead of applying for separate authorisation from each national regulator, a UK-based firm wishing to trade in the EU/EEA would simply apply for a ‘passport’ from the FCA. A passport would be required, for example, if a London advisory firm was servicing clients in France, Germany or any other EU/EEA country. Depending on the type of activity the firm carries out it may be necessary to hold more than one passport, for example there are separate IMD and MiFID passports.

Separate permissions are required from national regulators where a firm wishes to transact business that is not covered by the terms of their passport. Switzerland is not a member of the EU or EEA, so is not covered by the passporting regime, and separate permission has always been required to carry out financial services activity in that country. Likewise, separate permissions are required from the appropriate local regulators to carry out business outside the EU/EEA, for example in North America or the Far East.

However, use of the passporting regime by UK-based firms appears to be coming to an end. The UK will of course leave the EU on 29 March 2019, and although a transitional period lasting until the end of 2020 appears likely, come 2021 it is highly unlikely that the UK will be part of the passporting system. Leading politicians from both the UK and the EU have apparently ruled out any question of passporting continuing beyond this time, as the UK will be leaving the EEA as well as the EU and has also indicated that it will be unwilling to follow rules imposed by the EU once its membership has ended.

So many elements of the post-Brexit landscape are still unclear, however it does seem highly likely that a UK-based firm would need to obtain separate permission from all relevant national regulators should it wish to continue doing even a small amount of business on the continent.

A number of major players in the industry are reported to be considering setting up operations in other European countries as a result.