Sunday, June 26, 2016

analysis | What is “passporting” and why is it so important to the UK after Brexit?

Papers, please.

No Exit signs at St Pancras station in London. Credit: Author, 2014

The British financial industry, hammered by the country’s momentous decision to leave the European Union after Thursday’s referendum, faces continued uncertainty over the “passporting” arrangements between a newly separated UK and the EU. The future of British trade hangs in the balance, with the financial sectors calling for swift clarification on the country’s new political and financial relationship with the trading bloc.

What is Passporting?

A core part of the EU free-trade agreements, “Passporting” refers to the right of British-based firms to do business in other EU countries without needing to incorporate in the target country. Through this arrangement, a British-based insurance company can offer its services in Germany without needing to actually set up shop there, and vice versa. Likewise, an American bank can create a subsidiary in the UK, and can simply use this “springboard” to access markets in France and Spain.

Withdrawal from the European Union now means that any British-based financial company wanting to do business in the EU must now incorporate in a country within the trade bloc. This naturally boosts the appeal of alternative financial hubs within the EU like Dublin, Paris, and Frankfurt. Many members of Lloyd’s of London, the world’s premier insurance exchange, plan to “simply shift some of their business to subsidiaries within the EU, bypassing the Lloyd’s market in the process,” the Financial Times reports.

In a white paper released last year, law firm DLA Piper notes that should separation occur, UK-based financial organizations would be subject to the EU’s same regulatory standards, but without the ability to directly influence the formation of the standards. Passporting in the UK is currently regulated through the Financial Services Authority.

Some political organizations and think tanks have called for Britain to seek membership within the European Economic Area, allowing it to take advantage of passporting without being a full member of the EU. Current EU passporting agreements also extend to countries in the EEA such as Norway and Liechtenstein, which are not full members. EEA membership, however, would require the agreement of a bruised and truculent EU and the free movement of persons—anathema to the successful Leave campaign, which made the restriction of immigration a central platform.

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