LONDON — The loss of passporting rights post-Brexit will not necessarily be disastrous for UK-based financial services firms, according to a financial services lawyer.
Depending on the exact nature of the services they provide, and where they provide and advertise them, firms may be able to retain existing European clients even if the UK loses financial passporting rights, and without opening offices in the European Union (EU).
“For some firms, it may be the case they don’t need a passport in every jurisdiction,” Tim Dolan, a partner at Reed Smith, told Business Insider. He added that some firms “may not need a passport at all.”
In the event that the UK leaves both the EU and the European Economic Area (EEA), passporting rights — which allow UK firms to access customers and financial markets in the EU and EEA — will likely be lost, although the option to negotiate bilateral agreements will still be open. This has prompted concerns that banks will be forced to move staff out of London and into the EU.
According to the UK’s Financial Conduct Authority (FCA), around 5,500 firms registered in the UK rely on passporting rights for the financial services sector, and many firms hold several passports, meaning the total number in the UK is over 336,000.
But it’s possible that not all these firms actually need them. If, after Brexit, EU customers proactively contact UK-based firms for advice or to execute orders and the firms are not advertising in the EU, Dolan says: “I query whether they need a passport.” Doing what is known as a “characteristic performance test,” he says, is important to assess exactly what each firm does, and the associated requirements.
To date, many firms have not done this analysis: while the UK remains a member of the EU, financial services companies registering with the FCA have the option to apply for a range of passports.
“UK firms haven’t had to think about it, it’s easier to tick the box with the FCA,” says Dolan. Although this may change in the future, he says, many firms “may be surprised” about exactly what they need.
Speaking at last week’s Association for Financial Markets in Europe (AFME) conference, Rodrigo Buenaventura, director general at the Comisión Nacional del Mercado de Valores, said there will “be ways around the passporting issue.” In Dolan’s view, this is not to do with finding loopholes, but is simply a question of what precisely is required, depending on the nature of a firm’s work.
However, Buenaventura also said he expects that London will not be as large a financial centre after Brexit as it is today, and that companies should “prepare for the worst.”