Passporting, post Brexit
Since its inception, the EU Passporting system has allowed firms not directly regulated by the FCA to provide products and services within the UK. Once a firm has achieved authorisation in a participating state, the firm may then apply to operate and provide financial services in another state even though it has not received direct authorisation from that states regulator.
The system relies on the assumption that regulators across the EU demand a similar standard of behaviour and compliance of the firms under their supervision.
The UK’s Brexit negotiators have confirmed that the legal consequence of Brexit, is that firms will lose their passporting rights. For firms already authorised by the FCA, this means they will only be able to continue operating in Europe by establishing subsidiaries in their target countries and applying for authorisation or a license from the local regulator. Billions of pounds in services are exported to the EU every year through this process and over 5,000 UK firms hold passports to sell into Europe.
Unsurprisingly, the UK market is an attractive prospect for European firms with more than 8000 currently using the Passporting system to sell their financial products to UK consumers. The changes brought about by Brexit will affect these European firms just as much UK-authorised firms.
With Brexit negotiations finally gaining pace, firms are inevitably considering their positions and operating models in a post-Brexit world. The eventual Brexit model dictates the possible options open to firms. The critical point is whether the UK can remain part of the European Economic Area (EEA) whilst no longer being a member of the Union. If the UK remains part of the EEA or re-joins it, passporting firms should not be adversely affected. However, it seems increasingly likely that a ‘hard’ Brexit is in the offing, which leaves just a few options for the future of firms currently passporting. The Swiss model could be adopted with bi-lateral agreements put in place, the FCA may grant thousands of temporary licences or more concerningly, passporting rights could be removed completely.
The FCA authorisation process currently takes around six months on average, and understandably the regulator has been reviewing the practicalities of potentially 8000 firms simultaneously applying to be regulated. The likely approach to be taken by the FCA is the issuing of temporary licences or permissions, which and give the regulator time to properly vet each applicant. Andrew Bailey appears to have disregarded ‘grandfathering’, where firms would be co-opted into FCA supervision without making a formal application, as a potential option, referring to is as ‘not appropriate’. More details regarding the temporary permissions legislation is expected in the coming months.
Brexit remains a by-word for the unknown and several firms who currently rely on passports to operate in the UK are now looking to be ahead of the curve and begin the authorisation process now. The FCA is considered one of Europe’s most comprehensive financial services regulators and imposes exacting standards on its firms. Achieving authorisation is not a simple tick-box compliance exercise and a considered approach should be taken.
CCAS is highly experienced in helping consumer credit firms achieve FCA authorisation, and importantly, ensuring that ongoing regulatory expectations are met. If you are a firm who currently uses the passporting system to operate in the UK, contact us to discuss your options post-Brexit and how we can help you mitigate the risk that current uncertainties pose.