What Is Passporting?

Passporting allows a firm registered in the European Economic Area (EEA) to do business in any other EEA state without the need for further authorization from each country. Often companies based outside of the EEA will get authorized in one EEA state. The company will then use the passporting rights it receives from that country to either open an establishment elsewhere in the EEA or provide cross-border services.

Passporting is a valuable asset for a multinational company. It eliminates the red tape associated with gaining authorization from each country, a process which can be lengthy and costly for a business. Passporting eliminates regulatory barriers to free trade between EEA member states, making trade between these states as easy as – and, in some ways, easier than – trade between, for example, U.S. states.

For financial companies in the EEA, once a firm is established and authorized in one EU country, it can apply for the right to provide defined services across the European Union (EU) or to open branches in other countries, with only a small number of additional requirements. This authorization can be a firm's financial services ‘passport’.

Passporting eliminates the red tape associated with gaining authorization from each country, a process which can be lengthy and costly for a business. 

Brexit and Passporting

After Brexit, where the U.K. voted to leave the European Union in June of 2016, financial markets experienced a high level of uncertainty, as no one knew what would happen to the U.K. economy. Many speculated that some multinational companies, especially larger international banks, would leave the U.K. and base their operations elsewhere to retain their passporting rights and access to the single market. 

Once the UK leaves the EEA, financial services companies located there will lose their passporting rights throughout the EEA and will need to establish a subsidiary within an EEA country to regain those passporting rights. Otherwise, they could be subject to the same stringent regulations as any other non-EEA country wishing to do business in the EEA.

Some have suggested that the UK could get around this via regulatory equivalence or adopting regulatory standards equivalent to those of the pan-European financial regulator. However, this may not be acceptable to the pan-European regulatory body.

35,000

The number of jobs the UK financial services industry could lose without regulatory equivalence post-Brexit.

The impact of lost passporting rights on the UK financial services sector and its economy could be huge. About 5,500 British financial services firms have passporting rights pre-Brexit. The loss of EEA passporting rights could mean the disruption of as much as 20 percent of the UK’s investment and capital markets revenue. In just a few years after losing the passport, the UK could lose 10,000 finance jobs, which could have a serious impact on the economy, especially since those jobs tend to be higher-paying. Without regulatory equivalence post-Brexit, the UK financial services industry could lose as many as 35,000 jobs. That could mean a loss of £5 billion of tax revenue seven percent of the UK’s total economic output.

However, this damage could be mitigated depending on whether the UK and the EU agree on terms for Brexit. A two-year transitional regime will apply if terms are reached. Some jurisdictions, like the Netherlands, are taking steps to allow UK firms to continue their operations within the EEA. Many firms within the UK are taking steps to ensure that passporting remains uninterrupted, regardless of whether a deal or no-deal Brexit is achieved.