Passporting

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 that country.

Passporting is particularly relevant to financial and banking firms located in the Eurozone with cross-border operations.

Understanding Passporting

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 that 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 European Union (EU) country, it can apply for the right to provide defined services across the 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".

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. 

The UK left the EEA in 2020. As a result, financial services companies located there have lost their passporting rights throughout the EEA and will need to establish a subsidiary within an EEA country in order 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.

Since Brexit has been completed, analysts are trying to forecast the economic impact on the U.K. and its financial sector. About 5,500 British financial services firms had passporting rights pre-Brexit. The loss of EEA passporting rights will thus mean some sort of disruption of as much as 20% 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 new terms post-Brexit. Some jurisdictions, like the Netherlands, are taking steps to allow UK firms to regain their operations within the EEA via special consideration. Many firms within the UK are also taking steps to ensure that passporting remains uninterrupted by establishing subsidiaries abroad.