Essay Example: EU Passporting for UK Financial Services

Abstract

The UK enjoys substantial benefits from the current single market regime where is a major exporter of banking services. This is under the various directives including the Capital Requirements Directives (CRD), the Markets in Financial Instruments Directive (MiFID), and Payments Services Directive (PSD), which are related to the single market passporting regime. However, after Brexit, the UK will cease to enjoy the passporting rights as they apply to a single market. However, the UK has various options to ensure that bilateral relations between the EU and the UK are maintained. These are full Brexit, joining the EEA, maintaining bilateral relations (also referred to as the Swiss option), and lastly, relations as established under passporting and equivalence. In the full Brexit, the UK-EU relations will be regulated under the WTO rules. However, these have limitations and would mean that the UK cannot enjoy the benefits it currently has, but a smooth transition to post-Brexit bilateral relations with the EU is paramount, and the UK should negotiate a bilateral agreement to continue trading with the EU member states.

Introduction

The EU passporting system for banks and other financial services firms allows for free trade with minimal additional authorization, and thus, it is the foundation of the EU single market for offering financial services. Therefore, the EU passport is a vital legal mechanism that allows financial services corporations that are regulated and based in one country within the European Economic Area (EEA), and authorized under one EUs single market directives, to do business in other EEA member states on the basis of home state authorization. Therefore, the passporting rights are essential for the financial services companies within the EU as they allow them to run operations in the entire EEA (consists of EU countries and Lichtenstein, Iceland, and Norway). Therefore, this allows for these countries in a single market to conduct business freely, however, with the Brexit vote, there is the uncertainty of whether Great Britain will retain them when Brexit vote is upheld. In fact, according to Jens Weidmann, Deutsche Bundesbanks president passporting rights are tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area. As such, owing to the debate whether passporting rights will cease, the current paper critically assesses Jens Weidmanns statement reflecting on the legal environment around EU passporting for UK financial services, currently and after a potential Brexit.

EU Single Market

In the 1990s, the banking and financial structures of the EU changed substantially and in 1993 the single market in banking was inaugurated, which consequently transformed the regulatory and legislative environment for the financial and banking markets, which saw the initiation of a single central bank, the European Central Bank (ECB), which has now facilitated the single market systems. Under the single market, the EU states along with their additional counterparts in the EEA, enjoy reduced trade costs due to the reduction on non-tariff barriers. The non-tariff barriers include some measures that raise the costs of trade including rules of origin checks, border controls, and cross-country differences in regulations over things like standards and safety of products and services.

Under the single-market framework, there are legislative principles that guide the EUs approach to the single market baking. Firstly, each country should retain its banking regulatory and supervisory agencies. Secondly, there should be minimal harmonization from a level above the national one, which is related to soundness and safety and that the individual nations may have their own supervisory and regulatory regimes but all banks in the EU should abide by specified minimal standards as encapsulated in the various directives including the Capital Requirements Directives (CRD), the Markets in Financial Instruments Directive (MiFID), and Payments Services Directive (PSD), which are related to the single market passporting regime. Thirdly, the directives are usually issued ta the EU level in that the nations are required to take legislative actions, but the contents of these legislations should be dictated to them.

The European Banking Union (EBU) is under the EU single market and applies to the EU member states.EBU comprises of a Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism, which includes the Single Resolution Fund (SRF). The third EBU pillar is the Single Deposit Guarantee Scheme (SDGS). The legal framework contained in the institutional architecture of SRM and SSM, which is comprised of the public international law instruments and the EU, is under the SDGS, but not currently pursued. A new agency that was incorporated in the EU under EBU is the Single Resolution Board (SRB), which became functioning in January 2016, and its primary responsibility is drawing up and executing resolution schemes for banks and cross-border banking groups in the EU member states. The results of case Case C-270/12 United Kingdom v European Parliament and Council that focussed on delegation to agencies and the use of Article 114 of the SSM regulation in the case of short-selling intervention powers conferred on the European Securities and Markets Authority by Article 28 of the Short Selling Regulation as well as Case C-370/12 Pringle v Ireland which focussed on intergovernmental agreements between EU member states, law, and institutions, have successfully increased the legal certainty in the areas. Therefore, the SRM has stabilized the euro area under the single market legal framework and promote the integration of the EU financial market.

The Single Supervisory Mechanism shapes the rules applied to all the member states of the EU and all internal market issues that are related to financial services have no clear euro block area. The coalitions of the EU member states on financial services matters cuts across euro area/non-euro area membership. For this reason, the UK has been joined by other states including Luxembourg, Ireland, and the Netherlands among other EU member states in its positions about financial services issues, from the financial transactions tax to the Alternative Investment Fund Managers (AIFM) Directive. Consequently, this has stipulated the union banking in the EU member states as stipulated in Clause 2 of the European Council, which articulates,

Clause 2. Union law on the banking union is applicable only to credit institutions located in the Member States whose currency is the euro or in the Member States that have concluded with the European Central Bank a close cooperation agreement on prudential supervision [thus participating in the Banking Union].The single rulebook is to be applied by all credit institutions and other financial institutions to ensure the level playing field within the internal market. To this end, specific provisions within the single rulebook may be necessary for Banking Union members, while preserving the level-playing field and contributing to financial stability (European Council, 2016, p. 13).

Current EU Passporting for UK financial services

In the EU passporting system, all EU member states (including the UK) are part of the EU single market that allows for free circulation of financial services. For instance, there has been a harmony of financial services in the EU owing to the development of a single EU financial services rulebook, as well as the increase in harmonization and supervision of financial regulation standards. Therefore, the UK can offer financial services to other national markets in the EU member states. Essentially, once a UK financial services company or bank is established and consequently authorized in one EU country, it can apply to provide financial services in the entire EU, or it is free to open up other branches across EU with few additional authorization requirements, which is referred to financial services passport. The passport is not available for countries outside the EU, and thus. Non-EU firms face regulatory barriers in providing cross-border investment and banking services to their local customers, which means that once a non-EU firm obtains a license in a particular member state, it only conducts business in only that state. Currently, UK firms have nine passports that are each embedded in particular EU regulation or directive establishing the basic rules of business activities that can be conducted under such a passport.

For corporate banking, UK-based banks can use Fourth Capital Requirements Directives (CRD) passport that can be used in providing advisory services, custody or lending, or depositing services to businesses in other EU states. The UK-based bank can also serve clients in the entire EU via branches established in the EU states under the preferential terms that are created within the passporting framework. For market services, UK-based banks can use the Markets in Financial Instruments Directive (MiFID) passport that allows the bank or financial company to conduct business in other EU states, such as taking a derivative position in hedging loans, exchange rate exposure or debt issuance via London-based markets. The MiFID passports enable clients to sell or buy bonds and shares for other financial instruments and trade on exchanges and trading venues in the whole of EU. For private banking, UK-based financial firms and banks can use CRD and MiFID passports in assisting clients in other EU states in arranging a line of credit, managing investment portfolios, as well as advising on financial planning. For payment services, both the bank and non-banking corporations based in the UK utilize the Payments Services Directive (PSD) passport that provides for payment services to EU member state clients.

Therefore, from these passports, it can be derived that they are the basis for a single market in financial services and are utilized in enabling a steady flow of financial services trading in the entire EEA and EU. They are vital for the UK as it is the most significant financial services exporter inside the single market, and it is estimated that it exports more than 20 billion of services to clients in the rest of EU in 2014 and helps provide hundreds of billions of euros in finance. Passporting is based on two features. Firstly, it enables financial service companies and banks to sell services in EU borders on the same foundation as if they were present in the market of sale, which is vital in investment, corporate, and private banking where clients may be in one EU country while the bank may be based in another. Secondly, banks have the capacity of establishing branches in other EU states primarily on preferential terms. While non-EU banks branches in the EU are treated...