Volume: 11 Issue: 4
The UK Commons Select Committee on Exiting the European Union acknowledged in its third special report, published on 3 April 2017 (‘Committee Report’), the UK financial sector’s concerns about the potential loss of ‘passporting’ rights when the UK exists the EU, and recommended that the UK Government seek “secure stable and predictable equivalence arrangements or a bespoke system comparable to the EU system of ‘passporting’ which will ensure the stability of cross-border financial services between the UK and the EU” as part of its exit negotiations.
“The preferred alternative to passporting would be to reach a bespoke agreement with the EU, allowing wider, mutual rights of market access to reflect the UK’s unique position in relation to the EU,” explains Roger Tym, Partner at Hogan Lovells. “It will be important to agree an approach which enables access to skilled talent from both the EU and the rest of the world to keep the UK in a competitive position. Reaching an agreement is likely to be a difficult and lengthy process because it is necessary to obtain the unanimous consent of all 27 other EU Member States. The negotiations for the CETA between the EU and Canada have taken seven years and have demonstrated that the objection of just one country can threaten the conclusion of an entire agreement.”
“If the UK Government cannot reach a bespoke agreement, European legislation allows for third-country access to the single market for specific activities,” continues Tym. “If a third country regimes (‘TCR’) is available, it is on the condition that the EU authorities must first make a determination that the legal and regulatory system in the relevant third country is equivalent to that in the EU. However, settling for TCR access might not be satisfactory, because TCRs currently only cover a very small proportion of the financial services that are covered by the passporting regime and there is uncertainty regarding the ease with which the UK could obtain a determination of equivalence.” In the event that no bespoke agreement is reached and the UK cannot rely on the existing TCRs, the limited access options UK firms would have post-Brexit include establishing a subsidiary in the EU and applying to individual Member States for direct authorisation of a branch.
The Committee Report also recommends that “The Government should seek to agree a phased process of implementation for the [financial] sector early in the negotiations to provide certainty for businesses in preparing for Brexit.” “Certainty is vital,” said Alison Donnelly, Director and Head of Payment Services & E-money at compliance consultancy FSCom. “The costs of establishment in another jurisdiction are significant, and for most UK firms who passport, the return on any such investment is nil. The process is complicated, involving regulatory authorisation with the associated duplication of regulatory costs (fees and capital), office space, systems migration, relocation and hiring of appropriate staff, development of client terms and conditions under local laws and brand development. Firms need to know if they are going to have to go apply to another jurisdiction and they need time to do it properly.”
Meanwhile, the European Commission (‘EC’) published its ‘Public consultation on FinTech: a more competitive and innovative European financial sector’ on 23 March 2017 (‘FinTech Consultation’), which aims to assist the EC in developing its FinTech policy and assessing how FinTech can benefit the EU Single Market for financial services. The FinTech Consultation examines areas such as Distributed Ledger Technology and automated matching platforms. Notably it also asks questions around the future EU regulatory regime for FinTech, including whether the EU should introduce passporting for FinTechs across the EU Single Market, and asks respondents how regulatory and supervisory requirements for FinTechs might be harmonised.
On the same day as the FinTech Consultation was launched, the EU executive’s Vice President, Valdis Dombrovskis, gave a speech to a news conference in Brussels wherein he discussed the EC’s aim to “build a true technology-enabled single market” and the EC’s consideration of the EU regulatory regime for FinTechs, suggesting the possibility of customised licences for FinTechs.
“Without doubt, London is seen as the appealing European hub destination for FinTech firms right now. But with rivals such as Berlin jostling for attention, and the Brexit-induced threat of lost passporting rights, London’s lead looks set to be eroded,” said Tim Wright, Partner at Pillsbury. “If a pan-European approach to FinTech, as espoused by VP Dombrovskis, results in lower capital requirements and a lessening of the EU regulatory burden for FinTech firms, then Berlin as well as the likes of Cyprus, Ireland and Luxembourg look set to benefit at London’s expense.”