It is inconceivable that the UK won’t have financial passporting post-Brexit

It is inconceivable that the UK won’t have financial passporting post-Brexit

What the UK’s relationship with the EU post Brexit will be has become of central concern to many in the UK business community and both MPs and Peers are asking questions in Parliament, especially regarding the financial sector.

In this, Sir Ivan Rogers has been busy. The former head of UKREP under David Cameron has this month given evidence to both the European Scrutiny Committee and the Exiting the European Union Committee that covered all manner of areas, including financial passporting.

In his recent appearance in front of the Brexit Committee, Sir Ivan repeated his opinion that if the UK leaves the EU Single Market, there would be no financial passport per se. His views on this and the nature of how equivalency is granted may provoke horror to some in the financial community. The good news is that, in fact, it is inconceivable that UK firms won’t have the ability to sell financial services in the EU post Brexit.

One reason is obvious: the market for EU financial services is in the UK. As detailed in the second edition of Cutting the Gordian Knot, written by Iain Murray and myself and published by the Competitive Enterprise Institute last year, the EU has failed to develop either the capacity or the infrastructure for a successful financial services industry without the UK. As a result, foreign exchange, rates, and credit trading are all handled primarily in the UK.

Similarly, as co-location services and high-frequency trading are also based in London, if the EU rules that UK regulations are not good enough for them it could provoke a crisis in the markets – which will of course have negative effects on EU banks, businesses and citizens. It is therefore difficult to see the EU acting in a protectionist manner to exclude British-based firms as there is no domestic EU industry to protect.

On top of this, an EU financial regulatory institution the European Securities and Markets Authority (ESMA) has recommended to the EU Commission that financial passporting be extended to firms from the United States, as well as from Australia, Canada, the Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, and Switzerland. Given this, and as UK and EU law will differ little on the details of financial regulation immediately post Brexit, for the UK not to be granted equivalence would likely be only as a result of political vindictiveness rather than evidence based decision-making.

But what about the prospect of vindictiveness with the granting of the passport? Well, the EU Commission is not represented by the governments of the EU-27 but by a set of EU Commissioners drawn from the EU member states. Of course, there are conversations. Indeed, these EU Commissioners are recommended by EU governments; however, it is harder for equivalent arrangements to not be granted or withdrawn at short notice than what Sir Ivan implied in his evidence to the European Scrutiny Committee.

While this should give financial firms in the UK confidence, the leading role that the UK places in the global financial system should also generate optimism for the future. Its global business reach, membership of and influence within financial bodies such as the Financial Stability Board makes it well suited to remain the world’s largest financial centre – through both business and regulatory practices.

As a result, and assuming passporting rights and other developments (discussed at more length in Cutting the Gordian Knot), it is probable that the UK’s role as a global financial centre will be enhanced as a result of Brexit.

(Photocredit: Davide D’Amico)