Anthony Browne is Chief Executive of the British Bankers’ Association.
At the Conservative Party conference, there was really only one topic of conversation – our new friend, Brexit. Only a few seconds behind, in the fringes, on the conference floor and in the media coverage, was the debate about passporting for financial services. A couple of months ago, few had ever heard of this arcane issue, and fewer still knew anything about it.
The issue of passporting has become such a hot topic because it seems to be at the centre of an apparent tug-of-war within government about how much it should be prioritised in the negotiations with the EU. Many Eurosceptic MPs – and friends in the media – are insisting before negotiations even begin that we don’t need passporting. In the august pages of ConservativeHome, Peter Lilley wrote recently: “The value of passporting rights, though worth keeping, should not be exaggerated.”
It isn’t clear to me why Eurosceptics are so keen to downplay the importance of passporting. Perhaps they are worried that it is a ploy to keep the UK as a member of the single market (or the European Economic Area), with all that involves from budget contributions to the freedom of movement of people. But the banking industry has not asked to retain membership of the single market, and in any case the Prime Minister has made it pretty clear that it is off the table. We are all Brexiteers now, and we need to work together to make a success of it. Downplaying the importance of passporting goes against the golden rule of negotiations that you start out high, and don’t ask for less than you want.
It is also risky, because passporting is very valuable to the UK. It has underpinned the growth of London as Europe’s financial centre, and helped financial services become our biggest export market by far. The UK exports over £20 billion of financial services a year to the EU27, much of it underpinned by passporting rights.
There are nine different passporting regimes in EU law that allow financial services companies in one country to establish a branch in another country without having to be separately authorised or regulated. It is also allows financial service companies to sell directly to customers – whether companies or individuals – in other EU countries. It is two-way, and means also that banks from other EU countries can freely establish major operations in the UK, both to serve customers here, but also to serve customers across Europe.
Almost every argument used to belittle the importance of passporting is based on at best a misunderstanding:
- We were told in the referendum campaign that passporting wasn’t necessary because spending £500 putting up a brass plate in another country allows you to continue operating there. That may have been true before the financial crisis, but certainly not now. There are far tighter rules that mean that if you want to set up operations in another country without passporting rights, you will probably have to set up a full subsidiary, approved by the local regulator, with a separate board, compliance function, risk function, robust IT system, and separately capitalised with its own pool of money to draw on. All this will take staff and premises, all of which massively add to costs. It also means you are fragmenting your operations between the UK and EU27, meaning you lose economies of scale.
- We are told that in any case most banks have already got separate legal entities in other parts of the EU, so they can just passport out of those. But those entities are generally very small with limited operations, and although it might save some expense and time, they would still need to be built out into substantive operations with all the costs highlighted above. It would still mean banks in the UK not being able to serve customers directly in the EU.
- We are told that in any case the EU’s “equivalence regimes” effectively grant rights as good as passporting to third countries. If only! The equivalence regimes are not an adequate substitute for passporting, to such a degree that banks have made clear it wouldn’t stop them relocating activities. Equivalence regimes only cover a narrow range of services – there is for example no equivalence regime for corporate banking, including deposit taking and lending. The equivalence regime is granted by the European Commission, a process that can take many years and can be subject to political whim. Equivalence can also be withdrawn unilaterally by the EU at just 30 days’ notice. It would mean that we would be likely to have to adopt any new EU regulation, because if we didn’t adopt it they could claim we are no longer equivalent.
- We are told passporting isn’t necessary in wholesale markets, because it only grants the right to sell, and companies in other EU countries would still have the right to buy. It is true that even without passporting rights a company in Germany could phone up a bank in London unsolicited and ask to buy an interest rate hedging product. But banks in the UK would not be able to market or actively sell to customers in the EU, putting them at a massive commercial disadvantage. The banks in the UK have vast “sales and trading” desks that would no longer be able to, well, sell. Instead, they wold have to sit patiently by the phone twiddling their thumbs waiting for customers in the EU to phone up.
- We are told that passporting is expensive and bureaucratic, and doesn’t do away with the need to comply with other arduous regulations, so there is no point having it. Clearly a bank has to apply for the passport, but the whole process is streamlined, and the fact that a bank (quite rightly) still has to comply with other regulations is no argument against having a passport. In this simple cost benefit analysis, the fact that financial services firms use the passports by the hundreds of thousands shows clearly that they think passporting is worth it.
The referendum highlighted many downsides to the EU. But the integrated financial market across Europe is one of the EU’s great successes, making it easier and cheaper for companies from manufacturing to aerospace, pharmaceuticals to automotive, to raise money for investment. It also helps ordinary citizens get better returns for their savings. Financial services isn’t just a successful sector in its own right. It is also an enabler of others. Those voting in the referendum campaign weren’t voting that the UK should separate its financial markets from those of the EU. To do so would have consequences far beyond banking.
Our ambition should be to retain that integrated market in financial services between the UK and the EU27 for the benefit of all our successful industries. To do that we need to retain some version of passporting as part of a binding bilateral mutual recognition agreement that enables banks in the UK to continue serving customers in the EU, and enables banks in the EU to continue serving customers in the UK.
The EU has never had such an agreement with another third country, but then a country has never left the EU before – and certainly not a country containing the EU’s financial centre. Starting out negotiations saying we don’t need the very passporting that underpins the integrated financial market will make it less likely we achieve it.