Michael Watson: Will financial ‘passports’ survive Brexit?

Paris is trying to capitalise on Brexit by promoting its own financial hub. Picture: Thomas Coex/AFP/Getty Images
Paris is trying to capitalise on Brexit by promoting its own financial hub. Picture: Thomas Coex/AFP/Getty Images
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Until about the French Revolution of 1789, the word humour was hardly known in France and it was 1878 before the French Academy, the guardian of French language, accepted humoristique as a French word.

Avance rapide 140 years and the French are using every trick in the book, including humour, to pull the rug from UK’s financial institutions in a bid to cash in on the Brexit fall out.

It’s interesting that not everyone shares the view that Brexit will be Apocalypse-like

Take, for example, an advertising campaign promoting the French capital’s financial hub, La Défense. Suggesting our financial services sector is about to croak it after the removal of passporting rights which will curtail the ability of UK firms to sell financial products in Europe, Paris is cheekily promoted as the solution to Brexit woes: “Tired of the fog? Try the Frogs!”. This Brexit negotiation will have many twists and turns!

READ MORE: Brexit: Warning of 232,000 finance sector job losses

With financial services accounting for £8 billion of the Scottish economy and employing around 200,000 people – 53,000 of them in Edinburgh – we are not immune to the vexed question of how the sector operates once the UK takes its leave of Europe, particularly in light of the Hard Brexit increasing deemed acceptable, if not actively favoured, by many at Westminster.

Whilst we are only now arriving at the foothills of the Brexit negotiation mountain, prudence would dictate that there is a very real option that financial “passports” will not survive. In its absence, regulatory “equivalence”, often cited as the main fall-back option for UK financial services, is viewed by many as a bureaucratic patchwork of provisions which is riddled with gaps – anything but a robust safety net.

Against this backdrop, it would be foolhardy for the board of any substantial financial services company not to have a contingency plan. The fine detail required for such a Plan B is of course hard to pin down because of the level of uncertainty as to what a Hard Brexit means from a passporting perspective, but it would certainly be centred around ensuring that they have an option to establish their regulated business in a continuing EU member state.

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This would undoubtedly involve some roles and responsibilities potentially moving to Dublin, Frankfurt, Paris, or another financial centre, to ensure the business has an option post Brexit to access the EU market, similar to the way they do now. Firms which opt to set up business within an EU state and passport from there, will find that establishment requirements in some jurisdictions are relatively modest and services can be outsourced or delegated back to the UK.

Some states will appear more attractive than others, so firms must bear in mind the capacity of the more popular ones to deal with an increased demand on infrastructure and their regulators’ ability to cope with a surge of applications for authorisation.

But should those firms spend all their time worrying about this now? Probably not, as there is a minimum two-year window following the formalisation of Article 50, but also we do not yet know what legal and economic structures are going to be put in place.

It’s interesting that not everyone shares the view that Brexit will be Apocalypse-like for our financial services sector. Wolf-Georg Ringe, of the University of Oxford’s Department of Law, argues that the impact will be “miniscule, if not irrelevant”. In his paper, The Irrelevance of Brexit for the European Financial Market, Mr Ringe states: “Such optimism is grounded in the economic stakes for both sides, the UK and EU27, in retaining the benefits of the European Single Market for financial services.”

He argues that logically the EU and Britain should put aside all the political issues and acknowledge that from both perspectives it’s important to have a good open passporting arrangement. However, that does not take into account the fact that the negotiations, like any good negotiations involving legal, political, economic and, most importantly, emotional factors, will not be entirely logical.

• Michael Watson is head of the finance and projects group at legal firm Pinsent Masons

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