Regulatory

What is the impact of losing passporting rights?

Asset managers, banks, insurers and other financial services firms currently benefit from passporting rights under MiFID, AIFMD, UCITS and, in the insurance market, Solvency II. The potential loss of passporting rights as a result of the UK’s exit from European Union is likely to require firms to review and, in some cases, change their operational and legal entity structures to ensure continued access to markets.

Some UK firms may be able to benefit from third country passporting provisions available under the current regulatory regime if the UK regulations are deemed ‘equivalent’ to the EU’s in the future and, under that scenario, group solvency calculations would benefit from the existing equivalence provisions.

However, where third country passporting is unavailable, the existing regulations do not provide for the establishment of branches for cross-border provision of services within the EU by a non-EU firm so UK financial services firms wishing to continue with operations in the EU would have to establish an EU-based operation. Applying for authorisation takes time in any jurisdiction, and it would not take much of an increase in the number of applicants to start swamping many of the EU regulators. Similarly, firms in the EU that provide services in the UK using passporting will need to consider whether UK based operations will be required. Based on the number of inbound passports to the UK this could be a significant issue for firms.

Where financial services groups already have EU authorised subsidiaries it may be simply a matter of increasing the capacity and skillsets of subsidiaries and assessing the impact on capitalisation. However, firms who have operated on a passport out from the UK will need to seek their own authorisation to continue such operations, potentially by incorporating a local entity to do so. This may lead to restructuring; either to set up new subsidiaries, to sell off what may be considered uneconomic business based in other EU states or even to exit from the UK in whole or in part.

Firms should be taking action now. Moore Stephens is already assisting clients to deal with the implications of Brexit, and planning for a post-Brexit future and the possible loss of passporting rights by firms.

The following are examples of where Moore Stephens clients are asking for guidance: