What you need to know about passporting
Passporting, something previously little heard of by those outside the financial services industry, seems to have been a big source of panic post-Brexit vote.
Sadiq Khan told Morning Wire over the weekend that a loss of the provisions would be "a disaster", while London-headquartered HSBC warned back in February that it would consider moving as many as 1,000 staff to Paris if favourable passporting rights could not be secured in the event the UK left the EU.
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What is passporting?
In a nutshell, passporting currently allows financial services firms which are authorised in the UK to operate throughout the European Economic Area.
A lot of banking regulation in the UK stems from the EU – is this the end of financial services red tape as we know it?
It's unlikely that the rules the finance sector abides by will be torn down any time soon, if at all. Firms are only granted passporting rights because they comply by single market rules, so a total scrapping is unlikely to get the best results for the sector in the UK's negotiations to leave the EU.
A statement from the Financial Conduct Authority released on Friday pointed out that all the regulation would remain in place for the time being, regardless of where it originated from.
The British Bankers' Association in its statement pointed out that the rules relating to passporting in particular "could take some time to resolve and any changes to banking would take place over a long period of time".
Barney Reynolds, partner and head of financial institutions advisory and financial regulation at Shearman & Sterling, feels it's unlikely that financial services laws will be "washed away", although there may be some "minor adjustments where the UK hasn't agreed with things that have been done at a European level", such as the bankers' bonus cap.
How important is passporting?
The rights are important enough to have many big firms already considering their options should the UK fail to secure them. Vishal Vedi, banking partner at Deloitte, told Morning Wire that the rights were "of fundamental importance" adding that the passporting possibility the UK currently offers acts as a key factor for many overseas banks to establish branches in the country.
However, others, while not denying that the rights are important, do not see the potential loss of passporting rights as the death knell for the City. Reynolds remarked that the rights were "not as important as most of the media coverage so far has suggested", pointing out that a lot of activity in London's banking arena was not cross-border at all.
In addition, Arun Srivastava, Baker & McKenzie's London head of financial services, has previously told Morning Wire that "[maintaining a passporting regime] is extremely important but it's not exactly the end of the world".
Is banking the only industry affected?
No, other industries are affected by passporting rules too. Clifford Chance has pointed out that those working in insurance and asset management will also be concerned about what access to the single market they will be able to obtain in the negotiations.
What happens if the UK can't get a good deal on passporting?
Although many agree that it's far too early to even guess what the final deal will look like, if the worst did happen and the UK financial services industry lost access to the single market, banks would have to head to the drawing board.
Vedi explained: "The banks that are based here will then need to think very carefully around how they structure themselves to continue to do business with the EU and in many cases that will then mean having to establish, or think about establishing separate subsidiaries or branches in the EU."
Simon Gleeson, regulatory partner at Clifford Chance, warned: "There is no prospect of UK banks maintaining a passport unless the UK agrees to, amongst other things, freedom of movement and full adoption of all present and forthcoming EU laws – this is exactly the discussion which has been being playing out in Switzerland. Thus things will have to change but it is too early to say how, or how significant the impact will be."
However, Thomas Donegan, partner at Shearman & Sterling, told Morning Wire: "What we're seeing at the moment is a lot of contingency planning. It makes sense as a bank to look at where you'd stand in the worse case scenario and then work out what you'd do to plan around that, but it's not the time to start shifting half of your business to France."