The Impact of Brexit on Financial Services in the UK

On 23 June 2016, the UK electorate voted to leave the European Union in the Brexit referendum. This historic decision raises significant consequences for those financial institutions based in the UK, who rely on the European Economic Area (“EEA”) “passport” to access the single European market for financial services.

Passporting

At the moment a range of authorised businesses, such as banks, insurance companies and asset managers, are able to operate across the EU as long as they have a base in the UK. This is called “passporting”. Passporting also means that a UK bank can provide services across the EU from its UK home. However, post-Brexit, they may no longer be able to passport their services across the EEA unless special agreements can be negotiated.

Options

Various models have been proposed for how the UK and EU can maintain their relationship following a Brexit. In particular, the EU and the UK may decide to opt for:

• “Norwegian option”: UK becomes a member of the EEA and gaining access to the single market without being a full member of the EU. If the UK remain as a member of the EEA, the passporting rights of financial institutions would be preserved.

• “Swiss option”: Switzerland is not a member of the EU or the EEA. Instead, it has negotiated a series of 120+ bilateral treaties governing its relations with the EU, with limited access to the single market. However, the Swiss model would not provide the guarantee of single market access like EU or EEA regime. Therefore, UK financial institutions may still lose their current passporting rights.

• “Hard Brexit”: The UK could opt to leave the EU without seeking to retain membership of the EEA or negotiating bilateral agreements. This would mean that UK financial institutions would lose their current passporting rights.

Comment

Brexit raises significant uncertainty for the financial services sector. Unless the UK’s future relationship with the EU involves membership of the EEA, UK financial institutions’ passporting rights is likely be lost or severely restricted. Therefore, many financial institutions are now moving their headquarters from the UK to another EU jurisdiction. Ireland is among the top choice, as Ireland is the only remaining English-speaking EU member state which has the passporting service.