Hogan Lovells has collaborated with TheCityUK and The City of London Corporation's co-sponsored International Regulatory Strategy Group (IRSG), to launch a new report looking at the options for Financial Institutions in the EU's Third Country Regimes and Passporting.

‘The EU’s third country regimes and alternatives to passporting,’ is a detailed analysis looking at the EU’s existing third country regimes (TCRs) as a solution for allowing the whole UK-based financial services industry cross-border access to EU-markets following Brexit. It shows that the TCRs would not provide continuing access for all the financial services currently provided across border post-Brexit. It also underlines how existing alternatives to passporting and TCRs are either limited or significantly less efficient than current arrangements.

Our report concludes that the focus of the Brexit negotiations should be on designing and delivering a bespoke UK-EU deal rather than reforming or adapting existing frameworks. This bespoke deal should be based on mutual recognition and regulatory cooperation and allow for mutual market access, delivering the same, or comparable, levels of access rights to those currently available.

The report also makes clear the need for transitional arrangements to be agreed as quickly as possible to ensure the industry can continue to provide services to customers post-Brexit without disruption.

Mark Hoban, Chair of the IRSG, and former Treasury Minister, said: “The UK is the leading international financial centre and there are clear benefits to the EU in ensuring the UK’s ability to act as a strong financial hub for Europe. The UK Government must negotiate an ambitious deal that maintains the highest degree of access for the UK to the EU and vice versa.

“The analysis is clear: a new UK-EU relationship based on existing third country regimes and equivalence is not a viable option for the whole industry. The TCRs are limited in coverage and uncertain in their availability, and too unpredictable. A bespoke solution WITH reasonable safeguards is the only way to prevent the fragmentation of financial markets and ensure continuity of service for firms and customers in the UK and across the EU.”

Rachel Kent, Global Head of Financial Institutions Sector, Hogan Lovells, said: “The UK automatically becomes a third country on Brexit so, unless an alternative deal is agreed, the UK would then be relying on securing access under the EU's third country regimes to maintain its access to the EU for financial services. This analysis gives insights into the processes involved and identifies the gaps in, and limitations of, the TCR regime, so as to inform and help shape policymakers' priorities. A bespoke arrangement establishing mutual rights of access would benefit both the EU and the UK by securing continuity for financial services and this report outlines the steps to achieve that, if the political will can be secured. ”

A summary of the report’s findings:

  • Given their limited coverage, uncertainty of availability and the lack of key safeguards associated with them, the EU's current third country regimes do not provide a long-term sustainable solution for the UK-based industry as a whole to access EU markets post-Brexit.
  • The analysis reveals that current alternatives to passporting and TCRs for UK-based financial services firms are subject to limitations or are significantly less efficient than existing arrangements. A mutual access arrangement could be put in place as part of the bespoke agreement with mutual market access being granted on the basis that the respective regimes are recognised as being broadly consistent, but the UK should avoid trying to have access rights tied to the EU's existing concept of equivalence. Access rights under a mutual access arrangement should also seek to cover as broad a scope of activities as are currently covered under the passporting regime.
  • Arrangements should include robust processes and procedures that provide legal certainty
  • The transition into the new arrangements should allow for continuous access to products and services for firms and customers. The arrangement should also be designed to preserve continuity of operation for UK-based entities regulated at an EU level.
  • When the criteria for mutual access have been agreed, the UK and the EU should seek immediate mutual recognition that the other party meets the relevant criteria based on their regimes matching as at Brexit.
  • Regulatory cooperation and collaboration between respective regulatory authorities will be essential.
  • A mutual access arrangement could be used by the UK as the basis for its relationships with other third countries ongoing. It may also offer the EU a new way of dealing with other third countries.