This report is one of a series based on our recent webinar/seminar series ‘Helping financial institutions deal with the risks from a changing EU and Brexit’. You can access a recording of one of these events here. If the UK votes to leave the EU on 23rd June, we will hold a further seminar on 29th June (at Cannon Place, London) and a CMS-wide webinar on 5th July.

Financial services in the UK

Recent reports have highlighted data about the UK financial services sector and the extent to which the UK is host to European financial services firms.

In the Bank of England’s October 2015 report on EU membership and the Bank of Englandit was noted that “around half of the world’s largest financial firms – ranging from commercial and investment banks to insurers, asset managers and hedge-funds – have chosen to have their European headquarters in the UK”. The UK is home to over 3000 securities firms regulated under MiFID – dealers, brokers and investment managers. Well over 50% of the EU’s MiFID firms are based in the UK [1].

The UK financial services sector:

  • contributes slightly more than 7% of UK GDP, with around half of this coming from firms outside London [2];
  • employs more than 1 million people, of which two thirds are based outside London [3]; and
  • exports around 33% of its financial, insurance and pensions services exports to the EU; within this, non-insurance financial services export most intensively to the EU and account for the larger share of jobs in the broad sector [4].  

Financial services exports have increased from 1.6% of GDP in 1991 to 3.5% of GDP in 2015 [5].  

EU passporting

EU financial services legislation is based on the principles of ‘mutual recognition’, ‘passporting’ and the ‘single licence’. Authorisation of UK firms by the PRA or FCA does not merely confer a licence to conduct business in the UK, it is (for most types of financial institution) effective for the entire EU (and normally for the EEA states as well). A firm incorporated and authorised in an EU/EEA country, can:

  • conduct business with clients in other EU/EEA states (cross-border services) and
  • establish branches there,
  • without having to
    • obtain local authorisation,
    • meet differing local prudential requirements, or
    • hold local capital.

This regime is important both to European firms and to groups from outside the EU/EEA (third countries). Third country groups often establish an EU/EEA subsidiary which then enjoys full EU passporting rights. (You can read more about the EU regulatory system here.)

The following EU legislation incorporates a passporting/single licence regime for EU/EEA firms:

  • CRD IV [6] – credit institutions
  • MiFID [7] – investment firms
  • IMD [8] – insurance intermediaries
  • Solvency II [9] – insurers, life offices and pure reinsurers
  • PSD [10] – payment services
  • UCITS [11] and AIFMD [12] – which has a firm passport for managers and a product passport for funds
  • Mortgage Credit Directive [13] – for non-bank mortgage lenders
  • Electronic Money Directives [14]
  • Other EU legislation also reflects similar principles – such as EMIR [15] and CRA [16].


It is impossible to predict the impact of Brexit on the passporting regime as we do not know the basis for the UK/EU relationship post-Brexit. There is a ‘continuum’ of possibilities from full mutual recognition at one end, to the possibility of the UK having third country status, at the other end of the spectrum. This is what the Governor of the Bank of England called – ‘the mutual recognition/third country continuum’.[17]

  • The full mutual recognition/passporting regime (both branch and cross-border services) might remain in place across all sectors. For example, if the UK were to join the EEA, all of the above legislation would continue to apply or the financial services regime might be agreed in a separate, new UK/EU/EEA agreement.
  • The UK and EU might not agree any passporting for financial services, with the result that the UK would have third country status under the above legislation.
  • The UK and EU might agree limited passporting provisions. These might apply to some sectors but not others. They might apply to some forms of passporting (e.g. cross-border services business) but not extend to other forms of passporting (e.g. branch business).

Preparing for Brexit

The uncertainties about the outcome of the UK/EU agreement make it very difficult for firms to make precise plans as to the optimum structure for post-Brexit operations. At one end of the continuum, if full UK/EU/EEA mutual recognition were maintained, there would be no change for UK firms, or for EU/EEA firms doing business with the UK.

At this stage firms may consider the impact at the other end of the continuum as a worst case, namely the impact of the UK having third country status under EU legislation without any special passporting rights:

  • For UK firms, the questions will relate to how they conduct business with EU/EEA counterparties/clients and the status of their branches in EU/EEA states. It may be possible to continue to provide cross-border services without any further authorisation (this will depend on the precise scope of regulation in each EU/EEA country into which services are provided) but branches are highly likely to require separate authorisation from the regulator in the country in which they are established.  Instead firms may consider establishing/using a subsidiary in an EU/EEA state, which will then have full passporting rights.
  • For firms from other EU/EEA states the issues are the similar but in relation to their UK business.
  • Groups from outside the EU/EEA will need to consider their current structure for EU/EEA business and the extent to which they currently use a UK subsidiary to conduct business with other EU/EEA states or vice versa.
  • UCITS managers/funds will need to consider re-domiciling to an EU/EEA state if they wish to retain UCITS status and the benefits of the EU/EEA passport. Similar issues arise for AIFs.
  • UK firms who decide to use an EU/EEA subsidiary for EU/EEA business may wish to consider (a) establishing a UK branch of that subsidiary or outsourcing to the existing UK group company (e.g. to retain UK based employees), and (b) the extent to which the existing business and contracts of the UK company need to transfer to the EU/EEA subsidiary.

Eurozone issues

Under the new UK-EU settlement agreed in February 2016 (which will apply if the UK votes to remain in the EU), there are specific provisions to prevent discrimination against the UK and UK businesses on account of their being outside the Eurozone (see our other RZ report on the new UK settlement with the EU and its legal status). These concerns arose as a result of a series of issues in recent years which have been challenged by the UK, such as the European Central Bank’s (ECB) “location policy” for clearing Euro denominated financial instruments and transactions in the Eurozone. For further detail see the section ‘Key issues for the financial services sector – the Eurozone dilemma’ in the RZ report on ‘The new UK settlement with the EU and its legal status’.

Post Brexit, the scope of relevant EU legislation may not extend to the UK and this may assist with issues such as the controversial proposal for a Financial Transaction Tax. There are concerns, however, that without the benefit of the new settlement or the status of an EU member state, the UK may face an increased risk of discrimination and regulations which may be hostile to the City. In the context of the case of the ECB’s “location policy”, HSBC notes that “… it is clear that if the UK were not in the EU it would have less power to prevent eurozone authorities from attempting to bringmore euro-denominated activity onshore.”[18]