Brexit Bombshell: FCA Warns of Devastating Consequences of Losing Passport Rights

The UK Financial Conduct Authority (FCA) published its “Brexit Impact Assessment” In response to a request from the Treasury Select Committee, this paper outlines what the FCA considers to be the main risks and challenges facing the UK financial services industry.

If the EU and the UK fail to ratify the Withdrawal Agreement by March 29, 2019, and there is no alternative agreement, the UK will leave the EU without an implementation period. The Financial Conduct Authority explained that in the field of financial services, this will mean that the UK has established a “third country” relationship with the EU by default, and market access will be determined in accordance with World Trade Organization (WTO) rules and EU or member state rules.

Regulators warn that losing your passport will have serious consequences. Under the passport system, any financial services company established and authorized in an EEA member state has access to the single market for relevant financial services.

Previous correspondence from the Financial Conduct Authority to the Treasury Select Committee compiled cross-border passport numbers, showing that 8,008 EEA companies hold passports that allow them to do business in the UK, while 5,476 companies in the UK hold passports that allow them to do business in the UK. Passport for conducting business in the European Economic Area. When the UK leaves the EU, passport rights will no longer apply.

The FCA warned: “If the EU and UK do not take action to manage the risks arising from the loss of passports, existing cross-border business flows may be disrupted after the UK leaves the EU on 29 October 2019.”

In the short term, losing passports will create a series of cliff risks, such as the need for businesses to obtain regulatory licenses to service existing and new businesses. Without these, businesses may lose the ability to conduct business across borders, creating legal and operational risks.

Furthermore, in such circumstances, EEA and UK companies may also be unable to trade certain securities in both jurisdictions. This could lead to market fragmentation, as UK and EEA companies will no longer have access to the same liquidity pools. Over time, this could have a deleterious impact on the wider financial services market as competition decreases and costs increase for EEA and UK consumers. According to the FCA, a potential reduction in the depth of the market accessible to UK and EEA participants could also lead to increased costs or make it more difficult to execute larger transactions.

Regulators expect risks to be low in the short term, but specialist markets may be disproportionately affected. Over time, a larger restructuring could have broader impacts on the market.

The FCA expects that Brexit will have an impact on outstanding cross-border contracts. Brexit will not affect the performance of many contractual obligations agreed before Brexit. However, the performance of certain activities related to these contracts may require authorization in certain Member States.

Post-Brexit, businesses may need to obtain local authorization to fulfill existing cross-border contracts. FCA analysis so far shows the impact will be most significant in the insurance, uncleared OTC derivatives and cleared derivatives markets. There are also potential risks to financial stability and consumer protection if companies are unable to honor these contracts – particularly in the EU.

On the positive side, the Financial Conduct Authority, the Bank of England and the government have taken action to manage risks in the UK. These include the establishment of a Temporary Permissions Regime (TPR), which will allow inbound EEA companies and funds that wish to continue operating in the UK after exiting the UK to continue operating as before, including starting new business, while applying for full authorization in the UK.

In terms of customer protection, the FCA proposes to extend the coverage of the FSCS to cover more EEA companies to help safeguard the protection of UK consumers.