3VB Commercial Awareness Essay Competition Winner - Passporting
Choose one piece of EU legislation (proposed or enacted). Discuss the benefits of a similar provision being included in or excluded from the EU Withdrawal Act and what this will mean for UK business and commerce post-Brexit
On 29 March 2019, 11pm the UK will leave the European Union. The European Union (Withdrawal) Act 2018 (hereafter 2018 Act) repeals the European Communities Act 1972 on the day of leaving and converts existing directly applicable EU law into domestic law.
This essay will argue that an EU ‘passporting’ provision should be included in the 2018 Act to ensure stability for UK business and commerce post-Brexit.
First, I will evaluate the benefits of including such a provision and secondly, I will consider what this provision would mean for UK business and commerce, to conclude I will argue that a ‘passporting’ provision would be optimal for British business.
1) Benefits of inclusion: Brexit without breakage?
There are three main benefits of including a ‘passporting’ provision that guard against UK commerce breaking down into several complex regulatory agreements. These three benefits are (1) short term stability, (2) long term global links for finance maintained and (3) the best option in the face of limited alternatives.
In March 2018, Prime Minister Theresa May said ‘The UK has responsibility for the financial stability of the world’s most significant financial centre’.1 It is this important stability that necessitates a passporting provision post-Brexit.
Passporting is a legal mechanism that allows financial services authorised to provide services in their ‘home’ state to also provide services in other EEA member states without receiving authorisation in each member state. It was introduced with the Second Banking Directive (1992) and the Investment Services Directive (1994) and now includes 13 types of ‘passport’ that cover regulatory regimes including cross-country compliance for data protection.
London has greatly benefitted from this provision. It is the top-ranking city in the global financial centres index. This places it as the best financial centre not only in Europe, but in the world.2 A significant part of the attraction to London is its entry into the passporting provisions, which will be lost unless incorporated into a Withdrawal Agreement.
Secondly, long term global links.
Finance is the 21st century is global. UK commerce means UK companies providing services in other countries and receiving services from companies beyond the UK.
By erasing the need to comply to separate regulations in different countries, the passporting system solves a modern tension for UK commerce- the inherently global nature of financial services. The multi country supply chains for products and services illustrate this. 3
‘Issues of finance’ are predicted to be the biggest area of impact from leaving the EU, precisely because finance is global and leaving a European coalition isolates the UK as a global actor. 4
It may be countered either that the UK should not include a passporting provision because it will be bound by the type of global rule book that many people voted against, or that the European Community are unlikely to subscribe to such a provision.
To address domestic concerns, the UK government has already decided that a ‘temporary permissions regime’ that partly replicates the passporting system is compatible with the referendum outcome. To counter concerns about EU appetite for passporting two responses can be advanced. First, the ‘temporary permissions’ regime is predicated on the recognition that passporting is mutually beneficial to UK and EU commerce. 5 Secondly, the passporting system has already shown itself to be flexible to commercial pressures through its extension beyond its original EU parameters to the European Economic Area.
Additionally, as passporting involves a continuation of the status quo in a highly regulated area rather than the establishment of a new services agreement, it is more likely to be accepted politically in the UK and EU.
Thirdly, there is a lack of practical alternatives.
Financial services in the UK must continue to carry out operations across Europe. Indeed, the motivations of many Leave voters was to support UK commerce. In other commercial areas, it is viable to rely on World Trade Organisation (WTO) rules and international standards but the UK in a Changing Europe publication ‘Cost of No Deal Revisited’ highlights that the implications of losing all passporting access is difficult to calculate and not resolved by untested WTO rules in this area.6
Sir Mark Ivan Rogers, former UK Permanent Representative to the EU, highlighted the paradox of the EU being perceived as encroaching into ‘every nook and cranny of the country’s social and economic life…[and] that all these strings could be cut extremely rapidly’. 7 A passporting provision is a compromise position that accepts the reality that a rapid break with the passporting system is not a functional position for UK commerce.
What this means for UK business and commerce post-Brexit?
The current passporting system underpins a significant amount of UK commerce, especially in relation to services supplied domestically and in other EU member states. Without a passporting provision, the supply of services to the UK and from the UK to another Member States is severely threatened.
In practical terms, the passporting provision is vital for UK business and commerce post-Brexit because without it British-based firms will be forced to move operations to another location, which will disrupt UK workers and commerce.
Moreover, the inclusion of a passporting provision provides a degree of legal and commercial certainty to business as the date of withdrawal approaches. This is important for individual companies considering contingency plans and how (and where) they allocate resource. This is also important for maintaining confidence in the market, which supports UK commerce more generally.
Brexit brings opportunity and risk to UK business and commerce. A passporting provision in the 2018 Act puts the UK in a more certain position from which negotiations for new commercial opportunities can be pursued, without hamstringing the everyday regulation required for a functioning commercial sector.
1 ‘Future Economic Partnership with the European Union’ (2 March 2018), https://www.gov.uk/government/speeches/pm-speech-on-our-future-economic-partnership-with-the-european-union accessed 12/12/18.
2 ‘City firms may lose ‘prized’ EU access, say eurozone leaders’ (25 June 2016), https://www.bbc.co.uk/news/business-36628595 accessed 10/12/18.
3 Supply Chain for Airbus A380 Plane, https://upload.wikimedia.org/wikipedia/commons/thumb/f/fd/Transport_A380_en.svg/2000px-Transport_A380_en.svg.png, accessed 19/12/2018.
4 Comments of Alan Greenspan, former chairman of the US Federal Reserve in ‘City firms may lose ‘prized’ EU access, say eurozone leaders’ (25 June 2016), https://www.bbc.co.uk/news/business-36628595 accessed 10/12/18.
5 ‘EEA Passport Rights (Amendment and Transitional Provisional) (EU Exit) Regulations 2018: explanatory information’, HM Treasury, 24 July 2018 https://www.gov.uk/government/publications/temporary-permissions-regime-for-firms/eea-passport-rights-amendment-etc-and-transitional-provisions-eu-exit-regulations-2018-explanatory-information, accessed 12/12/2018.
6 ‘Cost of No Deal Revisited’, 3 September 2018 http://ukandeu.ac.uk/research-papers/cost-of-no-deal-revisited/ accessed 3/12/18.
7Sir Mark Ivan Rogers, Transcript of ‘Brexit as a Revolution’ Trinity College Cambridge Lecture, 11 October 2018 https://share.trin.cam.ac.uk/sites/public/Comms/Rogers_brexit_as_revolution.pdf, accessed 14/12/18.