The UK is unlikely to be able to secure passporting rights during Brexit negotiations, a top EU financial lawyer has warned in a report.
In its Blueprint for Brexit paper, think tank Politeia said preserving so-called passporting rights for financial services at all costs should not be prioritised by UK negotiators as it is not achievable.
Passporting allows financial services firms which are authorised in the UK to operate throughout the European Economic Area, and vice versa. Without the rights, these firms would not be able to operate in other countries in the same way they do today.
Prime Minister Theresa May's insistence there must be controls on immigration once the UK has left the European Union means the country will lose full access to the European market, according to report author Barnabas Reynolds.
Speaking to City A.M. Reynolds, a partner at international law firm Shearman & Sterling, said:
Passporting, or some grand bilateral deal to replicate it as much as possible, is likely to be unachievable. It brings with it EU legislation for the City, without any voice in making those rules, which is unacceptable. It also brings in the four freedoms and other encroachments on UK sovereignty.
Reynolds suggests one of two alternative models: so-called expanded equivalence or an overhauled financial centre model.
Expanded equivalence – Reynold's prefered choice – builds on an existing EU framework that gives firms from a non-EU country access to the trading bloc if their home rules are equivalent or similarly strict.
If this is impossible then Reynolds advises the UK reconsider its entire regulatory framework to develop an "attractive, market friendly" set of rules – the financial centre model.
Under the financial centre model the UK re-vamps its legal and regulatory framework for financial services entirely, to focus on outcomes not unnecessary processes.
The UK enhances the traditional magnetism of its financial markets, with highly focused, intelligently thought-out regulation, ditching the unnecessary and compromise-based EU rules. Financial markets participants will be freed from cumbersome regulation and rule-making and be better able to work profitably to serve the real economies of the world.
The UK government is expected to trigger Article 50 and begin its two-year countdown to leaving the EU by the end of March next year.
Formal negotiations with the EU will not get underway until then.
The UK Government needs to show the UK's legal framework on both models as quickly as possible so that financial markets participants can help evaluate which model is better in each sector.
It may well be that for some areas equivalence isn't worth seeking even when EU legislation has been re-worked along UK lines and redundant measures have been removed.
According to Financial Conduct Authority figures, there are 13,484 firms that use passporting, of which 5,476 are based in the UK.