Around 5,500 firms registered in the UK rely on the European Union’s passporting rights for the financial services sector, and they turn over about £9 billion in revenue. That is the universe of companies whose future is threatened when Britain leaves the European Union.
According to new figures from the Financial Conduct Authority, released by the House of Commons’ Treasury Select Committee, 5,476 UK firms have at least one passport that allows them to do business in other EU and European Economic Area nations. Many firms hold several passports, meaning that the total number in the UK stands at 336,421.
The loss of passporting rights following Brexit is probably the biggest fear in the City of London right now. If the passport is taken away, then London could cease to be the most important financial centre in Europe, costing the UK thousands of jobs and billions in revenues.
According to the Financial Times, estimates in the City suggest that roughly £9 billion of investment banking and capital markets revenue could evaporate if Britain loses its passporting rights.
“The business put at risk could be significant,” Treasury Select Committee chairman Andrew Tyrie said in a statement on Tuesday. Tyrie noted that Britain will need to come up with an entirely new solution to the problem of possibly losing the passport, saying:
"None of the current off-the-shelf arrangements can preserve existing passporting arrangements, while giving the UK the influence and control it needs over financial services regulation as it develops. Efforts to secure an appropriate arrangement for UK-based firms will be one of the most challenging aspects of the negotiations about the UK's future relationship with the EU."
"No doubt the hard grind of establishing what best protects UK interests is already underway. This issue needs to be right at the top of the in-trays of the Chancellor, the Governor of the Bank of England, and the UK's lead negotiators," Tyrie continued.
Banks could move to Paris, Frankfurt or Dublin
Current EU law allows European banks to operate branches in the UK that do not need to be separately capitalised from the parent company abroad. Similarly, non-EU banks, such as those from the US or Asia, can use their London subsidiary to sell services to clients across the EU. This has allowed London's financial centre to act as a hub for global firms looking to do business in the EU.
The use of this bank "passport," which allows banks in London to access the EU single market of 28 nations (including the UK), could be one of the rights the UK loses in the British exit from the EU. Other financial centres in the EU, such as Dublin, Frankfurt or Paris, could take over London's hub role if the UK loses its passport.
It is now looking increasingly likely that passporting rights are going to be a huge issue of contention in any Brexit negotiations. On Monday, the chief of Germany's Bundesbank, Jens Weidmann warned that the UK won't get a special deal from the EU on the passports, and will need to allow free movement of citizens from EU nations, if it wants to keep them.
Weidmann told The Guardian that "passporting rights are tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area."