Free trade in services (including not only banking and insurance, but also occupations such as legal, media, hairdressing, building, dentistry and accountancy) is also important for the UK economy. Financial services are the UK’s largest services industry accounting for 8% of UK national income.
- EU law allows financial services and insurance firms authorised in the UK to carry on business in any other EU member state without the need for a separate host state authorisation (the so-called passporting system), either by establishing a local branch or on a cross-border basis.
- The UK is the key financial centre of the EU not least because it is seen as a convenient location from which to access the wider European market.
- UK banks and insurance companies can operate freely in the rest of the EU and 80 of the 358 banks operating in the UK are headquartered elsewhere in Europe. More than half of the world’s largest financial firms have their European headquarters in the UK, including for example HSBC (global headquarters), Barclays (global headquarters), J.P. Morgan (EMEA headquarters) and Citibank (EMEA headquarters). The UK is highly integrated into the European financial system.
- This integration has helped the UK grow and thrive. UK departure from the EU would likely result in the UK losing its current level of open access to the rest of the EU and European banks would likely leave or shrink as central banks in Europe required more business to be brought back under their direct supervision. For example, in the past, the UK has managed to block proposals to limit the clearing of euro dominated OTC trades outside the Eurozone. The UK would not have been able to do so had it been outside the EU.
- Losing access to the single market in financial services would risk diminishing the position of the City of London as a global financial hub and a bridge for foreign business and the EU.
- Financial openness increases Britain’s vulnerability to shocks abroad and UK authorities depend on the quality of regulation in the home country of foreign financial firms active in Britain. The EU provides a framework for regulators to cooperate with each other, both in relation to routine supervisory activities and in special cases such as changes of control, recovery and resolution planning and investigations.
- The UK government and the Bank of England have contributed actively and successfully to EU prudential regulation. It is important that Britain remains at the table so that future banking regulation in Europe continues to be of the highest standard whilst striking an appropriate balance between harmonisation and flexibility.
As the Bank of England has said: “Overall, the EU has carried out a major legislative and regulatory programme that implemented and often exceeded the internationally agreed G20 post crisis reform agenda. The Bank of England has contributed actively to this process. The resulting legislation has substantially raised the quality of regulation in the EU overall. By ensuring those strengthened standards apply EU-wide and with the force of law, this helps support financial stability in the UK. This is particularly important given the UK’s financial openness, enabling the UK authorities to have far greater assurance as to the safety and soundness of the large number of financial firms from other EU jurisdictions that operate in the UK” (emphasis added).
- Bank of England, EU membership and the Bank of England, October 2015, page 9 – http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf. ↑
- One of the principal methods for this is the “passporting” regime, which allows financial services in the EU to set up branches or provide cross-border services freely in other member states, without requiring the need for prior authorisation in the host state. A financial institution can apply for a ‘passport’ from their national regulator by which the regulator guarantees that the institution is compliant with its own national regulatory standards and with minimum EU standards. Legislation requires that other member states recognise this passport and allow the institution to provide services in their jurisdiction. The passporting regime is referred to in the Financial Services and Markets Act as an “EEA right” and is provided for in law by each of the Single Market Directives. For further detail see Bank of England, EU membership and the Bank of England, October 2015, page 24 – http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf. ↑
- Bank of England, EU membership and the Bank of England, October 2015, page 23 – http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf. ↑
- Bank of England, EU membership and the Bank of England, October 2015, page 84 – http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf. ↑
- The UK accounts for 24% of all EU financial services income and 40% of EU financial services exports – Bank of England, EU membership and the Bank of England, October 2015, page 9 – http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf. ↑
- Credit Suisse Global Markets Research, Brexit: Breaking up is never easy, or cheap, 25 January 2016. Judgment of the General Court (Fourth Chamber), Case T-496/11, United Kingdom v. European Central Bank, 4 March 2015 – http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d2dc30dd986ad9b38a9641129277cb8d19b42c57.e34KaxiLc3qMb40Rch0SaxuPbhv0?text=&docid=162667&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=376367. ↑
- Recent legislation in these areas include the Capital Requirements Directive IV (Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC – http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32013L0036); the Capital Requirements Regulation (Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for the credit institutions and investment firms and amending Regulation (EU) No 648/2012 – http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013R0575); the Financial Institutions Conglomerate Directive (Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council – http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32002L0087); and the Recovery and Resolution Directive (Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council – http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0059). ↑
- Bank of England, EU membership and the Bank of England, October 2015, page 79 – http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf. ↑