Regulatory Passporting: The killer argument against Brexit

I finally understand the Conservative drive for the UK to Remain part of the EU. Basically, it’s about helping the banks save money against regulatory regimes.


I think I finally figured out why the Conservatives for Remain are getting so desperate and hysterical about staying in the EU.

It has always puzzled me why David Cameron and other Conservative party members are so adamant about the UK staying in the EU. I had conjectured numerous ideas and principles, but nothing added up. I could understand progressives of all flavours supporting the EU because of some vapid feel-good message of cooperation and togetherness, but there’s nothing about staying in the undemocratic EU that cohered with conservative principles. However, I have in the last week put together a few final pieces of the puzzle, and the picture has suddenly become clear. I think I finally understand the Conservative drive for the UK to Remain part of the EU. Basically, it’s about helping the banks save money against regulatory regimes.

You see, the EU has this mechanism of financial regulation called ‘passporting’. Within the EEA, you financial institutions only have to pass regulatory checks once. Pass it once, and it’s valid across the EU:

"Subject to its fulfilment of conditions under the relevant single market directive, a firm authorised in a European Economic Area (EEA) state is entitled to carry on permitted activities in any other EEA state by either exercising the right of establishment (of a branch and/or agents) or providing cross-border services. This is referred to in Financial Services and Markets Act 2000 (as amended) (FSMA) as an EEA right and the exercise of this right is known as ‘passporting’."

"Passporting rights only apply within the EEA. So, for example, they do not apply in the Channel Islands or the Isle of Man, as these are not EEA states. Although Switzerland is not an EEA state, Swiss general insurers have the right to set up an establishment in the EEA under the provisions of special bilateral treaties between the European Union and Switzerland. EEA general insurers also have equivalent rights in respect of Switzerland under these treaties. Special arrangements also apply in relation to Gibraltar."

The same mechanism will not apply if you are a financial institution operating outside the EU. Apparently, a bank outside the EU would have to go through the regulatory regime of each of the EU member states it wants to operate in. This requirement seems to defeat the point of having a single market. The whole point of having a single market and uniform regulatory standards, is to streamline processes such as this. It makes no sense to require multiple identical regulatory checks for the same market product. To me, this scheme reeks of protectionism. It is unfair to the global market and provides an uncompetitive advantage to financial institutions within the EEA.

This is further exacerbated by the whole raft of new financial regulations that are coming in: MAR (Market Abuse Regulations), and MAD (Market Abuse Directive), under the UK’s FCA, and MiFID II (Markets in Financial Instruments Directive revision 2), MiFIR (Regulation on markets in financial instruments), and European Market Infrastructure Regulation (EMIR) from the EU Commission, are just a taster of what’s looming on the horizon. Many of these heavy regulatory regimes are coming in because of the global financial crash of 2008.

In my opinion, this legislative response is a knee-jerk reaction to a danger that the industry would have already recognised by itself. It is a far too heavy-handed over-reaction. But this is a popular demand from the public who do not want to experience such a recession caused by the financial industry again. It’s true that history repeats itself, but never quite the same way. These legislative proposals will most certainly not prevent a future crash of the financial industry. In the meantime, the introduction of these regulations will hit the financial industry hard. When these regulations come into enforcement, the financial market will almost certainly experience another slump.

The costs of meeting this regulatory hurdle will be so massive that most financial institutions outside the EEA will be priced out of the European market. Thus a UK outside the EU will almost certainly find its financial industry declining in Europe. With London being the financial centre of Europe, the economic consequences of Brexit will be extremely severe. On Brexit, as Europe’s financial industry goes into temporary decline, the EU is not going to readily cut a deal with the UK to grant it passport access to the EEA. The UK is already leading Europe in financial services, it is not in the EU’s interest to bring this country back in as another competitor in a flailing industry.

This may sound like scare-mongering, but this is my understanding based on insider knowledge of the industry. This threat is more substantial and more realistic than anything you will read in the government’s pro-EU booklet. But you won’t hear this argument being paraded in public because there is still much public hostility to the finance industry. I have always held firm that David Cameron is a very good political PR person, revealing only what is necessary, and deceiving his way through public policy through misleading comments wherever possible.

The ironic thing is, the UK is already well ahead of the curve in these financial regulations. The British has a culture of professionalism and rule-keeping, and the UK’s FCA (Financial Conduct Authority) is stricter than most of its European counterparts. Thus if the UK stays in the EU, its financial industry will more or less sail through these new regulations (comparatively). Even more than that, as the rest of the European Union struggles to cope with the burden of these new financial regulations, the chances are hugely in favour of the UK coming out at the top of the European financial services industry, increasing its lead even further.

No wonder our dear Prime Minister is campaigning so hard to Remain within this protectionist bloc. The idea is that it is a gamble of insider knowledge that will result in the UK dominating the EU in finance. But I suspect such a drive will not be a popular move to most normal people.

This argument is not going to win anyone over from those affected by mass immigration, nor farmers and fisherman whose livelihoods and industries are being destroyed by harmful EU regulations. But David Cameron and many Tories are more interested in the finance of the economy, or more specifically their nepotist financiers. But it is still a very real threat to the country.

This revelation has shaken even my resolve. I am still hugely critical of the EU establishment. After all, this turn of events is a direct consequence of the EU’s legislative choices and actions. I will not support such an incompetent and unprincipled institution. But the costs are very substantial indeed. It seems the only hope is to leave the EU and remain a member of the EEA. Supporters of Flexcit are championing this very thing.

Author: Hoong-Wai

I am a sinner. I care about people, and truth, and justice. I have an interest in dancing, economics, engineering, philosophy, and science.

4 thoughts on “Regulatory Passporting: The killer argument against Brexit”

  1. That was a very honest appraisal. It’s a shame our politicians are not as open and honest. They may well gain some respect if they were.
    As a dairy farmer, I stand to lose £28,000 in subsidies per annum, post exit which is a big hit for a small business. I don’t know whether the UK government will chose to replace European subsidies with their own but despite this, I will still be voting out. The farm has ridden much bigger financial waves than Brexit will provide.
    Our democratic sovereignty is more important to me than any financial argument. If the business has to take a hit, then so be it – It is a small price to pay for regaining control from the EU and becoming a sovereign democracy once more.
    John Wigley


    1. Thank you for your honesty and integrity, John. I commend your willingness to take the risk of personal sacrifice for the sake of a principle of far greater importance.

      I just don’t know whether the UK economy will be able to take the hit of its financial industry going into decline. It has unnerved me.


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