Welcome to the first in a series of articles which will examine the impact of Brexit on the financial service sector. The aim of these posts is to explain how being outside the EEA will impact key financial service sectors such as asset management, banking and insurance.
But before getting into the details, we first need to explain some basic principles on how you create a single market for services as well as the importance of passporting.
The single market for services
While thousands of column inches have been written about how the single market for goods operates, less attention has been paid to how the services market operates.
Let’s start with the difference between goods and services. It’s easiest to think of the market for goods as people buying things from one another while the services market is about people doing things for one another. For example, buying a car is trading a good but hiring a mechanic to fix that car is the provision of a service.
That raises the first challenge for creating a single market in services. As services are about people doing things for one another then you need to be able to allow people to move around and provide these services.
As well as people and services flowing freely, so too must capital – otherwise it would be impossible to pay people for their services. Three out of the four freedoms of the single market – the free movement of people, services and capital are needed to ensure a single market in services can exist. The fourth, goods, is not necessary.
In addition to these freedoms, the single market in services also requires mutual recognition of qualifications and the non-discrimination between citizens. That way a French mechanic can work in France or anywhere else in the EEA.
The importance of passporting
With the basic structure of our single market in services established, we can turn our attention to the types of services to be sold within our single market. We mentioned car mechanics but there are numerous other examples of services – logistics, hair dressing, teaching, musical performance and accountancy.
Financial services are more complex than many others. They include selling life insurance, investment products or banking services. Providing these services necessitates the free flow of both investment and data as well as both the buyer and seller being free to enter into cross-border contracts.
There is also considerable variation within these financial services. For example, an investment product can use different asset classes, involve the use of derivatives and have different tax treatments.
The only way to guarantee services can be bought and sold across the single market is to ensure they are defined, otherwise local rules may prevent their sale.
Defining financial services makes it possible for a consumer, for example, to buy an investment fund which will meet the same requirements in every EEA member state. These definitions require regulatory frameworks.
Once a financial services firm is established and authorised in one EEA country, it can apply for the right to provide certain defined services throughout the economic zone – it can be passported throughout the region. Mutual recognition of regulators is an integral part of passporting.
While there is a single EU rulebook for financial services, that rule book is provided by a series of directives and regulations which are specific to each individual sector. In other words, the regulations governing asset management is not the same as those governing banking or insurance.
Now we have established the fundamentals which underpin the single market in services, we can turn our attention to each financial service sector and examine the impact of being outside of the EEA for each sector.