29 April 2020 | AtoZMarkets – The EU broker passporting system enables brokers in any EU or EEA state to trade freely with minimal authorization. These passports are the bottom of the EU single market for financial services. There are almost different types of passports that brokers, banks, and other financial services providers should follow to provide their services to businesses and customers across the EU.
Passporting is based on the single EU rulebook for financial services only. Therefore, this opportunity is not available for firms from the outside of the EU and the EEA. So, Non-EU firms may face significant regulatory barriers to provide cross-border banking and investment services among the many EU Member States.
In the following section, we will see what passporting is and why it is crucial.
What is Broker Passporting?
All European Union states are part of the EU single market. Goods circulate freely, and businesses established inside it to sell products and services in any part of it. Over time, EU states have harmonized their rules for many products and services to facilitate this trade across the EU. For more than twenty years, the scope of the EU single market has increasingly extended into a business in financial aid.
The foundation of passporting has been the development of a single EU rulebook for financial services across the area. Additionally, it increased the harmonization of standards of financial regulation across the EU.
After establishing and authorizing, a broker in one EU country can apply for the right to provide services throughout the EU. On the other hand, it can open branches in different countries across the EU. This authorization from the European Union regarding its financial services is known as 'passport'.
However, these passports are not available to 'third country' firms; those are incorporated outside the EU. Therefore, Non-EU brokers and other firms have to face some regulatory barriers in providing investment services to customers across the EU. In some Member States, it is not possible for a non-EU broker to obtain a license to provide services to local customers. Even if the non-EU broker does obtain a permit to open a branch in a Member State, that license might only be authorized to operate business activities in that Member State.
Therefore, It will not have any rights for the non-EU brokers to perform business activities from that branch with customers in the other Member States. There are nine different passports around the EU, which covers a different sort of financial service.
Examples of Passporting
We can distinguish the passporting in 5 different categories:
- Private banking: UK-based banks might use their CRD and MiFID passports to assist a customer in an EU state in arranging a line of credit, managing portfolio, or to provide financial planning. Passports are the foundation of the EU market for financial services.
- Payments services: Banks, brokers, and other financial service providers based in the UK use the Payments Services Directive (PSD) passport to provide their services to EU customers.
- Corporate banking: UK-based banks might use it's Fourth Capital Requirements Directive (CRD) passport to provide banking services. Any UK-based bank should serve clients in the rest of the EU through a branch created by the passporting framework.
- Market services: UK-based banks might use its Markets in Financial Instruments Directive (MiFID) passport to help a business in another EU state take. They also use their MiFID passports to help clients buy and sell shares, currencies, bonds, or other financial instruments and trading venues around the EU.
- Non-UK EU banks as a hub: Non-UK EU banks provide similar services that are mentioned above using operations in the UK. Their activity depends on their passports.
Why is Broker Passporting Important?
Each type of passporting covers a separate kind of activity, to enable brokers to provide services to customers and businesses. Therefore, much modern banking and other financial services involve business operations covered by more than one passport.
These passports are the primary requirement of the market in financial services. Therefore, it enables a steady flow of trade in financial services across the EU. Many brokers, banks, and other financial services operate their business activities in the UK. It is based on the rights conferred by 'passport' their services across the Eurozone.
Broker passporting is essential for the UK, which is the largest exporter of financial services inside the Eurozone. It exported over £20 billion of services to customers in the rest of the EU in 2014 and is still helping to provide hundreds of billions of euros in finance. This trade also supports ancillary services, legal and other business services to process and store data. Therefore, if a broker wants to operate its business activity in the Eurozone, it must take the passporting from the authority. As a large portion of financial events around the world happens in the Eurozone, it is essential to get passporting to catch the opportunities.
How does Passporting Work?
The passporting is a system that builds with the assumption that, brokers and other financial service providers to provide the authority in the EU to meet the same standard. Therefore, it considers them as a local business. The broker passporting system is made with a high level of regulatory cooperation between national supervisory authorities in the EU. It includes the merging of some supervisory functions for EU states participating in the financial sectors.
There are two significant features of passporting:
- It allows brokers, banks and financial service providers to offer products and services across the EU. This is very crucial for areas such as corporate, investment, and private banking, where the customer may be in one EU country, and the bank providing the service in another.
- It enables financial institutes to establish branches in other EU states on preferential terms. However, branches of non-EU banks in the EU Member States are treated as 'foreign'. Moreover, they often comparatively burdensome regulatory requirements not applied to local banks. Branches of banks from other EU states need authorization from EU national authorities. They should follow the 'home' regulator of the office on some supervisory issues.
The first feature enables businesses across the EU to buy financial services straight from the UK. Moreover, the second has enabled UK-based banks to establish networks of branches in financial centers across the EU.
The passporting system has been extended to provide services throughout the European Economic Area (EEA). It comprises the EU states and Norway, Iceland and Liechtenstein. The extension of the passporting privileges is based on their commitment to freedoms of movement, goods, and services.
Brokers, Banks, or other financial services businesses from countries outside of the EU and the EEA cannot access the passporting. They must establish a regulated business inside the EU. Moreover, they can take a license under the domestic licensing system of each EU country. However, such licenses are not available in all EU countries. Therefore, it carries no rights to onward cross-border trade from the licensing country.
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