More than 5,000 UK firms rely on 'passporting' to do business in Europe
The threat to Britain's financial services sector has been laid bare after it was disclosed that more than 5,000 firms rely on "passporting rights" to do business in Europe.
The head of an influential select committee warned of significant risks were they to lose them as a result of Brexit.
In a letter to the Treasury Select Committee, the head of the UK's financial watchdog, Andrew Bailey, said 5,476 UK firms hold a total of 336,421 passports, which provide access to the European Union's single market in financial services.
Meanwhile, 8,008 European businesses are using 23,532 passports to provide financial services in the UK.
Committee chairman Andrew Tyrie said: "These figures give us an initial idea of the effects of losing full access to the single market in financial services. The business put at risk could be significant.
"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."
The figures were originally requested in July when Mr Bailey, chief executive of the Financial Conduct Authority, appeared in front of the committee.
Mark Boleat, policy chairman at the City of London Corporation, said the figures "show just how important passporting is for a wide range of financial services" and "demonstrate how the UK acts as a gateway for firms outside the EU that want to trade within the single market".
The subject has been in focus this week after Bundesbank president Jens Weidmann said Britain would have to remain part of the European Economic Area (EEA) to maintain passport rights.
It came as a warning to British politicians lobbying for a so-called "hard Brexit" that would see the UK gain full control of immigration.
EU leaders maintain that Britain cannot remain in the single market without accepting the free movement of people.
However, a report by Moody's Investment Services claimed that the direct impact of a hard Brexit would be "manageable" and have a "modest" impact on British banks and financial services.
Moody's noted that some passporting rights could be salvaged by incoming EU regulations under the Markets in Financial Instruments Directive II (MIFID II), which would allow non-EEA financial institutions to operate across the single market and essentially bypass cross-border restrictions.
To qualify as a third party through MIFID II, the European Commission must deem the country's regulatory standards as equivalent to those in place across the EU.
The UK would be likely to qualify as the Financial Conduct Authority is continuing to apply EU rules until the Government officially starts the Brexit process.
MIFID II, which is set to come into effect in January 2018, would apply to firms offering professional services like investment advice, portfolio management, sales of derivatives and other investment products, and market trading in areas like foreign exchange.