Passporting

Passporting is the legal mechanism by which a financial firm authorized in one state of the European Economic Area (EEA) may provide its regulated services in the other EEA states without applying for a fresh authorization in each of them. The firm's home state regulator grants the original license and remains responsible for prudential supervision, while the host states rely on that authorization and supervise only limited matters, such as conduct rules and anti-money laundering compliance for branches and agents.

Passporting is a cornerstone of the EU single market in financial services. It allows a bank, investment firm, payment institution or electronic money institution licensed in, say, Ireland or Lithuania to serve customers from Portugal to Finland under a single license.

Passport rights are not a general principle; each one is created by a specific EU directive or regulation covering a particular activity. The main sources include:

• the Capital Requirements Directive for credit institutions (banks);
• MiFID II for investment firms and trading venues;
• the Second Payment Services Directive (PSD2) for payment institutions;
• the Second Electronic Money Directive for e-money institutions;
• the UCITS and AIFM directives for fund managers, and Solvency II for insurers;
• the Markets in Crypto-Assets Regulation (MiCA), which created a passport for crypto-asset service providers.

Because the rights come from the legislation, a firm can only passport the activities its home license covers. Lighter regimes are often excluded: a small payment institution or small electronic money institution registered under national waivers does not receive passport rights.

There are two forms of passport. Under the freedom to provide services, the firm serves customers in the host state cross-border from its home state, with no physical presence there. Under the freedom of establishment, it sets up a branch in the host state, or, for payment and e-money firms, appoints a local payment services agent, EMI agent or e-money distributor.

The process is notification-based rather than an application. The firm tells its home regulator which states it intends to enter and how; the home regulator checks the notification and forwards it to the host regulator, which may raise concerns, particularly about anti-money laundering. The host regulator cannot impose its own licensing test. The European Banking Authority maintains a central register of payment and e-money institutions and their passported activities.

Because one license opens the whole EEA, firms compare member states on the speed, cost and perceived rigor of their regulators before choosing a home state, a form of regulatory arbitrage. Fintech groups have clustered in states such as Lithuania, Ireland, Luxembourg, Malta and Cyprus. Critics argue that host states may be left with conduct and financial crime risks they cannot directly control. EU supervisory authorities have responded with peer reviews of national licensing and with guidance on when cross-border activity becomes a de facto establishment that the host state can supervise more closely.

The United Kingdom's departure from the EU ended passporting in both directions at the end of the transition period on 31 December 2020. UK firms lost the right to serve EEA customers under their Financial Conduct Authority licenses, and many established subsidiaries in EU states. EEA firms entering the UK were able to continue temporarily under a transitional regime while seeking UK authorization.

The United States has no equivalent of a passport for non-bank payment firms. A money transmitter generally needs a separate money transmitter license in each state where it operates, although the Money Transmission Modernization Act aims to harmonize requirements and NMLS allows shared exams. Firms without a license of their own sometimes rely on license sponsorship instead. National bank charters, by contrast, operate across states under federal law. Switzerland, outside the EEA, offers no passport either, and many Swiss financial intermediaries meet their anti-money laundering duties by joining a self-regulatory organization such as VQF.

• European Banking Authority
• EUR-Lex, official access to EU law