Triangular passporting is a relatively new concept that has gained attention in the European Union (EU) financial services sector, especially in the context of cross-border operations and regulatory compliance. It refers to a situation where a financial institution uses the regulatory permissions of one EU member state to access markets in another member state, often through a third intermediary country. This mechanism is closely tied to the EU’s single market principles and the passporting rights granted under various EU directives.
Understanding Passporting Rights
Passporting rights allow financial institutions authorised in one EU or European Economic Area (EEA) country to conduct business across the entire EU/EEA without needing a separate authorisation in each country. These rights are enshrined in directives such as the Markets in Financial Instruments Directive (MiFID II), the Capital Requirements Directive (CRD IV), and the Insurance Distribution Directive (IDD).
How Triangular Passporting Works
Triangular passporting typically involves three countries:
- Home State A: The country where the financial institution is originally authorised and regulated.
- Intermediary State B: The country through which the institution may route its services or operations (establish a branch), often for strategic, regulatory, or operational reasons.
- Host State C: The country where the institution wishes to provide services.
For example, a bank authorised in France (Home State A) may set up a branch in Ireland (Intermediary State B) and use that branch to offer services in Germany (Host State C). This structure can be used to optimise regulatory requirements, tax considerations, or operational efficiencies.
Regulatory Considerations and Challenges
While passporting is designed to facilitate seamless cross-border business, triangular passporting can raise regulatory concerns. Supervisory authorities may scrutinise such arrangements to ensure they are not being used to circumvent stricter regulations or oversight in certain jurisdictions, such consumer protection risks, AML and terrorist financing, loss of supervisory control in the event of further outsourcing, and third-party risks.
Triangular passporting is neither explicitly covered nor prohibited under existing EU laws. According to the European Banking Authority (EBA), the passporting rights under the respective EU law or its local law implementation always belong to the financial institution which decides if it wishes to provide services in Host State C without having a physical presence in that State, through a branch located in the Intermediary State B. In such cases, the passport notification should be sent by the competent authority of Home State A to the competent authority of Host State C (i.e. not only of Intermediary State B). The services provided in Host State C will be provided under the sole responsibility of the financial institution.
The Commission’s payments reform under a new Payment Services Directive (PSD3) is also intended to bring clarity and consistency to triangular passporting. Practical interpretations further suggest that the "host" should be determined by where the services are actually offered to end users (Host State C), which would impact notification flows, supervisory powers and applicable conduct rules.
Conclusion
Triangular passporting is a nuanced aspect of the EU’s financial regulatory landscape, although it has been used in the insurance sector for some time. While it offers flexibility and efficiency for financial institutions operating across borders, enabling them to easily expand internationally, it also requires careful navigation of regulatory requirements to ensure compliance and maintain the integrity of the single market, in particular the position of the Home State regular to such structure, as some regulators accept the passporting by foreign entities but do not support such structure by the entities supervised by them.
As the EU continues to evolve its regulatory framework, triangular passporting will remain a topic of interest for both regulators and market participants.
