On 12 July 2018 the UK Government released its highly anticipated White Paper regarding the future relationship between the United Kingdom and the European Union. The policy positioned in the White Paper reflects today’s divided government, providing for a soft Brexit for the goods sector of the economy and a harder Brexit for services. (For further Brexit implications see the article Are you ready for Brexit? by Silvia Sparfeld on the Noerr website). For the financial sector, this hard Brexit is manifested in the rejection of a system based on mutual recognition in favor of a super-charged equivalence regime. This departure from the current single market stirs uncertainty within the sector and could cause unintentional consequences for financial service providers and customers alike.

The Gentle Divorce of Interconnected Markets

At the time that the British people voted to leave the EU, over 75 percent of the Union’s capital market business was conducted through the UK. With the nation’s industry responsible for 37 percent of all European Initial Public Offerings and UK-based firms receiving more than one-third of all venture capital invested in the EU, the UK financial center is a global asset. Since its accession into the European Union, the British financial industry has been closely interconnected with that of its continental cousins by over 40 EU regulations and directives.

There exists legitimate interest in a mutually cooperative arrangement that recognizes these interwoven markets. The White Paper therefore suggests a regulatory divorce fostering compatible regulation for continual financial stability and the avoidance of regulatory arbitrage and market fragmentation. (For further information on the UK Government’s stance on the future of financial services following Brexit, see the House of Lords European Union Committee Report).

White Paper’s Departure from “Market-Passporting”

The UK government must now choose how to leave the single European Market while maintaining the integrity of its financial services industry. In its White Paper released on 12 July 2018, the government positioned itself against the adoption of an EU “passporting” regime. The EU-passport is a legal mechanism, which permits financial services companies based in one EU country to conduct business in other member states on the basis of their home state jurisdiction. This would have permitted banks, fund managers and insurers working out of London to continue to operate on pre-Brexit terms with added oversight from government executives. Following the reasoning contained in the White Paper, this method is too intrinsic to the single market system the British people voted to leave and is therefore inacceptable.

The White Paper’s Adapted Equivalence Arrangement

Instead, the White Paper suggests an adapted version of an equivalence arrangement to govern the interconnected business relationships between the UK and the EU. Equivalence is a cross-border trading procedure which allows markets to recognize each other’s standards. Effectively, this allows businesses in one jurisdiction to offer financial services in another, granted that the standards in each are similar enough so that customers are protected equally. The White Paper reasons a system of market equivalence is not sufficient to regulate the financial market between the EU and the UK, in part because the principle of equivalence does not provide for a mechanism of recognition for commercial banking or primary insurance. Propositioned in the White Paper, therefore, is an arrangement to maintain the strength of cross-border cooperation by allowing each respective government autonomy over decisions regarding market-access underpinned by a bilateral framework of treaty-based commitments.

Effects of the White Paper on London-based Banks and Companies

Although the White Paper only represents a stance of negotiation for the UK in the Brexit discussions, it sends a clear message to banks and companies that financial service regulations shall be nationalized. The proposed system of cross-border recognition based on a bilateral framework as set forth in the White Paper brings an air of uncertainty to the future of London-based businesses. The Government’s rejection of “market-passporting” could drive London based businesses to establish subsidiaries within the EU, incurring regulatory complexity that would require additional capital to back businesses. Furthermore, the absence of a standard for market equivalence could drive the EU to force the UK to implement certain regulations to ensure equivalence. This loss of regulatory control has the potential to throw the stability of the London financial sector out of balance.


To the disappointment of UK-based financial services firms, the UK will not pursue a plan of mutual recognition following the new White Paper, which would have allowed business to proceed as it had pre-Brexit. While the White Paper has provided more clarity on its approach to financial services, many details are still up for speculation. For financial firms with a London seat, the continued delay in Brexit negotiations will increase the need for business contingency planning and respective accompanying costs.