The European Treaties and the Regulations and Directives made under them give UK-authorised financial services businesses the right to carry on their activities across the EU, on a cross-border services basis and through a branch network. These rights can be exercised by following a simple UK-focused administrative process. There’s no need to get authorised or licensed by the other European regulators; and there’s no need to comply with their capital or prudential requirements either. Although it is sometimes necessary to comply with the UK’s conduct of business rules, and some of the conduct of business rules in some of the other European member states as well, that isn’t always true, and the number of supplemental rules is modest.

If the UK leaves the EU, UK-authorised financial services firms will lose these rights, unless the UK joins the European Economic Area (EEA); the European Free Trade Association; or it enters into a bespoke bi-lateral agreement with the EU.

At the moment, the EEA has 31 members – the 28 members of the EU (including the UK), together with Iceland, Lichtenstein and Norway.

Under the terms of the EEA Agreement, the EEA’s non-EU member states are obliged to comply with the EU’s rules on the free movement of goods, services, people and capital. So they’re obliged to comply with the EU’s financial services regulations, and to implement and comply with its financial services directives, as well. This is enough to give their regulated financial services businesses access to the EU’s single market, but their governments and regulators have no formal opportunity to influence the shape of EU rules. Iceland, Lichtenstein, and Norway are also part of the Schengen area, and therein lies a second (and perhaps more difficult) problem. The free movement of persons is such a fundamental right under EU and EEA law, and it’s been such a contentious issue in the UK’s recent #Brexit debate, that’s it’s difficult to see how the UK could leave the EU, and regain access to the single market, by joining the EEA in the short or medium term.

The UK could, perhaps, seek to join the European Free Trade Association (EFTA) instead of the EEA. But this seems unlikely too: whilst EFTA’s objectives include the free trade in goods, they also include the progressive liberalisation of the free movement of persons between the EFTA member states (Iceland, Lichtenstein, Norway and Switzerland). EFTA’s existing members have also agreed to the free movement of people into and out of the EU. Three of EFTA’s members (Iceland, Lichtenstein, and Norway) are committed to this under the EEA Agreement; and Switzerland is committed to it under the terms of its EU bi-lateral agreement.

This suggests that the UK could only regain unfettered access to, and be a member of, the single market if it could persuade the EU to enter into a bespoke bi-lateral agreement which allows for (say) the free movement of goods, services and capital, but not the free movement of people – something the EU has been unwilling to contemplate so far.

If that’s right, if the UK leaves the EU, it’s like to become an EU “3rd-country”. In these circumstances, the EU’s financial services rules would not apply to UK domiciled / regulated financial services companies, unless they wanted to sell products and services in and into the EU on a cross-border services basis or through a branch network. This would allow the UK to make its own financial services rules (although the Swiss EFTA / bi-lateral option would allow this too). But even that won’t give it an entirely free hand: 3rd-country equivalence may be required in some areas, and that could mean that the UK is effectively obliged to comply with the EU’s regulations and directives, long after the UK leaves the EU, because that’s likely to be the only practical way of securing an early equivalence assessment, with more bespoke (and perhaps more conservative) UK rules to follow after that.

For the moment, it is therefore difficult to see how UK domiciled / regulated financial services businesses will be able to retain unfettered access to the EU’s single market, if Brexit occurs – under any of the alternative scenarios under consideration today. The UK regulators would, however, be freed from some of Europe’s maximum harmonising rules, and that would allow them to raise minimum capital requirements, and consumer protection standards too, if that’s what they wanted to do. They have form in this area, so this is likely to be something to watch out for, as the 3rd-country scenario unfolds.