Brexit: a financial services perspective on a post-Brexit relationship between the UK and the EU



If the UK votes to leave the EU, it will seek to establish a new relationship with the EU. The UK Government published a paper on the possible models for the UK-EU relationship post-Brexit [1]. The paper highlights the various advantages, obligations and trade-offs which come with each possible model. Neither the UK nor the EU, however, has given any indication of what might be agreed or even what each side might propose in the negotiations. The outcome of such negotiations and the terms of any new agreement are therefore a matter of speculation.

The process for withdrawing from the EU under Article 50 of the Treaty on European Union and for negotiating a new agreement is explained in a separate RegZone report on “Brexit: Process for the UK to withdraw from the European Union and potential implications”.

Current arrangements between the EU and non-EU countries

In looking at the relative merits of EU membership and a future outside the EU, much time has been spent looking at the EU’s current arrangements with

  • Norway (and Iceland and Liechtenstein) under the EEA/EFTA;
  • Switzerland (the fourth EFTA member) which is a member of Schengen but not of the EU or the EEA;
  • Turkey (an EU applicant and associate member) which is within the EU customs Union but outside the single market;
  • Canada, the US and Japan – which are currently negotiating (or have completed negotiations for) separate agreements with the EU;
  • And also - the default position/baseline if there were no special relationship and WTO rules applied to trade.

None of these, however, can be said, at this stage, to offer a clear or likely precedent for the extent, terms or structure of a new relationship between the UK and the EU. There has been no indication from the EU as to what terms they might seek or offer; indeed there may well be very differing views amongst member states. Similarly there has been no indication from the UK government of the sort of terms/arrangement they would seek. The aftermath of a vote to leave is likely to be a volatile period politically. The Prime Minister has said that he would lead the negotiations but it is far from clear how the UK would determine its negotiating position, let alone what that position might be. Successful conclusion of a new UK/EU arrangement is likely to be difficult given the background and time constraints and the number of national governments and institutions that effectively hold a veto at some point in the process.

In short, no one knows what regime would emerge when this complex process is completed. This makes contingency planning for Brexit very difficult.

Illustrative charts – the UK as an EU member

The diagrams below were used in our webinars and seminars to illustrate, in very broad terms, how the UK might fit within the different EU relationships. They make various assumptions and illustrate various possibilities but are by no means comprehensive or a prediction of likely outcomes.

The current position is illustrated in Chart 1 below –

If the UK were to vote to remain in the EU, the UK/EU settlement would come into play (see the RZ report ‘Financial services and Brexit – the new UK settlement with the EU and its legal status’). This deals with the relationship between the Eurozone and non-Eurozone states. It is expected that “new joiner” states will join the Eurozone in the coming years – swelling the size of the Eurozone and decreasing the size of the outer-EU group. Although new joiners accept an obligation to join the Euro it seems likely that a few will not achieve this in the near term. Chart 2 below seeks to illustrate this scenario. It also assumes that both the UK and Denmark, which have opt outs/have opted out from the Euro, will not join the Eurozone.

Re-joining the EFTA – the model of Norway as an EEA member

Chart 3 below illustrates the position if the UK were to leave the EU and join the EEA.

The EEA is the only pre-existing arrangement which the UK could ‘apply to join’. The UK could apply both to re-join EFTA and to join the EEA. In order to do so, the UK would need the agreement of all the remaining 27 EU member states, and Iceland, Liechtenstein and Norway and Switzerland too.

The EEA agreement is a mechanism for extending the single market and the free movement principles across a broader area comprising EU member states (including new joiners) and the additional members of the EEA who are (confusingly) referred to in this context as the ‘EFTA states’ (but are (currently) only 3 of the 4 EFTA members). The process by which EU laws are applied to the EFTA states [2] is overseen by an executive arm, known as the EFTA Surveillance Authority. The EFTA Court is the equivalent, for these purposes, of the ECJ.

EFTA was originally proposed by the UK as an alternative to the formation of the EEC. It was later created as a trade block for non-EU/EEC states shortly after the EEC was established, when France had blocked the idea of the UK joining the EEC. The EEA came later and has served both as a stepping stone for full EU membership (in the case of Austria, Sweden and Finland) and as an alternative when the government’s plans for EU membership where rejected in a referendum (Norway). In the case of Switzerland, the proposal to join the EEA (given public opposition to EU membership) was itself rejected in a referendum in 1992. Both Norway and Iceland have considered applying for full EU membership but there are no current negotiations on foot. The EEA has not been used previously as a home for member states leaving the EU.

It is not clear whether, if the UK government sought and obtained agreement for EEA membership, it would make this subject to a further national referendum. Without a further referendum, EEA membership might pose difficulties for the UK government, from a political perspective, as this might be seen as maintaining some of the key concerns of those voting to leave the EU. EEA membership would involve:

  • the continuation of free movement of persons into the UK from EU/EEA states;
  • a substantial financial contribution to EU costs by the UK; and
  • the continuation of the principle of the supremacy of EU/EEA law albeit with the EFTA court and EFTA Surveillance Authority, replacing the European Court of Justice and the European Commission.

For financial services, EEA membership would offer the continuation of EU financial services legislation and the single passport system. It would offer full mutual recognition and would thus minimise any need for UK firms to restructure their operations (on account of regulatory change) for Brexit.

There have, however, been technical problems in the EEA adopting some recent legislation and the roles of the EBA, EIOPA and ESMA do not extend to the EEA (for further information see the RegZone report on ‘Recent problems applying financial services law under the EEA agreement’).

The principle change, in terms of financial services legislation, in moving from EU to EEA membership would be a loss of UK influence over EU policy and its new laws and regulations. Hitherto the UK has been a leader in the development of EU policy and rule-making and much of the EU system is modelled, to a greater or lesser extent, on UK experience and UK rules. In addition, the UK European Commissioner currently holds the portfolio for financial services and is leading on both new legislation and his program for the review of past legislation. Norway has no representation at the European Commission or European Parliament and no vote in deciding EU law. There are concerns in Norway about this “loss of voice”[3].

There has been speculation that the UK might be able to negotiate changes to the EEA Treaty to accommodate the UK’s status as a major global/European economy. In theory, this might include (but there have been no signs that the EU would agree to such proposals):

  • some greater control over the application of EU law in the UK and the process by which EU laws are reviewed, adopted and applied in the EFTA states [4]. The current EFTA states also have protections where the adoption of new EU legislation would give rise to ‘constitutional’ issues (i.e. matters requiring approval from their national parliament) [5]. In the case of the EU legislation concerning the EBA, EIOPA and ESMA, extension to the EEA was not possible because it would have involved EU bodies having the power to impose fines on EFTA firms; and
  • greater involvement in EU legislative proposals i.e. more than the right to information and consultation which the EFTA states currently enjoy [6].

The Swiss experience

The EU’s closest bilateral relationship is currently with Switzerland. There would be certain similarities with the position of the UK on Brexit, in that both concern European countries which border, and are closely connected with, EU countries but which wished to operate outside the EU and the EEA. There is no reason, however, why a bilateral UK/EU arrangement would follow the terms of the Swiss relationship.[7]

Chart 4 below illustrates this possibility –

The Swiss arrangements have been far from ideal. In particular:

  • Switzerland does not have a single agreement with the EU. It has negotiated over 100 individual agreements for different areas;
  • These agreements took many years to negotiate and require further negotiations to update them;
  • Swiss financial institutions have no passporting rights. Switzerland therefore has to seek equivalence status and its financial institutions only have very limited rights under EU legislation as third country firms; and
  • Switzerland:

o has to contribute to EU costs;

o had to adopt free movement of persons and open its borders as part of Schengen – a position that is now in conflict with the result of a recent Swiss referendum;

o although not obliged to do so (as EFTA states are under the EEA agreement), it adopts/follows a substantial amount of EU financial services legislation – most of MiFID II and the Prospectus Directive (by 2017/8), 90% of EMIR (1/1/16) and substantial parts of the Market Abuse Directive (1/5/13); and

o has adopted EU funds requirements but lost its EU funds industry as it lacked an EU passport. It has had to negotiate a bilateral agreement with Germany (1/1/14).

The UK is clearly a different and much larger economy than Switzerland. Debate has centred on whether the UK could secure a better deal:

  • with single market access and financial services passporting (unlike Switzerland);
  • without having to follow EU rules (as the EFTA states do) but merely achieving ‘equivalence’ status; and
  • without having to accept free movement of persons (as Switzerland and the EFTA states do).

For UK financial institutions, this might represent ‘nirvana’, but nothing the EU has said on the topic suggests any willingness to offer these terms.

There are also risks for UK financial institutions that Brexit could lead to:

  • increased EU policy/legislation hostile to the City/UK[8];
  • a danger of Scotland seeking to separate from the UK to remain in/re-join the EU; and
  • an uncertain future for Gibraltar (which currently has EU status as part of the UK) – the Prime Minister of Gibraltar has described this as an ‘existential threat in economic terms’. Both Scotland and Gibraltar are important financial services centres.

Turkey and free trade agreements

Turkey (which applied to join the EEC in 1987 and has been a recognised EU applicant since 1999) is an associate member of the EU and operates within the Customs Union. Turkish financial institutions do not, however, enjoy passporting rights.

The EU has agreements with countries outside Europe. It is currently negotiating, or has just completed negotiating, new agreements with three major economies – the US, Canada and Japan.[9] These are more limited and reflect a less integrated relationship – essentially ‘free trade agreements’ or a modern equivalent. It is proving difficult to reach agreement on the EU/US Transatlantic Trade and Investment Partnership (TTIP). Whilst these agreements/proposals address various issues including tariff barriers, none extend (or would extend) mutual recognition and the single passporting system for financial institutions to these countries. Like Turkey, these countries have ‘third country status’ under EU financial services legislation.

Chart 5 below illustrates the possibility of the UK having third country status under a free trade arrangement –



Whilst it is possible that financial services passporting might survive Brexit, there is clearly a very real risk that UK institutions will cease to benefit from the entire regime (or at least that it will not apply fully across all FI sectors). The same risks apply to EU institutions in relation to their UK operations.

These firms need to consider the impact on their business of a loss of passporting rights and consider how they might need to change their operating, regulatory and corporate group structure.



The information contained in this report is intended for firms planning for the consequences of a potential withdrawal of the United Kingdom from the European Union. It is not intended, and should not be taken, as expressing any view or recommendation (i) as to how anyone should vote at the forthcoming referendum, (ii) as to the anticipated result of that referendum or (iii) otherwise as to whether the United Kingdom should remain within or leave the European Union. It is provided for information only and general interest, and is not to be relied upon by any reader as constituting legal, tax or professional advice.



[1] HM Government, Cabinet Office: Alternatives to membership: possible models for the United Kingdom outside the European Union, paragraph 3.25, 2 March 2016. See also, “HM Treasury analysis: the long-term economic impact of EU membership and the alternatives”, first published 18 April 2016.


[2] See the Handbook on EEA EFTA procedures.


[3] Ibid, paragraph 3.18.


[4] See further information on EEA institutions


[5] For full details, please see the Handbook on EEA/EFTA Procedures.


[6] For further information on the current rights, please see the Handbook on EEA/EFTA Procedures.


[7] The UK Government’s view is that the EU is unlikely to offer the UK similar terms to those that it has with Switzerland. See supra, note 1, paragraph 3.43.


[8] See the section ‘Eurozone issues’ in the RZ report Brexit: Financial services in the UK and cross-border passporting’ [convert to hyperlink] and also the section ‘Key issues for the financial services sector – the Eurozone dilemma’ in the RZ report ‘Financial services and Brexit – the new UK settlement with the EU and its legal status’ [convert to hyperlink].


[9] The free trade agreement with Canada is considered in the HMG report Alternatives to membership: possible models for the United Kingdom outside the European Union as set out in paragraphs 3.52 to 3.65. The Transatlantic Trade and Investment Partnership (TTIP) with the US is considered in the same report at Box 6.