Euro note

The UK and the post-Brexit financial services regulatory and supervisory regime: From rule-maker to rule-taker?

Cleo Davies, PhD candidate in Politics at Edinburgh University.

The Single Market in financial services, just like any trade regime, is governed by a set of rules and standards. After forty years of membership of the EU, the financial services trade regime inextricably links the UK and the EU. And as in many other areas, there are legal and technical challenges to defining the future relationship between the UK and the EU. But regulators and politicians in the UK are also struggling to define a future vision for the relationship that ensures they maintain influence in shaping the financial services regulatory regime after the UK leaves the EU.

Speaking at a conference in Switzerland mid-May 2019, Sam Woods, Deputy Governor for Prudential Regulation and CEO of the UK Prudential Regulation Authority in the Bank of England, underlines the somewhat paradoxical situation in which financial regulators and supervisors in the UK find themselves with Brexit: “a scenario in which our future relationship with the EU takes a form that means we stick with a system which looks exactly like what we have today. There is no reason to be very alarmed by this prospect – it is not ideal but we have largely shaped that system through our membership of the EU and we make it work well currently. However, this would be undesirable if it came with the prospect of becoming a rule-taker in financial services with all the risks … that entails.” (Woods 2019).

As this quotation highlights, the UK has largely shaped the system its financial sector is embedded in, through its membership of the EU. In doing so, the UK’s active contribution is not only about rule-making; it has also done much to build the country’s reputation in Brussels as a pragmatic negotiator, not just a reluctant partner. Stepping back in time, in the wake of the Single European Act in 1985, the UK brought its own style of negotiation and regulatory approach on trade liberalisation to the table, thereby supporting the Commission’s agenda in furthering the single market in financial services. The approach aimed to secure acceptance of the equivalence of national legislations rather than top-down harmonization in matters of capital markets integration (Story 2005, 227). It was introduced into the legislation at EU level in relation to the Second Banking Directive in the late 1980s, the centrepiece of the EU’s legislation on financial markets. According to Ingo Walter and Jonathan Story (Story and Walter 1997, 236)the reciprocity clause in the UK Financial Services Act of 1987, whereby the government had the power to block a foreign takeover if equivalent opportunities were not available to British firms in the acquiring bank’s home country, was directly transposed into the draft for the Second Banking Directive in 1989. The Directive came into force on 1 January 1993. Its key feature was the abandonment of any prior requirement to harmonise existing laws, and instead introduced the principles of mutual-recognition and home-country control. In doing so, it provided for a single EU-wide passporting system for banks and financial services companies, meaning international financial institutions located in any EU member state can trade freely in any other with minimal additional authorisation. And many chose the UK as the point of entry to the single market in financial services.

Sir Leon Brittan summarised the political role played by the UK in furthering the broader European trade agenda in the late 1980s and 1990s, when he was the European Commissioner for Trade: “Britain was able to persuade its partners that the European Union’s considerable muscle should be used to advance the liberalising trade agenda that Britain favoured”(Brittan 1998, 16). As a consequence, the UK and arguably London in particular, have reaped economic and financial benefits from a hugely dynamic financial services industry. London is one of the largest financial services hub in the world and dwarfs all other financial centres in the EU. In 2018, financial services contributed £132 billion to the UK economy, representing 6.9% of total economic output, and 1.1 million jobs in the financial sector. In 2017, it generated a surplus in financial services trade of £44 billion, and £29 billion in tax revenue (House of Commons and Rhodes 2019). It would be simplistic to claim that the regime is a reflection of British interests. But the words of Leon Brittan in 1997 do highlight how the UK combined its expertise at the negotiation table with a political vision about trade integration, that articulated the common benefits for all partners.

Today, as highlighted by Sam Woods’ words, the UK is still coming to terms with rethinking its role in shaping the European financial services regime: how can it avoid becoming a rule-taker even as it appears to be moving away from its capacity to maintain a rule-shaping role once it is no longer a member of the EU? The answer is largely contingent on the terms of the trade deal and formal relationship that may emerge between the EU and the UK once the latter has departed from the EU. But the future relationship will also depend on whether the UK can maintain its reputational status as a pragmatic partner rather than a competitor as it moves away from the political centre of decision-making. The Single Market in financial services was not simply born out of technical rules and regulations; it was also a political decision about the future trajectory of the relationship between EU, its members and third countries.



Brittan, Leon. 1998. Globalisation vs. Sovereignty?: The European Response : The 1997 Rede Lecture and Related Speeches. Rede Lecture 1997. Cambridge: University Press.

House of Commons, and Chris Rhodes. 2019. “Briefing Paper Number 6193 – Financial Services: Contribution to the UK Economy.” House of Commons Library.

Story, Jonathan. 2005. “The State of the European Union Vol. 7: With US or Against US? European Trends in American Perspective, Ed. Nicolas Jabko and Craig Parsons.” In Financial Restructuring in the Age of the Euro: Still a Battle of Systems?, 219–53. Oxford University

Story, Jonathan, and Ingo Walter. 1997. Political Economy of Financial Integration in Europe: The Battle of the Systems. Manchester: Manchester University Press.

Woods, Sam. 2019. “‘Stylish Regulation’ – Speech by Sam Woods, given at the UBS 20th Annual Financial Institutions Conference, Lausanne.” Bank of England.