The warning came shortly after the end of the Brexit transition period, when the UK’s financial services relationship with the EU was still being negotiated. Unlike many areas covered by the UK-EU Trade and Cooperation Agreement, financial services did not receive comprehensive market-access arrangements in the deal.
EU Financial Services Commissioner Mairead McGuinness said the bloc wanted close cooperation with London but would assess equivalence on a case-by-case basis. Her central message was straightforward: equivalence and wide regulatory divergence could not easily coexist.
What Was the EU Warning About?
The dispute centred on the UK’s future relationship with the European financial market after Brexit.
Before Brexit was fully implemented, UK-based financial firms benefited from the country’s membership of the EU single market. That framework made it possible for many financial services businesses authorised in the UK to provide services across the European Economic Area under common rules.
After the transition period ended on 31 December 2020, that automatic framework no longer applied in the same way.
The UK therefore wanted to establish a new relationship with the EU that would allow financial firms in Britain to continue serving European clients where possible.
One potential mechanism was equivalence.
What Does Financial Services Equivalence Mean?
Equivalence is a regulatory mechanism used by the EU to determine whether the rules and supervisory arrangements in a non-EU country are sufficiently comparable to the relevant EU framework.
Where an equivalence decision exists, it can provide firms from that country with access or regulatory treatment in specific financial activities. It does not, however, create a general passport for all financial services.
This distinction became particularly important after Brexit. UK firms could no longer assume that access to EU markets would continue simply because Britain had previously been part of the single market.
The UK also established its own equivalence framework after the transition period, with HM Treasury describing its approach as outcomes-based and focused on transparency and predictability.
Why Was Regulatory Divergence Important?
One of the main arguments surrounding Brexit was that Britain would gain the ability to set its own financial rules rather than automatically following EU legislation.
That regulatory freedom was attractive to the UK government and parts of the financial sector because it potentially allowed Britain to design rules specifically for its own financial markets.
However, regulatory independence created a potential trade-off.
If UK rules became significantly different from EU rules, Brussels could become less willing to recognise them as equivalent. That could make it harder for some UK firms to obtain EU market access under equivalence decisions.
This was the tension behind McGuinness’s February 2021 warning.
What Did Mairead McGuinness Say?
McGuinness, the European Commission’s financial services commissioner at the time, said the EU wanted a close and constructive relationship with the UK.
However, she stressed that equivalence decisions would be considered individually rather than automatically granted across financial services.
She also said the EU would consider its own interests when deciding whether to recognise UK rules.
The commissioner made clear that the UK’s intention to diverge from EU regulations would require discussions on an individual basis. The message was that regulatory cooperation could continue, but market access could not simply be assumed.
Why Was This Important for the City of London?
London has historically been one of the world’s major financial centres, with banks, insurers, investment managers, exchanges and other financial businesses operating from the UK.
A significant portion of the industry’s international business involves clients and counterparties outside Britain, including the EU.
That meant Brexit raised an important question: how much access would London-based firms retain to European markets once the UK was outside the single market?
The issue was particularly sensitive for activities such as derivatives, securities trading, asset management and other cross-border financial services.
Reuters reported at the time that trading in euro-denominated shares had already moved away from London following Brexit, while parts of the swaps market had also shifted.
Why Didn’t the Brexit Trade Deal Solve Financial Services?
The UK-EU Trade and Cooperation Agreement came into force at the beginning of 2021, but it did not provide a comprehensive framework for financial services market access.
This was a major difference from the period when the UK was part of the EU single market.
Instead, financial services were expected to be addressed through separate regulatory cooperation and individual decisions.
Both sides agreed that they would work towards a framework for regulatory cooperation. In March 2021, technical negotiations on a UK-EU Memorandum of Understanding were concluded, creating the basis for a Joint UK-EU Financial Regulatory Forum.
What Was the Joint Regulatory Cooperation Framework?
The proposed cooperation framework was intended to give UK and EU financial regulators a structured way to exchange information and discuss regulatory developments.
It was not designed to recreate the single-market passport that Britain had enjoyed before Brexit.
Instead, the framework was intended to provide a forum for dialogue, cooperation and discussion of regulatory issues.
This distinction mattered because regulatory cooperation and market access are not the same thing. A forum can improve communication between regulators without automatically giving financial firms the right to operate across borders.
Why Was Equivalence Not Automatic?
One misconception surrounding the Brexit financial-services debate was that regulatory similarity would automatically produce market access.
That was not how the EU’s equivalence system worked.
The EU could decide whether another jurisdiction’s regulatory regime met the relevant standards for a particular financial activity. Equivalence decisions were also subject to the specific legal framework governing each area.
McGuinness emphasised that the EU would consider equivalence decisions individually and according to its own interests.
That meant even if UK and EU rules were initially similar, there was no guarantee that Britain would receive a broad package of equivalence decisions.
Britain Wanted Regulatory Freedom After Brexit
From the UK’s perspective, one of the major potential benefits of leaving the EU was the ability to develop an independent regulatory framework.
The government argued that Britain could maintain high standards while tailoring financial regulation to the needs of the UK’s economy and its position as a global financial centre.
HM Treasury’s equivalence framework stated that the UK would use an outcomes-based approach, focusing on whether regulatory systems produced comparable results rather than requiring identical rules.
This approach reflected a broader post-Brexit objective: maintaining strong financial regulation while giving UK authorities greater freedom to make their own decisions.
The EU Had Its Own Concerns
From Brussels’ perspective, financial stability and regulatory oversight were central considerations.
The EU did not want market access to be determined simply by the fact that UK regulations had historically been aligned with EU rules.
As a non-EU country, Britain would increasingly be assessed under the EU’s third-country framework.
The EU also had an interest in ensuring that financial activity serving European markets remained subject to appropriate European oversight.
This created a structural difference between the two sides. Britain wanted the freedom to develop its own rules, while the EU wanted to retain control over decisions affecting access to its financial market.
Andrew Bailey Also Defended London’s Position
The debate intensified after Bank of England Governor Andrew Bailey warned the EU against turning the UK’s financial services industry into a post-Brexit political dispute.
Bailey argued that Britain should not face demands that went beyond those applied to other major financial jurisdictions.
His intervention reflected concerns in London that EU decisions on equivalence could become closely connected to wider Brexit negotiations.
The EU, however, maintained that its equivalence assessments were part of its own regulatory framework and would be determined according to established criteria.
What Happened to Financial Services After Brexit?
The immediate post-Brexit transition was more complicated than simply losing all financial links between London and Europe.
Many UK and EU financial firms had already prepared for the end of the transition period by establishing subsidiaries or operations in the relevant jurisdictions.
Some financial activities moved from London into EU financial centres, while other areas continued to be handled from the UK.
The result was a more fragmented financial-services relationship rather than a complete separation.
The British government continued to emphasise London’s position as a global financial centre and argued that regulatory independence could help the sector remain competitive internationally.
Did the UK and EU Eventually Cooperate?
Yes. Despite disagreements over market access and equivalence, both sides continued developing mechanisms for regulatory dialogue.
The technical negotiations for the Memorandum of Understanding on financial regulatory cooperation were completed in March 2021. The framework was designed to support regular discussions between UK and EU financial regulators.
However, regulatory cooperation did not mean that the UK regained the financial-services passporting arrangements it had enjoyed as an EU member.
The post-Brexit relationship remained based on cooperation between two separate regulatory jurisdictions.
Why the 2021 Warning Still Matters as a Historical Brexit Story
The February 2021 warning captured one of the central economic tensions created by Brexit.
Britain wanted the freedom to regulate financial services independently, while UK-based financial firms also wanted practical access to European markets.
The EU, meanwhile, wanted to determine market access according to its own regulatory framework.
Those objectives were not necessarily impossible to reconcile, but they meant that the UK’s post-Brexit financial relationship with the EU could not simply replicate the previous single-market system.
For businesses, the key lesson was that regulatory independence could bring opportunities but could also create additional compliance and market-access considerations.
What Did the UK Government Want From Its New Financial Framework?
The UK government’s post-Brexit financial-services strategy focused on maintaining London’s competitiveness while preserving high regulatory standards.
In 2021, HM Treasury described its vision as an open and global financial hub with an emphasis on technology, innovation, green finance and competitive markets.
The government also argued that leaving the EU gave Britain an opportunity to design regulations specifically suited to its financial sector.
This was a fundamentally different approach from simply maintaining permanent alignment with EU rules.
What Was the Long-Term Trade-Off?
The post-Brexit debate can broadly be understood as a balance between regulatory autonomy and frictionless market access.
Closer alignment with EU rules could make cross-border business easier in some areas, but it could reduce the freedom to develop a distinctly British regulatory model.
Greater divergence could give UK policymakers more control over domestic regulation, but it could also create additional differences that firms operating across both markets would have to manage.
This trade-off was one of the reasons financial services became such an important part of the wider Brexit economic debate.
Frequently Asked Questions
What did the EU warn Britain about in 2021?
The EU warned that Britain could not expect broad equivalence-based access to the EU financial market if UK regulations diverged widely from EU rules.
What is financial services equivalence?
Equivalence is an EU mechanism under which the bloc can recognise another country’s regulatory and supervisory framework as sufficiently comparable for specific financial activities.
Did Brexit remove UK financial services access to the EU?
Brexit ended the UK’s automatic single-market arrangements, meaning UK firms could no longer rely on the previous passporting system. Access thereafter depended on individual rules, permissions and equivalence decisions.
Did the UK want to diverge from EU financial rules?
Yes. One of the objectives of leaving the EU was to give Britain greater freedom to develop its own financial-services regulatory framework.
Did the UK and EU create a financial regulatory cooperation framework?
Yes. Technical negotiations on a Memorandum of Understanding were completed in March 2021, providing a framework for regulatory cooperation and dialogue.
Was financial services included in the UK-EU Trade and Cooperation Agreement?
The agreement did not provide a comprehensive financial-services market-access framework equivalent to the arrangements that existed when the UK was inside the EU single market.
Final Thoughts
The EU’s warning to Britain in 2021 was one of the clearest early indications of the difficult balance facing the UK’s financial-services industry after Brexit.
London wanted greater freedom to develop its own regulations, while financial firms also needed workable access to European markets. The EU, meanwhile, retained the power to decide whether UK rules qualified for equivalence in specific areas.
The result was not a complete break between London and Brussels, but a more complex relationship based on separate regulatory systems, cooperation and individual market-access decisions.
Looking back, the 2021 dispute is useful for understanding why financial services became one of the most complicated economic consequences of Brexit — and why the UK’s decision to diverge from EU rules always had to be considered alongside the practical needs of businesses operating across both markets.
