The government proposed a form of enhanced equivalence in its overall Brexit white paper last week, a long way from the ‘mutual recognition’ that financial services firms had hoped for.
While the EU was always unlikely to agree to full mutual recognition, how far the UK’s opening negotiating position fell short of that goal disappointed many and left the the City with little clarity over how financial firms would keep access to EU markets after Brexit.
While what the government proposed would likely be preferable to simple third-country equivalence — the status under which non-EU financial services firms must operate now — the UK government's plan wasn’t nearly ambitious enough.
Events in the UK parliament this week also show that the proposals are unlikely even to make it to the negotiating table. The prime minister, Theresa May, is already reversing the intent of her white paper, intended as a compromise, to appease the right wing of her own party, who were said to be plotting to remove her as leader.
This makes any deal with the European Union less likely, as changing the proposal passed in the UK parliament on Monday night mean that any Brexit arrangement would need EU states also to engage in the complicated customs arrangements the government is proposing. Such a deal would also enshrine in law that Northern Ireland cannot be outside the customs territory of the rest of the United Kingdom — destroying the 'Irish backstop'.
Unless the EU is willing to be far kinder to the prime minister than it has been in the past, then the UK's position, already unlikely to be accepted in full, will be dead on arrival.
The UK would either have to compromise further, which the Tory right would reject, or leave with no deal.
That would mean no future trading plans. The UK would simply crash out of the European Union on March 30 2019, with all EU treaties and trading regimes becoming redundant.
There would be no transition period, UK banks would lose access to European markets, and Europe would be immediately separated from its primary financial centre.
Many in the UK political press have speculated that this might be the aim of Brexiteers in the House of Commons, which is why they proposed amendments designed to kill any chance of a compromise deal with the EU.
Bank of England governor Mark Carney warned on Tuesday, during a hearing of the UK Treasury Select Committee at the Farnham Air Show, that this would have “big” consequences for the UK economy, particularly the City, and could lead to “idle bankers”, lacking demand for their services.
The government’s slim majority of three on Monday night, in which the leader and former leader of the pro-EU Liberal Democrats were absent, shows how precarious the pro-Brexit parliamentary majority is.
All it would take is for some previously loyal Conservatives to vote on conviction rather than on party line, and all of the supposedly leading anti-Brexit party to turn up and vote, to sink any possible no-deal on Brexit day.
Parliament could elect to stop the UK leaving without a deal and instruct the government to extend Article 50.
This would either allow Britain to seek different terms or to call an election to try to increase its parliamentary numbers. The latter strategy is risky — it’s exactly what Theresa May tried to do last year from a considerably stronger position than she is in now.
Parliament could also instruct the government to seek to stay in the single market, via the EEA and EFTA, as well as potentially the customs union.
This would mean banks would continue to trade with the EU as they do now and would almost certainly be the preferred option for financial services in the UK under any Brexit scenario.
The final option is the unlikely scenario of a second referendum, should politicians be unable to break the deadlock.
There is no clear path for a bespoke deal between the UK and EU that will be acceptable enough — in that it causes minimal damage to the economy — to command a clear majority among British politicians, while also respecting the "will of the people" as outlined by hard Brexiteers.
The roll-back by the Prime Minister on customs, to ensure her short-term survival, makes a withdrawal agreement less likely and therefore an agreement on future trade impossible.
The UK financial services industry thus remains in limbo, with the clock ticking.
The future for the City could either be operating under largely the same conditions as now or the seeming disaster of the UK crashing deal-less out of the EU come March.
Either way, the white paper is looking more and more like a white elephant.