You know, OP, my initial reaction to this was the same as yours (and I still don't think it's reasonable to ask you to cut him off, given all circumstances).
However, another way of looking at this is that 'morally' they were for all intents and purposes married for a very long time and there were two children from that union. Had they done a ten minute registry office appointment to legally marry she would almost certainly be entitled to half the assets, in recognition for her contribution to their union (facilitating his earning, raising children etc.)
Because they did not do that, he takes the view she is entitled to nothing but whatever he deigns to give her and evidently considered he is being very generous in providing for her for a couple of years. He may be technically correct that he owes her nothing under the law (he may not - I suggest your sister speak to a solicitor) but do you think that's morally right?
Your husband either thinks (1) those 10 minutes in the registry office morally make all the difference and she would then have been correctly entitled to half, or (2) that caring for children, running the home and enabling a partner to perform a well-paid job is worth nothing and in an ideal world shouldn't be recognised financially at the end of either a long relationship OR a marriage, and that your friend would be taken for a mug if he were forced to give half on divorcing too! (In which case, take a closer look at his attitude towards you!)
Your sister's ex seems to be coming out of this smelling of roses in your view on the basis he's "doing her a favour" rather than, in fact, arguably paying far less than is morally due to his very longterm partner and mother of his children on the basis of a (potential) legal technicality.
I don't think I admire him very much.
Just food for thought.