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Sir Keir Starmer will exclude the City of London from his bid for “closer alignment” with the EU, after financial services firms lobbied against any return to Brussels rules.
British government officials told the FT that while ministers wanted “closer cooperation” with the EU on financial services, the Prime Minister had no intention of trying to re-integrate the sector with the Brussels rulebook.
Starmer’s comments this week that “if it is in our national interests to have even closer alignment with the single market, then we should consider that” raised concerns in the Square Mile.
Some ministers, including Deputy Prime Minister David Lammy, have talked about the benefits of a new customs union with the EU.
“This is the last thing we want to talk about,” said a City lobbyist, arguing that British financial services had moved on from tough debates about single market access after the 2016 Brexit vote.
Steven Fine, chief executive of investment bank Peel Hunt, told the FT: “The UK has made substantial progress on financial services reform over the last few years and most regulatory lawyers will tell you that there is significantly less friction in our regulatory framework than most jurisdictions in Europe. You don’t want to create potential uncertainty as the City is recovering its mojo.”
One City’s non-executive director said: “There is an argument that financial services do not need to be included because our dominant position means the EU needs us more than we need it.”
The question of Britain becoming a “rule taker” from Brussels again – which the Conservatives and Reform UK have strongly opposed – is back on the agenda as some Labor MPs and Liberal Democrats push for closer economic integration.
Ministers will introduce legislation to Parliament in the coming weeks to allow EU legislation in specific areas such as food standards and animal welfare to facilitate smooth trade.
Brexit placed a costly burden on British banks and after 2016 many of them lobbied for an “equivalence” deal to retain access to the EU market in exchange for aligning UK banking regulation with Brussels.
But since then, interest in such deals has waned among financiers. “Ten years ago equivalence would have been very valuable, but now the world has moved on,” said Kerstin Mathias, director of international affairs at the UK finance trade body.
Miles Sellick, chief executive of TheCityUK, which represents the financial services industry, said closer cooperation with the EU made sense. “But rejoining the single market or customs union will not be a simple upgrade. The UK would risk trade flexibility for uniformity: less scope to shape its own rules and less possibility to cut customs deals beyond Europe.”
A government official said the City’s concerns were “legitimate”, and that ministers were “not paying attention to the alignment” of rules affecting financial services. “This is an area where we have become very separated from the EU since Brexit.”
“There’s really no point in following EU rules, Britain is the bigger market,” another official said.
A government spokesman said the UK-EU “common understanding” reached last year – which opened the way for Britain to adopt Brussels rules in areas such as food standards and energy – was narrowly tailored and did not include financial services.
“However the EU is the UK’s second largest trading partner for financial services and we continue to explore areas of cooperation where it is in the interests of our economy.”
In a sign of efforts to build closer cooperation between the two sides, Chancellor Rachel Reeves has attended meetings of EU finance ministers, while EU Financial Services Commissioner María Luis Albuquerque attended Reeves’ Mansion House speech last year.
Reeves has also talked about “dynamic alignment” to help industries such as the chemicals sector overcome post-Brexit disruptions.
Mats Persson, macro strategy leader at EY-Parthenon, said more companies are “seeing the benefit of the UK’s ability to navigate regulation in an agile and innovative way, particularly in relation to emerging technology and access to global markets”.
Last September, the UK and US launched a task force to examine ways to increase cooperation in areas such as digital assets and capital markets, a move that would have been difficult if Britain was still in the EU.
UK regulators have recently taken advantage of their ability to remove or rewrite rules inherited from EU directives, such as eliminating caps on bankers’ bonuses or delaying the introduction of so-called Basel III reforms on bank capital.
Financial services is one of the UK’s largest sectors, accounting for around 9 per cent of economic output and providing 1.1 million jobs.
The sector’s real output has fallen since the financial crisis but finance and related professional services remain a large contributor to tax revenues, productive £110bn in the year ending March 2023, according to PwC analysis.
Paul Manduca, chairman of wealth manager St James’s Place, expressed skepticism about the possibility of a closer relationship with Europe. “The reason we won’t be able to go back into the customs union and single market is because we won’t be in Europe, not because of Reform UK leading the polls. Why go through all the effort to let us in, only to have it all unraveled again?”
