The City has moved beyond regulatory alignment with the EU

Sarah Hall explains why despite efforts to align more closely with the EU in other sectors as part of the government’s UK-EU reset, the UK’s financial services sector will not see closer alignment with EU rules. 

Recent reports have made clear that, whilst the government continues to explore how it might deliver a closer relationship with the EU, one of the most significant sectors in the UK economy – financial services – will not see closer ‘alignment’ with EU rules.

When the UK was an EU member state, financial services firms used London as a base to service European markets through ‘passporting’ arrangements. This allowed firms in the UK to service EU clients without the need to open offices in the EU or seek additional regulatory clearances. As a result, around 40% of UK financial services exports went to the EU prior to Brexit. Crucially, as a member state, the UK also played a significant role in shaping EU financial services regulation in ways that supported the development of UK interests.

Once the UK left the EU, passporting for financial services ended. Instead, UK firms seeking to access the EU market were reliant on ‘equivalence’ decisions. Equivalence is not a like for like replacement for passporting. The EU’s equivalence regime only covers specific areas of financial services and does guarantee permanent market access, as they can be time-limited or unilaterally revoked by the EU.

In an early example of regulatory divergence, the EU and the UK took markedly different approaches to equivalence. The UK adopted a liberal stance, granting the EU equivalence in many areas. In contrast, the EU was much more restrictive, granting the UK far fewer equivalence determinations than competitor financial markets such as the US and Singapore.

Despite this reduction in EU market access, London remains Europe’s leading international financial centre and research has shown how the City has demonstrated an enduring ‘sticky power’ within international finance. Dense networks of financial services firms, related professional services such as legal services, and close relationships between financial businesses and regulators mutually reinforce each other, affording the City a degree of resilience when it comes to responding to challenges such as Brexit.

Buoyed by this resilience, the City has been reluctant to align with the EU in regulatory terms because there is a commonly held understanding that the EU remains more reliant on UK financial markets than vice versa Furthermore, the overall ambitions of the UK and EU regulatory approaches are different.

In the UK, changes are focused on delivering a ‘Smarter Regulatory Framework’, the main parameters of which were set out at Mansion House 2023 under the Sunak Government and updated in March 2024.  The new approach aims to deliver a regulatory framework that is better tailored to the specific needs of UK financial services, focusing on agile regulation that facilitates growth and international competitiveness in the sector.  This was viewed as a significant benefit of Brexit by the sector, since EU regulation on financial services needs to cover the requirements of all member states, none of which contain an international financial centre of the size and scope of London.

Importantly, the development of a distinctive UK financial services regulatory regime that diverges from the EU has continued under the current government. For example, in her first Mansion House speech in November 2024, Rachel Reeves announced that the government would develop a new Financial Services Growth and Competitiveness Strategy, which was published in April 2025. This placed financial services at the centre of the Government’s wider ambitions to encourage regulators to ‘regulate for growth’.

Divergence has arisen with the EU as the UK focuses on reducing regulatory obligations. This includes a consultation on making transaction reporting rules more agile and proportionate and changes aimed at energising the UK’s investment culture whilst also reducing the administrative burden in preparing investment product information.

Divergence has also arisen when the UK has chosen to move closer to US rather than EU regulation. For example, the UK has, in line with the US, delayed by a year the implementation of new global banking reforms known as Basel 3.1. More recently, in October 2025, the Financial Conduct Authority set out proposed changes to the UK’s rules on short selling (in which investors essentially bet on a company’s share price going down) which would see the identity of sellers not being publicly disclosed. This would again move UK regulation closer to that of the US, rather than the EU.

Updates in EU regulation have also led to divergence. In contrast to the UK’s focus on competitiveness and regulatory flexibility, the EU has focused on delivering a stronger and more resilient financial system, although there have been concerns that this is impeding growth. For example, EU changes to its listings regime which are aimed at making its capital markets more competitive depart from the UK approach.

However, there are other policy areas where initial divergence may be followed by convergence. For example, in crypto assets, the EU moved more quickly than the UK with its Markets in Cryptoasset Regulation whilst the UK’s regulation of cryptoassets under the Financial Services and Markets Act 2000 are expected to come into effect in October 2027. However, both the UK and EU are focused on how they all respond to US dollar stablecoins which could be an area for dialogue in the future.

Despite some areas of shared areas of regulatory concern, seeking greater regulatory alignment with the latest developments in EU financial services regulation, particularly as a third country which cannot influence that regulation, is not an attractive option either to the sector or to the government.

This does not mean that cooperation and dialogue are not possible between the UK and the EU on financial services. The Joint EU-UK Financial Regulatory Forum provides a regular opportunity for both parties to explore areas of mutual interest, particularly in newer regulatory areas such as crypto currencies.

But, overall, financial services is a rare area where the UK appears happy to position itself as a competitor to the EU, focused on its own priorities for the sector within its wider growth agenda, rather than seeking to build closer alignment.

By Professor Sarah Hall, Professor of Geography at the University of Cambridge.