As top technocrats prepare for high-stakes discussions on financial services this Wednesday, tensions between the U.K. and the European Union are beginning to surface, threatening to disrupt the progress made since Brexit. The meeting will be the third in a series of regular talks aimed at fostering cooperation between the two sides, but recent regulatory decisions by the U.K. have caused an outcry in Brussels.
While politicians are often blamed for reopening old Brexit wounds, in this case, it is the regulatory bodies themselves that have stirred controversy. Two recent decisions by British watchdogs have irked EU officials, setting the stage for an uneasy dialogue when European Commission representatives meet with the British Treasury in London.
“The risk always in these discussions is that politics plays a role,” said a senior EU official, speaking on condition of anonymity to discuss sensitive talks. This week’s discussions will be held amid the broader geopolitical landscape, with shifting leadership and national priorities shaping the tone of the conversations.
Banking Disputes and Regulatory Tensions
Five years after Brexit, the financial services sector has slowly begun to recover from the rupture, with both the EU and the U.K. working to rebuild their financial relationship. A partnership agreement signed between the two sides has allowed for biannual financial talks, and regulators have cooperated on issues such as green finance and banking rules. However, recent decisions by the U.K. have sparked tensions, particularly concerning banking regulations that affect the EU.
In January, the U.K. surprised Brussels by delaying the implementation of global banking rules, known as Basel III, which the EU had already adopted. This move raised concerns in Brussels, where officials feared that the U.K. was embarking on a deregulatory path, anticipating a shift toward more lenient financial rules under the leadership of U.S. President Donald Trump.
“We were not expecting it,” the EU official stated. “We had assumed that the U.K. would implement these rules simultaneously with the EU.”
U.K. Finance Minister Rachel Reeves, in contrast, argued that Britain had the flexibility to take a more nimble approach, claiming that the country had “gone ahead of other European nations” in implementing financial reforms.
At the same time, a proposal by the U.K.’s payments regulator to cap fees on card transactions has raised alarms in Brussels, with European payments firms arguing that it would increase their costs. EU lawmakers have suggested that the proposal could violate the Brexit deal.
Even a relatively positive development for the U.K., the EU’s recent extension of recognition for British clearinghouses until 2028, has not been without controversy. While British officials welcomed the relief from a looming deadline, the extension has created a new deadline that could lead to future negotiations, frustrating some U.K. representatives.
Political Pressures and the Path Forward
Despite these emerging fractures, both sides remain focused on economic growth, with political leaders in the U.K. and the EU eager to demonstrate progress to their voters. Reeves and Prime Minister Keir Starmer have used Britain’s slow economic growth to press financial regulators, while both sides are also keen to protect their industries from potential U.S. tariffs under a new administration.
However, behind the political posturing, regulators on both sides share a common priority: financial stability. A senior EU official noted that despite political pressures, both the U.K. and EU regulators are more concerned with maintaining stability than competing for global leadership in finance.
“We’re not naive,” the official said. “We know this will be a long road, but we are seeing some positive movement and constructive engagement.”
A lobbyist from the City of London echoed this sentiment, stating that the discussions provide a valuable opportunity to address grievances and move forward with practical solutions. “It would be great if the U.K. and EU aligned on everything, but there will always be differences,” the lobbyist said.
Looking Ahead
Despite the disagreements, there are signs of collaboration. For instance, although the U.K. could have moved more swiftly to implement shorter settlement cycles for securities trades, it chose to align with the EU’s timeline, proposing the same deadline of October 2027 for T+1 settlement cycles.
As the U.K. and EU continue to navigate the post-Brexit landscape, much of the financial rulemaking will be influenced by global developments, including the actions of the U.S. While both sides are striving to stay competitive, it remains unclear whether they will be able to align their approaches in the long term. For now, the outcome of this week’s talks will be closely watched as the U.K. and EU continue to manage their complex financial relationship.
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