Starmer excludes financial services from EU alignment talks

Keir Starmer has drawn a firm line under months of speculation about the future of UK financial services regulation, confirming that the sector will be excluded from any negotiations on closer alignment with the European Union. The decision, first reported by the Financial Times, represents a significant moment in the post-Brexit settlement: the government has chosen regulatory autonomy over market access for the City, calculating that the costs of reopening the rulebook outweigh the benefits of deeper integration with the EU's single market.

A decision driven by domestic politics and City lobbying

The prime minister's stance reflects a convergence of political and commercial interests. For Starmer, ruling out financial services alignment removes a potential attack line from Reform UK and Conservative critics who would frame any regulatory convergence as a betrayal of Brexit. For the City, the decision brings something it has craved since 2016: certainty. After eight years of contingency planning, equivalence assessments, and fragmented market access, the major banks, asset managers and infrastructure providers have adjusted their operating models. Few have the appetite for another period of regulatory upheaval.

A government spokesperson said officials would continue to explore cooperation "where it is in our economy's interest", but made clear there would be no push for City firms to return to the Brussels rulebook. That phrasing matters. It signals a transactional approach: cooperation on specific files such as clearing, data sharing or sustainable finance taxonomy, but no overarching framework that would bind UK rulemaking to EU standards.

What the post-Brexit reforms actually changed

Since 2021, UK regulators have dismantled a series of EU-era rules that politicians argued had hampered competitiveness. The Financial Conduct Authority and the Prudential Regulation Authority, operating under a revised remit from the Treasury, have delivered three headline changes. First, the cap on bankers' bonuses, introduced under the EU's Capital Requirements Directive IV, was scrapped in 2023, allowing variable pay to exceed fixed pay once more. Second, capital requirements for smaller lenders were eased, with the PRA arguing the previous framework was disproportionate. Third, the listing regime was overhauled in 2024, introducing a single category for equity shares, lowering the free float requirement from 25% to 10%, and giving founders greater control through dual-class structures.

These changes were not cosmetic. They responded to a measurable decline in London's attractiveness as a listing venue. In 2023, the London Stock Exchange saw just 18 initial public offerings raising £777 million, the lowest level since 2009. The reforms have begun to reverse that trend. By the third quarter of 2025, 32 IPOs had raised £3.4 billion, including the much-watched flotation of Raspberry Pi and the return of several technology companies that had previously chosen New York or Amsterdam.

Why the industry does not want to go back

Steve Fine, chief executive of Peel Hunt, articulated the industry's position with unusual bluntness. He described the post-Brexit reforms as essential for a viable domestic capital market and warned that reversing them would choke off the nascent recovery in IPO activity. "The UK now has materially less friction than most other European jurisdictions as a venue for listing," he said. "If we want IPOs to come back, if we want the City to thrive, if we want public markets to be a key part of the overall financial markets landscape, this is all been really important. So ripping it up and going back to where we were simply wouldn't make any sense. We do not want to be choking that off through excessive regulation."

Fine's intervention carries weight because Peel Hunt sits at the sharp end of the UK's mid-cap market, advising companies that are precisely the ones the listing reforms were designed to attract. His argument is not ideological; it is commercial. The European listing regime, with its higher free float requirements and stricter governance codes, simply does not suit the growth companies the UK is trying to retain.

The trade-off TheCityUK has identified

Miles Celic, chief executive of TheCityUK, offered a more nuanced assessment. His organisation represents the broader financial and professional services ecosystem, law firms, accountants, insurers, fintechs, not just the investment banks. Celic acknowledged that closer cooperation with the EU, the UK's second-largest market for financial services, made commercial sense. But he warned that as a non-member, the UK would face a structural disadvantage: "rejoining the single market or a customs union would not be a simple upgrade. As a non-member, the UK would risk trading flexibility for uniformity: less scope to shape its own rules and fewer chances to cut bespoke deals beyond Europe, in return for the benefits of a single EU framework. As always, there's a trade-off."

That trade-off is the core of the dilemma. The EU's equivalence regime, the mechanism by which third-country firms access the single market, is unilateral, time-limited and politically volatile. The UK has equivalence for clearing and some investment fund activities, but not for wholesale banking, insurance or asset management. A dynamic alignment agreement would offer more stability, but at the price of regulatory sovereignty. The government has decided that price is too high.

What the spring 2025 summit actually agreed

The government spokesperson's reference to a "crunch summit in spring 2025" points to the UK-EU leaders' meeting held in May of that year. That summit produced a joint declaration identifying several areas for strengthened cooperation: veterinary agreements to ease food trade, mutual recognition of professional qualifications, electricity market coupling, and a youth mobility scheme. Financial services was notably absent. The omission was deliberate. Both sides recognised that the political toxicity of the issue, for the UK, the spectre of rule-taking; for the EU, the precedent of cherry-picking, made it impossible to land a meaningful outcome in the available timeframe.

Instead, the two sides agreed to continue technical discussions through the Financial Regulatory Forum, established under the Trade and Cooperation Agreement. That forum meets twice a year and has, since 2021, produced a handful of practical outcomes: information-sharing arrangements between the FCA and ESMA, a memorandum of understanding on central counterparties, and joint work on crypto-asset regulation. These are useful but incremental. They do not restore the passporting rights the City lost on 1 January 2021.

The equivalence impasse and its consequences

The EU's equivalence framework remains the primary channel for UK firms to serve EU clients. But it is a fragile foundation. Equivalence decisions are adopted by the European Commission alone, can be withdrawn with 30 days' notice, and have been used as political leverage in other disputes. The Commission withdrew equivalence for UK trading venues in 2021, forcing a massive relocation of euro-denominated share trading to Amsterdam and Paris. It has repeatedly delayed decisions on UK clearing houses, creating uncertainty for the €1.2 trillion of EU client exposures cleared in London.

In response, UK regulators have built a parallel framework. The Temporary Permissions Regime allowed EEA firms to continue operating in the UK while applying for full authorisation. The Overseas Persons Exclusion provides a route for UK firms to serve professional clients in the EEA without a local licence. These mechanisms work, but they are narrower than passporting and do not cover retail business. The result is a fragmented market: wholesale activity has largely adapted, but retail cross-border business has withered.

What this means for the UK's competitive position

The decision to exclude financial services from alignment talks locks in a two-speed relationship. The EU will continue to integrate its capital markets union, advancing projects like the European Single Access Point for financial data, a consolidated tape for equity and bond trades, and a harmonised securitisation framework. The UK will pursue its own agenda: the Edinburgh Reforms, the Smarter Regulation programme, and a push to make London a global hub for digital assets and green finance. Where those agendas overlap, cooperation will happen. Where they diverge, the UK will accept the friction.

There is a risk in this approach. If the EU's capital markets union succeeds in deepening liquidity and reducing fragmentation across the continent, the relative attractiveness of London as a standalone venue could diminish. The City's historic advantage, its role as the gateway to Europe, has already eroded. The government's bet is that the gains from regulatory agility, faster approvals for new products, bespoke regimes for emerging sectors, alignment with US and Asian standards, will outweigh the loss of seamless EU access. That bet has not yet been proven.