A chill is setting in over the recent warming of UK-EU financial relations. London's financial leaders have warned that new, highly technical EU rules are creating practical hurdles that could overshadow the positive political 'reset' between the two sides.
On the surface, things looked promising. High-level meetings like the EU-UK Financial Regulatory Forum signaled a new era of cooperation. However, while politicians were shaking hands, regulators were finalizing two key pieces of legislation that are now causing concern. The core issue is a clash between high-level goodwill and the detailed, on-the-ground reality of diverging financial regulations.
First is the EU's updated rulebook for banks, known as CRD VI. A specific part, Article 21c, is the main point of friction. In simple terms, it tightens the rules for non-EU banks providing 'core banking services' like deposit-taking and lending to EU clients. Previously, much of this could be done from London. Now, the EU is effectively saying, 'If you want to do this business with us, you need to set up a fully authorized branch or subsidiary within the EU.' This means higher operational costs and more complexity for UK-based banks.
Second is a regulation called EMIR 3.0, which deals with the clearing of derivatives. The EU has long wanted to bring more of the clearing of euro-denominated trades—a market dominated by London—onshore. This rule introduces an 'Active Account Requirement' (AAR), which compels EU firms to clear a significant portion of their euro derivatives through an EU-based CCP (Central Counterparty). This directly challenges London's role as Europe's primary financial clearing hub.
The combined effect of these rules is a structural shift. They increase the cost and complexity for UK firms to serve EU clients, forcing them to move more operations, capital, and staff into the EU. This is why the City of London is worried. The cooperative mood music from late 2025 and early 2026 is being drowned out by the practical compliance headaches these rules create, potentially derailing the delicate reset in relations.
[Glossary]
- CRD VI (Capital Requirements Directive VI): Part of the EU's rulebook that sets out how much capital banks need to hold to ensure they can withstand financial shocks.
- EMIR 3.0 (European Market Infrastructure Regulation 3.0): The latest update to EU rules designed to increase the stability of the over-the-counter (OTC) derivatives market.
- CCP (Central Counterparty): An organization that acts as the middleman between the buyer and seller in a financial transaction, reducing the risk of either party defaulting on the deal.