Here Sarah Hall FAcSS of University of Cambridge and UK In a Changing Europe explores the UK-EU reset and the impact it could have on increasing growth, focusing especially on the potential advantages of using regulatory approaches to better support cross border financial services trade.
Good growth and UK financial services through the UK-EU reset
Continued global geo-political uncertainty has continued to weigh heavily on UK growth. This was reflected in the Office for Budget Responsibility halving its UK economic growth forecast to 1.0% for 2025 in March. As a result, it is not surprising that interest has increasingly focused on how the government’s EU reset might be used to enhance growth. However, whilst attention has focused on security, agri-food and, to a lesser extent, youth mobility, if the full economic value of any such reset is to be realised, more attention needs to be paid to UK-EU financial services trade. As Andrew Bailey noted in a recent speech on trade, there are opportunities for both the UK and the EU if more open financial markets can be developed. And yet, there are also risks. How financial services sits within wider agendas of ‘good growth’ has been heavily scrutinised following the 2008 financial crisis. And given the UK’s significant regional economic inequality, how financial services might be supported beyond London and the South-East needs to be addressed.
Turning to the options for financial services within the wider reset in UK-EU relations, there are three main areas that need to be considered: the role of equivalence in support for cross border market access for financial services, interventions aimed at supporting the mobility of individuals delivering financial services, and regulatory relations.
Beginning with market access, the EU’s approach to governing market access for the UK, in common with other third countries, is through “equivalence decisions”. These decisions are granted unilaterally by the EU in specific parts of financial services where the EU deems that UK regulation is ‘equivalent’ to EU regulation. However, they are not permanent and as such are by no means a replacement for single market access.
Whilst equivalence is used by the EU in relation to all other major financial partners, including the US, its approach to the UK is more restrictive (and counter to the more liberal approach developed by the UK). The UK currently has one active clearing decision compared with 18 for the US. This decision is due to expire in June 2028 creating a cliff edge in market access which does not offer the certainty the sector would welcome. However, previously the decision was due to expire in June 2025 and the EU had been very clear that it was not going to extend this decision further. This changed in January 2024 reflecting the challenge facing the EU in replicating the size and liquidity of London’s capital markets.
In relation to the second area of focus on UK-EU financial services, Labour’s manifesto identified signing a ‘mutual recognition agreement for professional qualifications’ (MRPQ) as one of the specific measures it would introduce to improve UK-EU trade. An MRPQ supports cross border services trade by allowing professionals qualified in one country to practice in another without needing to requalify. Interestingly, securing an MRPQ was proposed by the UK to the EU during the Brexit trade deal negotiations but was turned down by the EU.
However, whilst this is one area that has received considerable attention at various points in the reset, it isn’t clear precisely what form such an MRPQ might take and its economic impact for financial services beyond auditing is likely to be limited. This is because financial service providers do not typically need to have specific professional qualifications – the exception is audit. The benefits of an MRPQ can also only be fully realised if it is accompanied by liberalisation of mobility arrangements between the EU and the UK as this form of mobility has become more complex and hence more time consuming and costly since Brexit. Given the wider positioning of migration debates in UK politics currently this does not appear a likely route within the reset.
The most likely route to better supporting UK-EU financial services trade is through regulatory measures. In particular, following the 2023 Windsor Framework, a Memorandum of Understanding was signed by the two sides in 2023. This creates a joint EU-UK Financial Regulatory Forum which has met three times since, focusing on exchanging information in relation to areas of common regulatory interest. It is not set up to align regulation or improve market access but by exploring areas of common concern such as in relation to funding defence and security commitments and the green transition it could act as a gradual route to develop deeper cross border connections in financial services.
A more radical approach is provided by the Bern Financial Services Agreement which was signed by the UK and Switzerland at the end of 2023. This is a highly innovative form of regulatory agreement in which each jurisdiction agrees to mutually recognise regulatory frameworks to facilitate market access. In so doing, it goes far beyond the provisions that are usually made for financial services in trade agreements such as the Trade and Cooperation Agreement that governs UK-EU trade. It is also much more comprehensive in coverage compared with equivalence decisions.
It is unlikely that this could be replicated between the UK and the EU in the short term, particularly given that the Bern Agreement took over two years to agree. However, it does show that if there is political will, there is scope to use regulatory approaches to better support cross border financial services trade. In such dialogues, it is important to recognise that financial services are by no means limited to London. If the full value of such a reset is to be delivered understanding how regulation can be best developed that not only supports London’s financial services cluster but also recognises the variegated landscape of clusters in other cities such as Birmingham and Edinburgh, and their trading relationships with the EU, will be vital in delivering good growth that includes, but extends beyond London and the South East.
About the author
Sarah Hall FAcSS is 1931 Professor of Geography and Fellow of St John’s College at University of Cambridge as well as Deputy Director and Senior Fellow of UK in a Changing Europe. Sarah is a public economic geographer whose work focuses on the uneven impacts of profound economic change including Brexit, the changing economic position of China internationally and the rise of finance led capitalism. She regularly uses her research findings to contribute to academic, public and policy debate.
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