Jesper Berg is a Non-Resident Fellow, Rebecca Christie a Senior Fellow, Hans Geeroms a Visiting Fellow, and Francesco Papadia a Senior Fellow, all at Bruegel
The European Union-United Kingdom summit in London on 19 May 2025 offers an opportunity for British Prime Minister Keir Starmer and the EU representatives to widen the scope of post-Brexit dealmaking. Financial services should be part of the improvement agenda1. While previous negotiations prioritised shielding markets and banking from the broader tensions, that approach – five years on from Brexit – no longer serves British and EU interests. Leaders now should use the relationship reset to protect financial stability, withstand transatlantic turmoil and help their respective economies thrive.
The EU and the UK have incentives to work together to make their respective economies as strong as possible, especially as questions start to be raised about the global roles of the US and the dollar. Financial services should join defence, energy, veterinary standards and other topics on the summit table, with a goal of reaching political agreement on further cooperation.
Both sides have an interest in upholding high international prudential standards for the financial system, and they each have strengths to share with each other. For example, the EU can learn from the UK on how to simplify financial regulation, while the UK can work with Europe to strengthen sectors including sustainable finance, digital currencies and other innovative financial technology.
Political leaders should use the May summit to provide a mandate to technical staff. Once that backing is secured, technical workstreams can work out specific agreements, either through inclusion of financial services in a revised EU-UK Trade and Cooperation Agreement (TCA)2 or as part of an ad-hoc accord3. We see two top priorities:
- Easing tensions and reducing risk from the long-term spat over the clearing and settlement industry4; and
- Managing so-called letterbox firms, which have an official home base in the EU but continue to control assets from London.
End the equivalence uncertainty
The current clearing standoff is inherently unstable. The EU depends on London for the clearing of its risk-hedging derivatives trades via London-based central counterparties (CCPs). The European Commission has extended clearinghouse equivalence to the UK three times, most recently in a 30 January 2025 decision that runs until 30 June 2028, when renewal will once again be up for debate. Ongoing uncertainty over the ‘equivalence’ regime hurts markets. It is time for the EU to stop insisting that the two markets can be separated and to start looking for long-term ways to manage the situation.
During Brexit, the European Commission tried to relocate the derivatives clearing in euro and zloty from the UK to the continent5. But the market for central clearing of over the counter (OTC) derivatives is very concentrated, especially for interest rate swaps: more than 90 percent are cleared by LCH (London Clearing House, LCH Ltd). Clearing benefits from serious economies of scale and scope. The more transactions, the more advantageous it is to have central netting.
Fragmenting the market weakens these advantages, which is why the industry and most EU countries agree with the UK that it does not make sense to have multiple clearing centres for the same transactions. However, some countries are wary that the UK CCPs and their supervisors could act against EU interests.
To get to a state of permanent equivalence, supervisors on both sides should establish formal channels of cooperation rather than relying solely on relationships and trust. Ideally this requires global oversight of CCPs by a college of strong supervisors, but an EU-UK accord allowing ESMA regular collaborative review would be a good place to start. To the extent that decisions made in London affect the entire financial system, regulators in all relevant jurisdictions should be involved in helping things run smoothly, with more structured ways to offer input.
For the EU, cooperating with the UK offers the promise of a faster route to stronger markets – overall growth, not comparative advantage, should be the desired outcome
Letterbox arrangements increase risk
When it comes to letterbox firms, systemic risk would decline if UK firms moved more substance to the continent, and an EU-UK agreement could pave the way for improvements. It is not in UK supervisors’ interest to allow crossborder fragility to pile up. A stronger and safer market will encourage growth, offsetting any initial shifts in business.
Supervisors also need new ways to manage Brexit-related fragmentation of investment-firm oversight. Luxembourg harbours around €5.5 trillion in assets under management6 – more than the UK and almost double the size of what is held Germany or France. Yet many asset management firms in Luxembourg delegate portfolio management.
There is a concern that these firms are mainly ‘letterbox entities’, with minimal presence in Luxembourg and real decision-making, risk management and other functions carried out in London. This could undermine proper oversight, as firms might have incentive to seek out low-regulation entry points into the EU while conducting real operations elsewhere.
It does not help the UK to have its firms seeking out laxer rules for their crossborder business. A high-level agreement on common standards and manageable compliance burdens could help both sides.
As tensions recede, it is worth exploring how London could better serve as a hub for foreign direct investment into the EU. The UK is second overall, after the United States, representing 25 percent of all acquisitions and 21 percent of greenfield projects in the single market (European Commission, 2024).
After Brexit, total FDI levels from the UK into the EU dropped by about one quarter, although the extent to which other jurisdictions may have stepped in is unclear, as some inflows originated from London-based non-UK firms. In any case, the UK can act as a single point of entry for many global firms into the EU, and the EU should welcome such investment.
The dust has settled
Since Brexit, some 10 percent of the UK’s banking sector assets and 40,000 jobs have relocated to Paris, Frankfurt, Dublin, Luxembourg and Amsterdam. This could be assumed to be a new equilibrium. Another argument from the early days – that the UK should not receive the finance-sector concessions granted to Japan and Canada because its market is larger and poses more systemic risk – should now be turned on its head: the way to manage interconnection risk is to work more closely together, not to maintain barriers.
Brexit took Europe’s most important financial market out of the EU. Using total market capitalisation (Figure 1) as a proxy for capital market size, the size of the capital markets of the 27 EU countries is smaller than that of China, while the EU and the UK together represent the world’s second largest capital market.
Figure 1. Stock market capitalisation, selected economies, 2024, $ billions
Source: World Bank.
Diverging safely
Ideally, a new financial services agreement would create channels for divergence from previously aligned regulation, so that both sides preserve autonomy without unduly increasing compliance burdens.
Other areas where further cooperation could help include strengthening the insurance sector given increasing climate-change-related natural disasters7; aligning payments infrastructures and offering an answer to the risk of a fragmented global payment system; and potential regulatory coordination to help EU firms benefit from cheaper and better-quality services available in London, while managing crossborder risks. Getting there will require a mental shift. Financial services are typically excluded from trade talks so that market stability is not jeopardised by links to disputes in other areas.
Also, while Brexit was underway, EU countries were fighting over attracting business and institutions from London, including where to relocate the European Banking Authority, previously housed in London. Settling issues in relation to the overall EU financial sector with the UK was at times a secondary matter to grabbing market share in the new equilibrium.
The EU’s need for private investment is growing even as its capital markets integration project has stalled. The clearest change so far has been a rebrand from Capital Markets Union to the Savings and Investment Union, while the policy itself remains sticky. Yet an additional €800 billion per year may be needed for green, digital and defence investments (Draghi, 2024).
The European Commission has proposed loans of up to €150 billion to EU countries for rearmament and has called for national level investment of €650 billion to the same end. Germany has in principle cleared the way for a defence and infrastructure investment package that could run to €1 trillion8. These massive investment needs require a deep capital market.
Given that EU and UK rules will necessarily never again move in lockstep, political solutions are needed. An alternative to insisting that functions move inside the EU would be to ensure that the institutions operating out of the UK comply with certain standards. This can also be part of the reset of EU-UK relations.
It might involve the EU and UK pledging to align financial rules in some areas by setting guardrails around future divergence, or even a move to share some supervisory oversight. Any agreement could be limited to big firms and wealthy investors, to reduce complexity and avoid adding compliance burdens to retail services.
The UK will profit more from an agreement on financial services than the EU given its comparative advantages in many finance sectors, as shown by Britain’s current account surplus in services9. To the extent EU firms have an easier time doing crossborder business in London, the City’s companies will benefit. Diplomacy therefore argues for the UK to make other concessions to compensate for its larger gains.
As for the EU, cooperating with the UK offers the promise of a faster route to stronger markets – overall growth, not comparative advantage, should be the desired outcome. If both sides become better off due to less fragmentation, that counts as a win-win.
Endnotes
1. Alex Wickham, Alberto Nardelli and Ellen Milligan, ‘Trump’s Tariffs Put UK Back on Course for May EU Reset Deal’, Bloomberg, 8 April 2025.
2. The EU-UK trade agreement makes limited reference to financial services (Hallak, 2025).
3. The EU has never ruled out sectoral agreements provided there is sufficient mutual interest. See García Bercero (2024).
4. For background, see Apostolos Thomadakis and Karel Lannoo, ‘Setting EU CCP policy – much more than meets the eye’, Revue Banque, 1 Dec 2021.
5. This was proposed as part of EMIR 3.0, the latest revision of the European Markets Infrastructure Regulation but did not make it to the final version.
6. Kabir Agarwal ‘Luxembourg investment funds see value of assets rise by 6% in year’, The Luxembourg Times, 3 July 2024.
7. The European Central Bank and European Insurance and Occupational Pensions Authority have estimated that only 25 percent of risk is insured while the price of premiums increased by 60 percent since 2015 (ECB-EIOPA, 2024).
8. Sabine Kinkartz ‘€1 trillion impact: What easing debt brake means for Germany’, DW, 17 March 2025.
9. For 2024, the United Kingdom’s external balance in services amounted to a surplus of approximately £194 billion.
References
Draghi, M (2024) The future of European competitiveness, European Commission.
ECB-EIOPA (2024) Towards a European system for natural catastrophe risk management, European Central Bank and European Insurance and Occupational Pensions Authority.
García Bercero, I (2024) ‘A trade policy framework for the European Union-United Kingdom reset’, Policy Brief 30/2024, Bruegel.
European Commission (2024) ‘Fourth Annual Report on the screening of foreign direct investments into the Union’, SWD (2024) 234 final.
Hallak, I (2025) ‘EU-UK regulatory cooperation in financial services’, At a Glance, European Parliamentary Research Service, March.
This article is based on a Bruegel Analysis.