The Wall Street Journal

U.K. Financial Sector Fears Europe Fallout

Cameron's Veto of Debt-Crisis Treaty Stokes Concern in London That Pending Banking Laws Will Hurt Domestic Industry

By SARA SCHAEFER MUñOZ And ALISTAIR MACDONALD

LONDON—U.K. Prime Minister David Cameron's decision last week to veto a new European Union treaty aimed at solving the euro-zone debt crisis puts a spotlight on the slew of pending legislation in Brussels aimed at the EU-wide financial-services sector—and the stakes for London's financial sector if it isn't able to influence it.

The freshly chilled relations between the U.K. and the EU resulting from Mr. Cameron's move have stoked fear among London financial firms that the loss of goodwill with Brussels lawmakers could deal a blow to the U.K.'s financial sector.

Losing battles in Brussels, they said, could jeopardize London's standing as a world financial center, potentially transforming the U.K.'s political isolation into an economic one, they said.

"It's going to make it so much more difficult to be heard" on these matters, said the head of government relations for a large bank in London.

Mr. Cameron told a packed session of Parliament on Monday that the U.K. remains an active part of the EU and said last week's vote doesn't change that, dismissing speculation that his action heralded Britain's eventual departure from the EU.

"I went to Brussels with one objective, to protect Britain's national interest, and that is what I did," he said. Mr. Cameron said he asked for "modest, reasonable and relevant" safeguards for the financial-services industry to balance out the increased power a new treaty would have given the euro zone.

Mr. Cameron's price for signing that treaty was a list of safeguards to protect Britain's large financial-services industry from future regulation and preserve its sovereignty to impose its own regulations—even if they are tougher than the EU's. The Europeans called his bluff, complaining Mr. Cameron was trying to gain leverage during the crisis.

Now, financial firms and their lobbyists worry that Mr. Cameron's move will come back to bite them at the negotiating table.

On Monday, Olli Rehn, the EU's commissioner responsible for economic and monetary affairs, said at a news conference that if Mr. Cameron's actions were intended to prevent London's financial-services industry from being regulated, "that's not going to happen," wire services reported.

The think tank OpenEurope estimates that there are currently 49 items of EU-level financial-services regulation that have been either adopted but not implemented, proposed but not yet adopted, or are currently being discussed without a formal proposal. The idea of increased regulation is one that worries many bankers. One general fear is that the EU will pursue new regulations requiring certain types of business to be transacted within the euro zone, cutting London out of the equation.

That is what is at risk in a proposed new rule that could wind up requiring that clearing houses for derivatives transactions be located in the euro zone. U.K. officials so far have felt that, up to now, they have made progress in measures that could damp the impact of the new rules. The fear now is that such concessions could be reversed.

Another area of worry for U.K. financial firms is a proposed financial-transactions tax, which the European Commission has said would raise €57 billion ($76.3 billion) a year across Europe, with €40 billion coming from the U.K.

As it is currently proposed, the tax is subject to veto by the U.K. However, a person close to London financial firms said there are signals that the proposal may be revamped, using a loophole that wouldn't allow a U.K. veto.

In addition to big-ticket issues, the financial-services sector also is pushing for minor concessions. For example, within a broader proposal on bank regulation, U.K. banks want to classify a loan as being in default after 180 days of nonpayment; EU lawmakers are pushing to make that window smaller at 90 days, said a person familiar with the talks.

Not all members of the U.K. financial community think Mr. Cameron's stance will have a negative impact. Dan Reed, a broker at HB Markets, a London brokerage firm, said "There's no drastic effect right now.…The veto is a sideshow to the real deal: the EU political and euro-zone situation."

In some cases, the financial sector may be relieved if U.K. lawmakers have less clout.

Mr. Cameron said on Monday that many U.K. rules "could go further" than European rules. He pointed out that the EU may rule against Britain's bid to make banks put a wall between investment banking and retail activities. That would be a win for U.K. banks, which have generally disliked the proposal.

In addition, Mr. Cameron last week pushed for the U.K. to be allowed to go above and beyond what Europe puts in place with its implementation of Basel 3 capital requirements for banks, another effort that could now fall flat.

"The system has been working well and we've been cooperating here," said an adviser to a British member of the European Parliament, who added a fear that Mr. Cameron's move would undermine that.

It isn't just the financial sector that frets about potential fallout from any isolation of the U.K.

Steelmakers fear the U.K. could lose its "leadership" position on issues such as deregulation and competitiveness, while other manufacturers fear a growing isolation from a key market.

"In the short term, it should make no difference as all the [EU] structures are in place, but across [the] longer term…we are going to become less relevant in political decision-making," said Ian Rodgers, director of the trade body U.K. Steel.

Still, Mr. Cameron appears to have secured the backing of at least one important constituency: the British people.

In a poll published in the Times newspaper Monday, 57% of respondents said he was right to veto the 27-nation deal. Still, 56% said it would reduce the U.K.'s influence in the EU.