(Nov 11): Andy Burnham’s government won’t accept so-called dynamic alignment of the UK’s financial services rules with those of the European Union (EU), a stance that raises questions about the prime minister’s wider ambitions for closer ties.

Under the mechanism, the UK would automatically follow EU regulations in certain areas. But as ministers seek to maintain the City of London’s independence, the Burnham government does not want it to apply to financial services, UK officials told Bloomberg. 

The UK’s Labour government is in talks with the EU to forge closer ties that may include alignment in sectors such as agriculture and energy, but British officials have told EU counterparts that applying it to financial services is a red line they are unwilling to cross, people familiar with the matter said. All spoke on condition of anonymity because talks are ongoing.

While the development will be welcomed by some in the City of London who have welcomed post-Brexit freedoms including the removal of a cap on bankers’ bonuses, it also highlights complications involved in Burnham’s push for a much closer EU relationship. If he were to try to take Britain back into the EU or join its single market, as he has said is possible, he would likely have to sign up to its rules governing financial services. 

A UK government spokesperson said it would not provide a commentary on its negotiations with the EU but stressed that Britain’s financial services are a key national strength. The UK’s opposition Conservatives and Reform UK parties have long opposed dynamic alignment, saying it would leave Britain as a rule-taker with no say over devising regulations.

British banks took a hit after the UK voted to leave the bloc in 2016, but the divergence in regulations over the last decade means much of the sector now opposes alignment of its regulations.

In July, TheCityUK, which represents Britain’s financial services industry, said automatic dynamic alignment “is not appropriate for the UK’s financial and related professional services industry”. It argued that the sector “requires the UK regulatory authorities’ speed of decision taking, flexibility and agility, and could not operate effectively under arrangements that require it to automatically follow the lead of another jurisdiction with different priorities and needs”.

A paper published by UK Finance in June said “we do not support wholesale UK alignment or dynamic alignment with the EU in financial services”, arguing that Britain’s post-Brexit divergence meant it could now respond more swiftly to risks and market developments, and that its rules should be “tailored to domestic conditions”. The group argued that the UK had benefitted from diverging from the EU on environmental, social and governance disclosures, digital assets and artificial intelligence.

Burnham is maintaining the position held by his predecessor Keir Starmer’s government, which exempted financial services from a push for closer alignment with the EU, some of the people said. They said dynamic alignment on financial services was not included in a paper of common understanding agreed between Starmer’s administration and the EU in 2025. 

Anand Menon, a director of the UK in a Changing Europe think tank, told Bloomberg that the Bank of England and the Treasury would always be likely to oppose “rule taking” in financial services, helping explain Burnham’s decision to reject dynamic alignment. 

He said Burnham’s stance would appear to rule out the so-called Norway option for a future relationship, which would allow single market membership through the European Economic Area but without voting rights on rules.

Instead, according to Menon, Burnham appeared to be considering a more bespoke Swiss-style arrangement, though he cautioned that may not be on offer from the EU. The other option to avoid becoming would a rule-taker would be to rejoin the EU in full, Menon said, as then Britain would then be able to have a say on the bloc’s regulations.

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