Last updated: 17 January 2026
Prime Minister Keir Starmer has made it official: financial services won’t be part of the UK’s push for closer alignment with the EU. While the government’s talking about “selective alignment” in other areas, the City of London and payment firms are staying outside that conversation.
And honestly? Most payment institutions seem fine with it.
What Actually Happened
In early January 2026, government sources confirmed that financial services would be excluded from upcoming regulatory alignment discussions with Brussels. This came after Starmer suggested the UK might consider tighter single market alignment “where it serves national interests”, which immediately got the City nervous.
The Financial Times reported that ministers have ruled out bringing the sector back under European regulatory frameworks, despite some internal government interest in enhanced cooperation. Translation: we’ll keep talking to Brussels, but we’re not going back to following their rulebook.
Why the City Pushed Back
Here’s the thing: ten years ago, payment institutions and banks would’ve jumped at the chance for EU equivalence arrangements. Fast forward to 2026, and the appetite for Brussels rules has basically evaporated.
UK Finance put it plainly: “Ten years ago equivalence would have been very valuable, but now the world has moved on.”
The sector’s spent the past few years building out UK-specific frameworks. APIs, SPIs, and EMIs have adapted to FCA rules. Going back to EU alignment would mean ditching that flexibility for what TheCityUK’s chief executive called “trading flexibility for uniformity.”
For small payment institutions especially, this matters. You’re not a 5,000-employee unicorn with compliance teams in every jurisdiction. You’re a 20-person operation trying to run cross-border FX or remittance services without drowning in regulatory overhead.
The Regulatory Divergence Reality
Let’s be clear about what this means in practice.
What’s Actually Changing
The UK and EU are already on different tracks. The FCA’s new safeguarding rules kick in on 7 May 2026, introducing statutory trust requirements and monthly reconciliation reporting that don’t exist under PSD2. Meanwhile, the EU is moving forward with PSD3 (expected 2027), which takes a completely different approach: strict segregation instead of trust-based frameworks.
If you’re a cross-border payment institution operating in both jurisdictions, you’re looking at parallel compliance regimes. Different safeguarding methods. Different capital calculation approaches. Different reporting templates.
The Passporting Question
This is where it gets interesting for SPIs and APIs thinking about expansion.
EU-licensed payment institutions can still passport services across the EEA. One licence in Lithuania or Malta gets you access to 27 member states. UK-licensed firms? You’ll need separate arrangements to operate in EU markets.
But here’s the flip side: UK regulatory independence means the FCA can move faster on innovation-friendly frameworks. They’re not waiting for consensus from 27 member states before updating rules around embedded finance or new payment rails.
What This Means for Your Business
If You’re UK-Only
You’re in the clearest position. The FCA’s May 2026 safeguarding reforms are your main priority. Get your reconciliation processes sorted, prepare your resolution pack, and line up your annual audit arrangements.
The regulatory roadmap is actually more predictable now. No risk of sudden alignment with Brussels rules that could upend your compliance framework.
If You’re Cross-Border
This is trickier. You need compliance strategies that work in both jurisdictions.
For safeguarding: the UK wants trust-based arrangements with statutory overlay. The EU wants strict segregation and diversification requirements. You might need different safeguarding account structures depending on where customer funds originate.
For licensing: if you’re considering acquisition of a licensed entity (rather than greenfield application), pay attention to where that licence is based. An EU API gives you passporting but ties you to Brussels frameworks. A UK API gives you FCA flexibility but limits direct EU access.
The M&A Angle
Here’s something most payment institution founders aren’t thinking about yet: regulatory divergence affects business valuations.
If you’re selling a UK SPI or API, buyers are going to price in the lack of automatic EU market access. Conversely, EU-licensed entities with established passporting arrangements might command a premium for buyers who want pan-European reach.
On the flip side, UK regulatory flexibility could make UK-licensed firms more attractive for certain use cases, especially around emerging payment technologies where the FCA’s willing to move faster than Brussels.
The Practical Checklist
Right, here’s what you should actually do:
By March 2026:
- Review your compliance roadmap against both UK and EU divergence scenarios
- Assess whether your product strategy depends on cross-border market access
- Consider whether you need separate UK/EU regulatory counsel (spoiler: you probably do if you’re operating in both markets)
For Your Tech Stack:
- Plan for UK-EU interoperability layers in your API integrations
- Build flexibility into your reporting systems. You might need different outputs for FCA vs EBA requirements
- Don’t hardcode assumptions about regulatory harmonisation
On the Commercial Side:
- If you’re targeting EU clients from a UK base, map out what access looks like post-divergence
- Consider whether acquiring an EU-licensed entity makes strategic sense for your expansion plans
- Factor regulatory jurisdiction into your pitch when raising capital
The Bigger Picture
Look, this isn’t the end of UK-EU cooperation on payments. City minister Lucy Rigby was in Brussels mid-January talking about “deeper cooperation” on specific issues like T+1 settlement coordination. The UK and EU operate a joint regulatory forum that meets regularly.
But cooperation isn’t the same as alignment. The UK’s making a bet that regulatory independence (tailored rules that can move fast for a £1.5 trillion financial services sector) is worth more than seamless EU market access.
For small payment institutions, that might actually be the right call. You get an FCA that can update licensing requirements without waiting for 27-country consensus. You avoid the compliance complexity of tracking every Brussels directive amendment.
The trade-off? You’re building for a UK market first, EU market second world. Plan accordingly.
Frequently Asked Questions
Will UK payment institutions lose EU passporting rights completely?
UK firms lost automatic EU passporting after Brexit in 2020. This latest decision doesn’t change that. It just confirms the UK won’t be seeking to bring payment services back under EU regulatory frameworks. If you want EU market access, you’ll need separate licensing or partnerships with EU-licensed entities.
Can I still operate in both UK and EU markets?
Yes, but you’ll need separate compliance frameworks. Many payment institutions are establishing dual structures: a UK entity regulated by the FCA and an EU entity (often in Lithuania or Ireland) regulated by local NCAs. It’s more complex but entirely workable.
How does this affect buying or selling a payment institution?
Regulatory jurisdiction matters more for valuations now. EU-licensed APIs with passporting rights might command premiums for buyers wanting pan-European access. UK-licensed firms offer regulatory flexibility and innovation-friendly frameworks. Due diligence needs to explicitly address which markets the licence unlocks.
What about PSD3 and future EU regulations?
The UK won’t be bound by PSD3 when it comes into force (likely 2027). The FCA will continue developing its own framework. This creates compliance divergence: different capital requirements, different safeguarding rules, different strong customer authentication approaches. Cross-border firms need strategies that satisfy both regimes.
Is this good or bad for UK fintech?
Depends on your business model. If you’re building innovative payment solutions that need fast regulatory approval, UK independence could be an advantage. If you’re running high-volume cross-border payments into EU markets, the lack of alignment creates friction. There’s no single answer. It’s about matching regulatory strategy to your commercial reality.
Should I be worried about future regulatory changes?
The 2026 review of the UK-EU Trade and Cooperation Agreement is coming. But given where both sides are now, expect evolution rather than revolution. The pattern seems clear: technical cooperation on specific issues (like settlement timelines) without broader regulatory alignment. Build your compliance strategy with that assumption in mind.
What’s the timeline for these changes?
The UK’s new safeguarding rules take effect 7 May 2026. PSD3 in the EU is expected 2027 but still needs final approval. The Trade and Cooperation Agreement review happens throughout 2026. If you’re cross-border, you’re looking at 12-18 months of regulatory change that needs active monitoring.
The bottom line: UK payment institutions now have clarity. You’re not going back to Brussels rules. Build your strategy accordingly. Focus on FCA compliance, plan for regulatory divergence if you’re cross-border, and stop waiting for alignment that isn’t coming.
The regulatory environment might be more complex, but at least you know which game you’re playing.
