U.K. Prime Minister David Cameron's decision to opt out of a new European Union treaty quickly drew support from the British public, but its long-term consequences for the country's important financial-services industry are less clear-cut.
Mr. Cameron refused last week to include the U.K. in a new treaty that would create more EU integration for members using the euro, positioning his stance as a win for the U.K. The British public, and euro-skeptic members of Mr. Cameron's own Conservative Party, backed the move strongly, seeming to give Mr. Cameron an important domestic political win.
But while London's banks and financial lobbyists—the supposed beneficiaries of his actions—were appreciative of the sentiment, Mr. Cameron's move was greeted with more muted enthusiasm, with some saying it could actually backfire over the long run.
Mr. Cameron's commitment to hang onto U.K. sovereignty, for example, could give the U.K. more power over Britain's financial regulation in general—but there is no guarantee that such a move results in lighter regulation for the country's banks. Indeed, the move keeps the door open to regulation by the U.K. that goes above and beyond what Brussels puts in place, such as a proposal to separate bank's retail business from their riskier investment-banking units that has angered the financial sector here.
Just as important, the U.K.'s banks are now worried that the ill-will created by Mr. Cameron's stance means the U.K. "won't even have a seat at the table" the next time financial regulations are negotiated under existing rules, said one lobbyist for the City of London.
Mr. Cameron's stance against the EU could also reverberate for European banks operating in London, which serves not just as the banking center of London, but also all of Europe. The City of London, as it is called, is home to large units of banks like Germany's Deutsche Bank AG, which would be subject to any tough restrictions EU regulators might impose on the U.K. in the future
"We do not yet know the impact this arrangement is going to have on the U.K.'s ability to secure agreements on sensible regulation—but that is critical," said Angela Knight, the chief executive of the British Bankers' Association.
The stakes are high for the U.K., where 11.2% of tax receipts came from the financial services sector in the fiscal year 2009-2010, according to the City of London Corp. A million people work in the financial-services sector in the U.K., roughly half of them in London, the corporation said.
Nearly lost in the analysis of Mr. Cameron's actions was a key point: that last week's treaty wouldn't have subjected the U.K. to any more financial regulation or any fiscal integration with the rest of the EU. Instead, it was about approving the use of an existing treaty to allow greater fiscal integration for members of the euro zone, which the U.K. isn't part of.
Mr. Cameron's price for signing that treaty was a list of safeguards to protect Britain's large financial-services industry from future regulation. The Europeans called his bluff, complaining that Mr. Cameron was trying to get leverage out of the EU during its time of crisis.
Those demands were that future transfers of power from a national regulator to an EU regulator on financial services would be subject to a veto; a promise that the European Banking Authority is kept in London after recent suggestions it would be moved; that the European Central Bank be rebuffed in its attempts to rule that euro-denominated transactions are cleared within the euro zone and that British banks should be allowed to go ahead with higher capital requirements than the rest of the EU.
On the latter point, London's financial sector sides with the EU, and saw the EU rebuff as a win.
Mr. Cameron's move also appeared to have damaged relations with his more pro-European Liberal Democrat coalition government partners. Deputy Prime Minister Nick Clegg told the British Broadcasting Corp. that the veto was "bad for Britain" and could leave it "isolated and marginalized." Liberal Democrat lawmakers reported that local activists were angered by Mr. Cameron's move and were putting pressure on them to distance themselves from the government's European policy.
Still, while Mr. Cameron has angered some people across Europe and the City, his own public appear to have reacted well to his actions. According to a survey by pollsters Survation for the Mail on Sunday newspaper, 62% of people agreed with the prime minister's stance, with 19% against.
The prime minister also played to an increasingly fractious part of his party, with public praise showered on Mr. Cameron by lawmakers who days earlier had been criticizing him. The Daily Mail tabloid newspaper said on Saturday that it was "A day for Britain to salute David Cameron" because he "finally said no to the European elite," a sentiment seconded across other tabloids.
Some analysts also say they have heard threats that the U.K. will be isolated before, after it has gone against the EU grain, and yet a loss of influence for the region's third-biggest economy hasn't followed.
Many European may envy Britain's decision to keep out of the euro, which has allowed it to control its own monetary policy and seen it avoid many of the bailout bills. Despite Britain's own record debts, investors have pushed the yields on British Treasury debt to below that of almost every other European nation. A recent poll for ComRes suggests 42% of French and German citizens believe their country would be better off had they not joined the single currency.
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