City warns Cameron veto may come back to haunt it

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Britain's decision to veto a European Union-wide treaty on the single currency in order to safeguard the interests of the City of London could backfire, senior members of the country's crucial financial sector warned yesterday.

David Cameron's refusal to sign any treaty that did not build in new safeguards for the City was welcomed by bankers – particularly the Prime Minister's insistence that Britain would not accept a new financial transactions tax. However, there was also widespread anxiety that Britain had leftitself so isolated that Mr Cameron would find it almost impossible infuture to prevent the City beingadversely affected by European Union decisions.

Even the British Bankers Association warned that the Government could now find it harder to secure the best deal for the financial services sector on an ongoing basis.

"We do not yet know the impact this new arrangement is going to have on the UK's ability to secure agreements on sensible regulation, but that is critical," said Angela Knight (pictured), the BBA's chief executive. She added: "The UK has most of the EU's financial business, but we have a minority of the votes."

In theory, Britain would be in a position to veto any renewed attempt by France and Germany to introduce a new tax on banking across the EU because taxation legislation requires the unanimous backing of all member states.

However, many other reforms with potential to damage the City could be made with a majority vote.

The UK is widely seen as having dodged a bullet this year, with last-minute amendments to the European Commission's directive on alternative investment funds only secured after two years of intensive lobbying. London-based hedge funds and private equity firms had feared the directive, in its draft forms, could have caused irreparable damage to their businesses.

In future, securing such amendments may be more difficult. Chris Whitney, of the stockbroker HB Markets, said: "David Cameron's decision to veto the Treaty puts the UK in a fragile position as it moves towards isolating itself."

That position was echoed by lobbyists and think-tanks. Hugo Brady, of the Centre for European Reform, warned: "If you're not at the table, you're on the menu."

That concern was echoed by the Business for New Europe group. "In the past, the UK has rarely been outvoted on issues relating to financial services because we have been able to build alliances," it said. "The risk is that we have so alienated countries by vetoing treaty change that those who voted with us in the past will not be inclined to vote with us in future."

The split between the UK and Europe comes at a particularly delicate moment for negotiations on several fronts over forthcoming European Union legislation. In particular, the EC has just published its proposals for a new "markets in financial instruments" directive, covering areas where London is at the forefront, including trading in equities and other financial assets. Talks are also ongoing about new EU rules on banks' capital reserves.