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In Brussels - where the European train keeps rolling along, only pausing briefly to note the changing of the political guard at Buckingham Palace on Tuesday.

It may provide the first tricky challenge for the new government, as early as next week.0

While William Hague, as Foreign Secretary, wants to send a message about his atlanticist outlook by going to Washington first, the new Chancellor, George Osborne, has an appointment in Brussels with other finance ministers.

And I'm told the Spanish, who control the agenda for such Council of Ministers meetings (because they have the presidency), want to put a tricksy issue on next week's agenda.

Le model Anglo-Saxon

It's the plan to impose a big new burden of regulation on the hedge fund industry, which has its European operations heavily concentrated in London. There have been concerns about the investment trusts, which have been a concern also in Scotland, Sweden and Germany.

But the hedge fund industry thrives without regulation, and it is seen by those who dislike le model Anglo-Saxon as viewing it with particular disdain as the unacceptable face of free market capitalism.

On the plans being drawn up in parallel between the European Commission and the European Parliament, Britain stands isolated. It had some support from the Czechs, but not with much enthusiasm.

The best the new Chancellor can hope for is that his fellow ministers will stick to a convention that they don't ignore the objections of a single state where it has a clear economic interest.

But Mr Osborne will quickly learn that, in return, they'll be looking for him to play their European game. That kind of convention only comes with an understanding that he'll be similarly accommodating to others in due course.

It's possible the Spanish will be pressured into dropping the hedge fund directive from next week's Ecofin meeting, just as it was postponed from a meeting ahead of the UK election to avoid causing problems for Alistair Darling. But if not next week, then it's very likely next month.

Austerity in Spain

And even if the Council of Ministers pull back, the Parliament, which has an equal say on such matters, is more gung-ho for clamping down on free market excesses. That's particularly after some of its members have seen their national budgets driven into sharp cuts by those same hedge funds and others driving down bond prices.

We saw more of that on Wednesday (as predicted in The Ledger on
Monday) with accelerated austerity measures in Spain. (Incidentally, and of particular interest in Scotland, Madrid's ability to rein in spending and increase tax is significantly hampered by various arrangements for devolution of fiscal powers around the country.)

Wednesday also saw a very significant toughening up of the Commission's powers over national budgets. George Osborne, and his fellow finance ministers, are expected to file their draft budgets to Brussels for approval.

It won't involve departmental line-by-line analysis, there will be "more bite" for those inside the eurozone, and budget sovereignty remains with national parliament.

But economy commissioner Olli Rehn will wield his powers to pass judgement on whether George Osborne's budget plans are doing enough to bring Britain's deficit and debt under control. It's not the kind of thing that the new government's Tory backbenchers are going to like much.

Uber-regulator

With hedge fund regulation comes a broad range of other measures aimed at increasing financial market regulation in the wake of the crisis, much of which could well cause friction with the new, more Euro-sceptic ministers in Whitehall.

Plans are being drawn up for backing the increased level of bank deposit guarantees - due to rise to a maximum 100,000 euros per customer - with a deposit fund, of perhaps 2% of assets. That's on top of much increased core capital requirements.

More contributions would be required for a central "solidarity fund"
intended to avoid every country having to hold the maximum necessary funding.

On the regulatory front, the Commission's counted more than 60 supervisors across the 27 countries, but without any co-ordinating oversight role across boundaries.

So - no surprise - the Commission wants to see an uber-regulator, resolving disputes when national regulators fail to co-ordinate or agree, and with a reach across banks, insurance and pensions.

And for those banks that are so big and multi-national that their power poses a systemic risk (no definition or threshold for this is being offered), the super-regulator could do the regulating in place of national supervisors.

That's not just Allianz, Deutsche Bank and BNP Paribas. It's hard to see how it could leave the Royal Bank of Scotland or HSBC untouched.

Sound assets

The European Parliament is pushing for stronger, more centralised regulation than the Council of Ministers, and under the new treaty arrangements, this week saw MEPs and the Spanish-led legislative council trying to resolve their differences.

The next front would require a move in derivative trading towards open markets rather than over-the-counter (in bilateral deals). That should improve transparency.

Those originating securitised assets would be required to hold some, as an incentive to make sure they're sound.

Ratings battle

And while there's a concession that short-selling couldn't be banned, there is a plan being considered that temporary bans could more easily be triggered.

The European Commission is also considering how best to tackle the power of the credit ratings agencies. They're privately-controlled but provide a public good, holding sway over corporate and sovereign debt markets. Their funding, by those they're rating, is an obvious conflict of interest. And - worst of all to many in Brussels - they're American-based.

So there's a case for a European credit ratings agency. But how can these European institutions set one up, or encourage new entrants into the Moody's/Fitch/Standard & Poor triopoly?

The Commission doesn't want a new European credit rating agency to become an official arm of government, with all the weight and liability that could entail, so I'm told the issue is still in discussion.

Pushed offshore

This all adds up to a lot of new cost on Europe's financial sector, potentially weighing down a sector that's also expected to get credit flowing to private business as well as into government bonds. And somewhere in there is to be an assessment of how much that cost might be.

Wouldn't it put Europe's banks at a disadvantage, while pushing London's hedge funds to low-regulation, offshore locations such as the Cayman Islands?

Perhaps not, if you look at what's going on in the US. The land of the brave and the home of the free market has been appalled by what's been going on - not just the banks that collapsed or needed bail-outs, but by the more recent arrogance of Goldman Sachs in its return to rude financial health.

So senators in Washington are heading down many of the same regulatory roads as commissioners in Brussels.

What will London do? Vince Cable and George Osborne are now sharing power in London, armed with the rhetoric of breaking up the banks (Cable notably moreso than Osborne), but with differing party outlooks on how to handle Europe's growing interest in all this.

It looks like the financial sector's challenges and uncertainties have a long way to go.