Brexit caused significant disruption to the UK’s financial services landscape with the ending of the passporting regime that allowed UK firms to operate in the EU, and vice versa. With London, and its regulatory framework, now lying outside of the EU, an exodus of UK firms establishing operations in other European cities was inevitable. A growing complexity, a decreasing in harmonisation, and a fragmentation of regulatory regimes has been felt by all over the last five years. Whereas before the rules were the same, today businesses must examine the rules applicable to their activities in both markets and assess where their procedures and /or products need to differ to reflect the differing requirements.
Brexit still looms large over the UK’s relationship with the EU. Regulatory divergence is a key concern. Under the UK-EU Trade and Cooperation Act, the UK agreed to limit subsidies that distort a level playing field and imposed further limitations on labour and environmental standards.
Go deeper with GlobalData
Regulatory uncertainty
Regulatory uncertainty continues to stem from the ideological divide in British politics. Sunak’s government pursued initiatives that sought to ensure the UK was “an innovative and competitive global financial centre and a driver of growth” such as 2021’s Taskforce on Innovation, Growth and Regulatory Reform, or 2022’s Edinburgh Reforms. That government saw opportunities for a Brexit dividend through divergence; however, Starmer’s government has been more circumspect in pursuing the same, for instance, by the failure to pursue the Data Protection and Digital Information Bill and its loosening of requirements including requirements to conduct impact assessments, the need for statutory data protection officers, third country controllers, or processors to appoint UK representatives.
The UK is working to tailor its rules with a pragmatic approach to legislation – in general, to amend or remove rules that are not working, or no longer serve a purpose, and to boost competitiveness. In terms of financial services, much remains in common, but divergence in evident.
PRIIPs
The EU Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation requires sellers to provide standardised key information documentation setting out the characteristics, risks, costs and potential returns of products to enhance consumer protection. Post Brexit, the UK introduced greater flexibility through removing performance scenarios and adjusting summary risk indicators for illiquid PRIIPs. The EU still maintains stricter rules on how information is displayed ensuring consistency rather than flexibility. The FCA amended the definition of Consumer Composite Investments to reflect disproportionality concerns about disclosure requirements.
MiFID
Whilst UK MiFID retained much of the EU regime, differences still emerge. Here, research and execution may be bundled, whereas in the EU investment research and trade execution must be paid for separately. Likewise, the product categorisations have diverged, the UK offers additional categories and brings products like structured capital at risk products within scope of enhanced disclosure. The timings of review of MiFID and specific topics for review differ between the regimes too. Similarly, the UK retained much of the EU Markets in Financial Instruments (MiFR) which operates alongside MiFID. However, to boost competitiveness the UK has reformed post trade transparency to simplify it.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataSolvency II
Initially there were no policy changes in onshoring the EU Solvency II legislation with changes reflecting the UK’s status outside the EU. It ensured that the PRA continued to be able to reflect the supervision of another regulator in its assessment of group solvency.
Operational Resilience
Firms in scope must identify, prepare for, be able to respond to, recover from, and learn from operational disruptions. While the principles are similar across both jurisdictions, differences have emerged. The EU’s Digital Operational Resilience Act (DORA) being implemented in January, whereas the FCA’s (PS21/3) Rules on Operational Resilience fully applying in March 2025.
Consumer Duty
While the EU addresses the treatment of retail clients in MiFID II, PRIIPS, and its Retail Investment Strategy, the UK’s consumer duty is a specific enhancement.
Digital Assets
The EU’s Markets in Crypto Assets (MiCA) which regulates digital assets (excluding security tokens) is now in force and covers the full range of activity in dealing with a financial product. However, the UK’s approach, via FSMA and various forthcoming policy statements, has been piecemeal and seeks to treat digital assets in a similar manner to existing products.
So far, divergence has been limited. Given discussions on how the UK can keep, and grow closer, to its largest market in the EU, continue it is unlikely that the pace will increase. The UK’s approach to regulation demonstrates flexibility and pragmatism, something yet to be reciprocated by the EU. Yes, divergence leads to increased compliance costs, but these amendments also demonstrate an ability and willingness to amend rules to meet new requirements. It is too early to say how this will impact the UK’s position, but certainly over time this will increase UK competitiveness and attractiveness through encouraging, and adapting, to the development of new products, pending the EU’s own developments.
Karl Foster is a Financial Services partner at Spencer West LLP
