Second, the degree of regulatory drift since Brexit means the two jurisdictions have different regulations – for example, the packaged retail and insurance-based investment products regulation mandates disclosures to retail investors.
But there are differences in the form and content of the prescribed key information document in the EU and the UK, meaning cross-border firms must comply with two sets of rules and bear the additional costs imposed by divergence. Moreover, both sides intend to further diverge in their regulations.
Drifting to divergence
The gradual emergence of differing regulations since Brexit was due to separate EU and UK institutional processes.
The UK has adapted inherited EU rules to suit its own needs (such as changes to Mifid II best execution reporting), and the EU has continued its process of scheduled legislative reviews (such as Mifid II and AIFMD) that are not replicated in the UK.
In addition, policymakers have sought to keep apace of market developments, such as in environmental, social and governance-based investing, and digital assets.
However, more recently, there has been a recognition of differing policy objectives and an explicit intention to diverge from the other.
On the EU side, this has taken the form of protecting the EU’s markets from UK competition or, as EU policymakers would see it, third-country firms seeking to access the EU while undercutting its rules.
The focus has been on the delegation of portfolio management from the EU to the UK within the AIFMD and UCITS legislation, and the marketing arrangements permitted under Mifid II, such as offshore firms using tied agents and secondments to sell their products in the EU.
In both instances, the EU has settled on more transparency about firms’ arrangements rather than hard limits.
Interestingly, these negotiations have unveiled conflicts between EU member states – such as France, which wishes to grow its financial services status – and international hubs such as Luxembourg and Ireland.
Meanwhile, the UK has a political imperative to demonstrate "Brexit dividends" and an acceptance that EU passporting rights are unlikely to be granted.
The Edinburgh reforms announced in December 2022 address various regulations; some, but not all, derived from the EU, such as short-selling and securitisation rules.
The government has clearly sought to tip the balance towards economic growth and away from the regulators’ customary risk aversion.
This too has provoked internal conflicts between the government and regulators over Solvency II reforms and the Financial Conduct Authority’s upcoming consumer duty.
