EU-UK Divergence in Financial Services Regulation

This divergence particularly affects subsidiaries of UK companies operating in Ireland as these firms will be required to comply with both UK law applicable to the parent entity and EU regulations as a result of being based in Ireland. UK Chancellor Jeremy Hunt discussed the direction of UK regulatory change in a recent speech delivered on the 10^th July 2023.

Divergence in UK and EU law

During a speech delivered on 10^th July 2023, UK Chancellor Jeremy Hunt spoke of the recently-passed Financial Services and Markets Act 2023 (FSMA), characterising it as landmark act which would enable the revocation of retained EU law and facilitate wholesale regulatory reform and delivery against competitiveness and growth objectives by UK regulators (including the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority),

The FSMA amends, repeals or replaces most of the UK’s retained EU law and gives UK regulators greater flexibility to reform and simplify the UK financial services rulebook, “to ensure […] the most growth-friendly regulation possible without compromising our [sic] commitment to stability”. It will allow UK regulators to focus on the growth and international competitiveness of the UK economy while facilitating innovation within the financial services sector (innovative payments and FinTech services in particular). This means that UK regulators now have a different mandate to those of the EU, likely leading to further regulatory divergence, raising specific challenges for groups operating across both jurisdictions.

While the growing divergence will be a challenge for firms with operations in both the UK and EU, the Chancellor noted that the UK-EU Memorandum of Understanding on Financial Services Cooperation was recently signed in Brussels. This memorandum will facilitate a forum for cooperation between the EU and the UK. Specific to regulatory developments, the forum’s activities will include the sharing of information and consultation around planned regulatory and supervisory developments. This will ensure the timely identification of cross-border implementation issues to support an on-going shared understanding of the relevant regulatory framework.

Although it is not yet clear which areas are more likely to be impacted, it is probable that areas where strong overarching international standards have been established (such as, for example, bank capital regulation) will be less affected. By contrast, areas with weaker or non-existent international standards, or areas where the UK has not inherited any EU regulation, could see higher levels of divergence. This could affect more recent areas of regulatory focus such as green finance or crypto assets. In addition, due to UK regulators’ new mandate under FSMA to facilitate growth, areas in which UK regulators seek to pursue competitive advantage for the UK market could also be susceptible to greater regulatory divergence vis-à-vis the EU. 

This new direction in UK regulation will bring challenges to Irish-based subsidiaries of UK entities. In particular, these subsidiaries will need to ensure they are proactively reviewing changes to both UK and EU regulation. This may result in these subsidiaries having competing obligations in regard to both UK and EU law. The manner in which these subsidiaries navigate and manage these competing obligations will be instrumental in ensuring ongoing compliance and preventing potential regulatory arbitrage.

Next Steps

Regulated firms which fall within the scope of both UK and EU law should review their existing regulatory horizon scanning and impact assessment procedures to ensure they are fit-for-purpose and appropriately integrated into their regulatory change management processes. The continuing divergence between UK and EU regulation increases the importance of these processes and procedures in the context of regulatory change identification, interpretation and implementation, to mitigate the risk of non-compliance with regulatory laws, rules and expectations.

Our Services and Contacts

Grant Thornton Ireland is positioned well to assist your firm in navigating changes to EU, UK and Irish regulation. Our multi-disciplinary team has deep expertise and is comprised of cross-jurisdictional retail and wholesale conduct and risk professionals, (including individuals with significant wholesale market industry experience, and some formerly holding senior supervisory roles at the CBI and the PRA). From complex implementation programmes to ad hoc tailored advice, Grant Thornton Ireland’s knowledge and know-how can be leveraged to support your firm.