January 6, 2023
Post Brexit, the EU and the UK are no longer aligned on policy and rulemaking in respect of financial services. This is leading to divergence in the rules that investment firms must follow. Remaining up to date with regulatory changes becomes therefore even more important and arguably challenging than before.
Explore our insights on how to navigate this new landscape.
The UK's departure from the EU provides a "once in a generation" opportunity to review regulation in areas that were previously subject to EU law and the legislation inherited by the UK after Brexit, which came to be known as "retained EU law" in the jargon, can only be changed if Parliament passes new laws. The UK Government has announced the Brexit Freedoms Bill will change that, by introducing powers to make it easier to amend retained EU law.
Separately, the EU is moving ahead with its own plans. With both jurisdictions following their own regulatory change initiatives, the differences between the EU and UK frameworks are expected to create an additional layer of complexity for market participants active in both markets.
We’ve been messaging that regulatory divergence was coming to our EU and UK clients since Q2 2020 when we saw the first signs in relation to the share trading obligation and refusal to grant the UK equivalence. It’s now over two years since Brexit and divergence is coming through on all new regulations as well as reviews of existing requirements such as MiFID II.
We are seeing that outside of the EU, the UK is working to tailor its rules to suit the UK market’s growth and competitiveness. With the hope of equivalence lost, the UK has moved forward to enact rules that are more pragmatic and generally, remove rules that are not working as expected or are no longer serving a purpose.
Post Brexit, the areas of divergence where we have already seen different approaches implemented are operational resilience, CSDR and the new prudential rules. Other topics that are now in focus are trading, market data, clearing, digital finance, ESG and the Consumer Duty.
How Should Businesses Proceed?
Regulatory divergence is a factor that should be the focus of individuals at both EU and UK firms charged with advising the business on the impact of proposed changes. We need to accept that all new regulations are likely to diverge to some extent as the EU and UK are now separate.
Pershing Can Help Your Firm Post-Brexit
Pershing is prepared to fully support clients with robust and resilient operations across all our EMEA entities.
As part of BNY Mellon, a global financial institution, and with Pershing EMEA’s strong presence in Ireland, the UK and Jersey, we continue to be well placed to service clients, minimising any potential challenge, turbulence, and disruption to Europe’s capital markets and to our clients, and supporting our clients as they navigate their own Brexit planning:
Linda Gibson, Head of Regulatory Change (December 2022)
We are seeing regulatory divergence in approach between the UK and the EU on all new key regulations (the new prudential regime for MiFID investment firms, MiFID II reviews, or CSDR to name a few). Differences are subtle but still impactful and the implementation timelines vary, too. We now have two regulators moving in different directions and with different priorities which will have a significant impact on firms who need to be able to integrate the amendments into their wider business strategy and look out for more amendments to be announced as they are drip-fed through.
The majority of relocations of businesses and operational moves were made ahead of the Brexit deadline and before the pandemic but travel restrictions over the last two years have challenged the practicalities of relocation. We are seeing that many financial services firms are still far from being fully ‘post-Brexit’ and the evolving complexity of regulatory divergence means they are taking a watching brief on when and where to co-locate.
We have seen the number of MiFID firms regulated by the CBI increase and Dublin remains well positioned for UK firms to co-locate or relocate and remains a top choice for operational moves. Being established in Ireland enables Irish MiFID firms to provide services across the EEA via the MiFID services passport. In Ireland, the regulatory framework tends to be aligned with the UK on new initiatives. This positions UK firms well to co-locate in Ireland and benefits our Irish clients who can leverage work undertaken in their UK entity.