KPMG's Regulatory Barometer

EU:UK alignment or divergence?

The new KPMG Regulatory Barometer aims to help firms identify the key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change.

The first edition of the Barometer identifies nine key regulatory themes and assigns them each a regulatory impact score and a regulatory maturity indicator. As the Barometer reflects both UK and EU regulatory developments, the third piece of the puzzle is our view on the extent to which financial regulation is aligning or diverging since the UK left the EU.

Almost two years on from the end of the Brexit transition period, authorities in the UK continue to consider where divergence from EU laws and regulations could be desirable. Over time, the debate has shifted from the UK considering alignment and seeking equivalence, to now more systematically reviewing where different approaches could be beneficial.

The UK has started to put in place new mechanisms to review “onshored” regulations (through the European Scrutiny Committee), repeal onshored legislation and introduce new rule-making powers for regulators in areas currently covered by retained EU law (through the Financial Services and Markets Bill). Divergence has started slowly but is accelerating as the UK reviews onshored rules and the EU pushes ahead with its own agenda. This divergence will increase complexity for cross-border firms.

Across the nine themes identified in the Barometer, the EU and the UK remain aligned to different extents (and are starting from different places due to previous UK and EU Member State “gold-plating” and national rules).

Below, we summarise the key developments to date:

Theme	Alignment or divergence – our perspective
Delivering ESG and Sustainable Finance	Diverging: the rapid development of new regulation makes continued divergence in this area most likely. The EU has been faster to roll out its environmental Taxonomy and the Sustainable Finance Disclosure Regulation. However, the UK is starting to catch up with plans to implement a green taxonomy (with the same six environmental objectives) and to introduce Sustainability Disclosure Requirements and product labels that in some respects achieve the same goals as the EU SFDR. In some areas though the UK has not followed the EU’s lead, for example the EU’s amendments to the UCITS Directive, AIFMD and MiFID II. On both sides of the Channel, authorities have expressed a desire to regulate ESG ratings and data providers.
Maintaining Financial Resilience	Broadly aligned: both jurisdictions are focused on implementing the final Basel reforms to a broadly similar timeline and recalibrating the rules under the Solvency II Directive. The UK however is also working on a new regime for non-systemic banks and building societies. For investment firms, the EU and the UK have already rolled out largely similar versions of a more proportionate prudential regime.
Regulating Digital Finance	Broadly aligned: the EU has taken the lead in the regulation of cryptoassets and has almost finalised its flagship regulation. The UK is now issuing its own proposals. Both jurisdictions are currently gathering feedback around regulations relating to artificial intelligence, have drafted new rules to increase regulators’ powers around BigTech firms, and are developing Open Banking frameworks.
Strengthening Operational Resilience	Diverging: the UK has pushed ahead with new operational resilience requirements that came into effect in March 2022 and will be fully implemented by 2025. In the EU, the Digital Operational Resilience Act (DORA) has yet to be finalised and will take longer to implement (the timeline having been extended). In the EU, specific rules are also being developed following the Commission’s proposals for a cyber resilience act.
Developing Financial Infrastructure	Aligned: as part of international efforts, the EU and the UK are contributing to work looking back to the March 2020 market turmoil and the role of margin calls, as well as the resolution of CCPs. Both are also progressing CCP stress tests (although the EU is now on its fourth exercise whilst the UK is just concluding its first), and plan to introduce a consolidated tape, but final proposals have not yet emerged in either jurisdiction.
Enhancing Customer Protection	Diverging: the UK continues to build on its legacy of promoting consumer interests by introducing the proposed “Consumer Duty”. Additionally, the UK’s “assessment of value” for authorised fund managers is now well established but this is becoming an increasing area of supervisory focus in the EU. Product governance remains a key area of focus in both jurisdictions but through different approaches – in the UK via the Consumer Duty, and in the EU via ESMA’s review of the MiFID II product governance guidelines.
Reviewing Capital Markets	Broadly aligned: both the EU and the UK are reviewing MiFID II and MiFIR, making adjustments and consulting on changes to their listing regimes. Overall, we expect there to be slightly different outcomes but no significant changes in either jurisdiction. Both jurisdictions are also contributing to international work to review fund liquidity management arrangements and to promote the transition away from LIBOR.
Redrawing the EU-UK border	Diverging: both jurisdictions are reviewing “substance” and delegation arrangements in fund management companies, but for different reasons. The UK continues to roll out its “Overseas Funds Regime”, however no equivalent access mechanism will be available in the EU. For now, the EU has granted UK CCPs temporary equivalence, but on a time-limited basis in order to allow time to build out the EU’s clearing infrastructure. Whilst the UK continues to take an open approach to cross-border services, the EU’s proposed reforms to its banking prudential framework could further tighten access.
Reinforcing Governance Expectations	Diverging: given the UK’s previous implementation of SM&CR and already advanced proposals on diversity and inclusion, the starting point for the two jurisdictions was already slightly different. The UK continues to expand the scope of SM&CR, while the EU is increasing its focus on fit and proper assessments of senior managers. Both jurisdictions’ regulators are scrutinising outsourcing arrangements and services provided by third parties.