Rewriting the rules: where could UK regulation now diverge from EU law?

23 Mar, 2021

Rewriting the rulebook 

With Brexit done and hopes rising that the worst of the pandemic may soon be behind us, the British Government’s attention has shifted to its post-Brexit, post-pandemic future. The rupture with the EU’s legal order means that, in some areas, new, independent regulatory frameworks are necessary. In other areas, although the Government initially rolled EU rules and regulations over into UK law, it can review and amend them where it thinks it can do a better job. This is very much part of the Government’s Brexit philosophy.  

Indeed, the Government is keen to take steps to cut ‘red tape’. In January, the Prime Minister urged business leaders to offer ideas on how to amend regulations to support economic growth – an exercise the Government has been undertaking, albeit with few results, over the past decade. The Chancellor has also been tasked with leading a new Cabinet Committee to identify and drive delivery of regulatory reforms to accelerate the post-Covid-19 recovery. A small panel of backbench MPs, dubbed the ‘Taskforce for Innovation and Growth through Regulatory Reform’ (TIGRR), have been given the same mission. 

While this may be welcome news for businesses with specific regulatory asks in mind, it risks instability if regulatory change is pursued for its own sake. Last January’s backtracking on a revision of labour rules shows that deregulation is not always universally welcomed by industry or the general public. A bonfire of EU rules designed to improve safety or raise environmental standards is similarly unlikely to be a vote winner. 

Ambitions may also run up against the terms of the EU-UK Trade and Cooperation Agreement, which seeks to maintain a level playing field. Even if new UK rules remain within the bounds of the EU-UK deal, companies may prefer a less divergent system to avoid the costs of complying with two different sets of regulation. There are also risks to the Union if laws in Great Britain start to diverge significantly from those in Northern Ireland, which (for goods) will remain aligned with the EU. 

Nevertheless, there may be opportunities for business to argue for targeted amendments to some regulatory regimes. In other cases, business will want to manage potentially unwelcome changes. Surveyed below are a few areas where the Government could pursue regulatory change in an effort to boost the competitiveness of certain sectors and accelerate the UK’s recovery. 

Boosting the economic recovery 

Support for the post-Covid-19 recovery will remain a key policy objective for regulatory reform. Faced with building a successor to the EU state aid regime, HM Treasury is unlikely to greenlight any new system to prop up failing firms. However, modified subsidy rules that facilitate tax incentives for R&D and long-term infrastructure investment are more likely to receive a favourable hearing. 

The Government’s muted reaction to the recent Penrose Review – which focuses on cutting the complexity of the post-Brexit competition and regulatory rulebook – suggests that the UK’s vision in this realm has not yet crystallised. We expect greater clarity in the next few months, for example in HM Treasury’s policy paper on the future of economic regulation, and following the ongoing consultation on whether to retain the EU’s vertical block exemption regulation – likely to be the first of many similar consultations on retained EU competition law. In the same territory, the CMA’s merger assessment guidelines, published last week, sheds light on how the Authority intends to assess mergers, now that it is expected to take on an additional 50- domestic merger reviews annually. 

With the rapid Covid-19 vaccination programme being presented as an early example of the Brexit dividend, Government will be keen to bolster the UK’s reputation as a life sciences leader, for example, by redoubling the Life Sciences Industrial Strategy’s efforts to improve the speed and efficiency of clinical trials.  

Digital Regulation 

The Government’s ambition to establish a thriving digital sector in the UK could be supported by adopting a more proportionate and principles-based approach to digital regulation, in contrast to the more stringent legislative proposals being discussed in Brussels. We have seen this at play in relation to artificial intelligence, where the European Commission will soon be proposing regulation, while many in the UK believe the technology should be deployed more widely before an evidence-based regulatory model can be designed. 

In the same vein, although the UK’s stance on impending regulation of digital markets has much in common with the EU approach, it appears to place a greater premium on competition and innovation. We see a similar drive in the implementation of the National Data Strategy – although here Government will be mindful of the UK’s ability to continue to benefit from the EU data adequacy decision. 

Financial Services 

Having failed to prioritise financial services in Brexit negotiations, the Government has signalled it is now keen to reset the relationship with the City.  HM Treasury is consulting widely. Live consultations cover the funds regime, crypto-assets, investment firm prudential regime implementation, and the overseas framework for cross-border financial services. Recently published reviews on Fintech and the UK listings regime have made ambitious recommendations.  

While the Government may weigh any potential benefits of divergence against the risk of jeopardising an eventual equivalence award, the hardened attitude from the EU means there is less incentive for the UK to remain aligned.  However, a regulatory race to the bottom is not in the UK’s interest; it will be mindful of both financial stability and its desire to show leadership in its adherence to  the highest international standards.  

Sustainability & achieving Net Zero 

In the run-up to COP26, Government will be receptive to arguments that demonstrate divergence from the EU rulebook could support its environmental ambitions. For instance, reforming UK state aid rules on aid intensity could allow the Government to support low-carbon energy generation initiatives to help develop a pathway to Net Zero. Similarly, there may be interest in revisiting environmental rules that some argue impede the construction of low-carbon infrastructure, such as new offshore wind projects. 

Looking ahead 

The Government faces a fork in the road. ‘Divergence done well’ could spark healthy competition with both sides looking to follow best practice. Poorly managed, it could descend into a tit-for-tat battle, rife with suspicion and retaliation. Politics will play a part, and the Government will want to demonstrate Brexit wins before the next election. Equally, the EU will want to continue to show that there are no advantages to Brexit. The wheel may have to turn on both sides before a constructive stance can be adopted. 

Anna Abela is a Manager at Flint. She wrote this note with input from Flint Specialist Partner Philip Rycroft and other expert Partners at Flint. 

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