Theme: Political Economy | Content Type: Blog

Regulatory Opportunities Come with Potential Costs for Post Brexit UK Services

Sarah Hall


Ryan Tang

| 6 mins read

Services make up around 80 per cent of UK economic activity. Prior to the UK’s departure from the EU and the Covid-19 pandemic, the EU was typically the destination for around 40 per cent of UK services exports. Trade figures to the end of 2021 show that UK services trade remain 10 per cent below pre-pandemic, pre-Brexit trends. This has been driven by a marked decline in EU services imports.

The UK services sector has been trading under the terms of the Trade and Cooperation Agreement with the EU for over a year. However, in common with other free trade agreements, the Agreement does very little to support EU-UK services trade.

This is has serious repercussions for the UK economy.

Regulatory divergence

Alongside pursing greater trade with non-EU countries, the UK government has responded to reduced EU market access by seeking to derive compensatory growth through the pursuit of regulatory divergence from the EU. This can be seen clearly in the Taskforce on Innovation, Growth and Regulatory Reform that made recommendations to the Prime Minister in June 2021 regarding ‘how the UK can reshape its approach to regulation and seize new opportunities from Brexit with its new found regulatory freedom’. In June 2021, the government also established a Brexit Opportunities Unit based in the Cabinet Office and in July launched a consultation on ‘Reforming the framework for better regulation’. The government’s response to this was published in January 2022 through the policy paper ‘The benefits of Brexit: how the UK is taking advantage of leaving the EU’.

The latter paper emphasises the ways in which the UK will seek to develop a competitive regulatory regime that maintains high standards but is also better tailored to the specifics of the UK economy than the EU’s approach was. For example, on financial services, it states that the government is ‘actively seeking out opportunities to tailor the regulation of our financial services sector to better suit our markets, improve competitiveness and deliver better outcomes for consumers’. Meanwhile, for professional services, the report emphasises changes to the recognition of professional qualifications in areas such as legal services with the aim of ending ‘the preferential treatment our [UK] interim arrangements currently afford professionals with qualifications gained in the EEA and Switzerland and put applicants from around the world on an equal footing’.

However, the focus on deregulatory opportunities obscures the ways in which the scope for Brexit dividends varies considerably by different types of economic activity. It also camouflages the potential costs involved.

Financial services

The case of financial services illustrates these trade offs well. This is a sector that the government has clearly identified as having considerable scope for growth through regulatory divergence from the EU. A number of reviews have been launched examining how the UK will adapt EU law and regulation post Brexit as well as targeted interventions for specific parts of the sector such as the Hill Listings Review and the Kalifa Review which focused on fintech.

At one level, there are clearly areas where regulatory changes could be made that are generally agreed upon within the sector. For example, the UK has been clear in its focus on reforming regulation for the insurance sector. This focuses on the Solvency II framework that the UK followed as an EU member state and has onshored into UK regulation after Brexit. The Treasury has  announced details of its plans that focus on releasing capital from insurance with the aim of  increasing investment in infrastructure programmes. This responds to criticisms of Solvency II from within the insurance sector that it is too risk averse for the UK market, demanding insurers to retain more capital than is needed in a low interest rate environment, which in turn prevents them from taking on other investments, notably in infrastructure.

However, the scope for comparative advantage in this area may be limited given the fact that the EU changed its approach to Solvency II in September 2021. Moreover, any divergence from the UK in regulatory terms makes further positive decisions on automatic UK financial services market access to the EU through equivalence decisions less likely. This is important because the UK is currently operating with fewer equivalence decisions than other comparable financial centres, notably the US and Singapore.

Adding costs and complexity

The UK has also been clear that it seeks to support the growth of green finance through the production of a UK green taxonomy – essentially the rules by which what is classified as green is decided. However, the EU already has a green taxonomy that the UK contributed to developing whilst a member state. For businesses, having multiple taxonomies in use adds costs and complexity as they potentially need to adhere to both rules if they want to operate in the UK and the EU.

These examples show that whilst there are opportunities to tailor regulation to the UK economy, particularly in newer services sectors where the regulatory rulebooks are less well developed in areas such as digital and green services, it is important to recognise the potential costs, as well as opportunities that diverging from the EU on regulatory reform may give rise to.

  • Sarah Hall

    Sarah Hall

    Sarah Hall is Professor of Economic Geography at the University of Nottingham, and Senior Fellow at UK in a Changing Europe.

    Articles by Sarah Hall