UK has ‘done little to diverge’ from Europe since Brexit
The UK has “done little to diverge” with the European Union on regulation since Brexit, a new report suggests, but that has not stopped the bloc’s own legislation increasing divergence between the two jurisdictions.
Across a swathe of issues, analysts at UK in a Changing Europe (UKICE) said the UK had cleaved much closer to EU regulations than it could have done, despite having the freedom to forge its own regulatory path after Brexit.
“On environmental, product and labour standards, EU-era legislation has barely been reformed, even though rules on habitats protections, vacuum power levels and working hours were major targets for Brexiters,” they wrote.
UKICE suggested that the lack of divergence was partly an attempt to avoid imposing extra administrative costs on businesses, which would have to conform with two different rulebooks.
The think tank also noted that there was limited political support for any major bonfire of regulations on employment or environmental law.
But while the UK has not actively diverged from the EU, new legislation in the bloc has created ‘passive divergence’ between the two jurisdictions, where the EU changes its rules and the UK does not follow.
For example, the EU has passed major regulatory packages on the presence of harmful substances in products like toys, and also now requires goods to carry a ‘Digital Product Passport’, providing information on the materials in the product and its environmental impact.
These new rules, as well as the non-tariff barriers imposed by the 2021 Trade and Cooperation Agreement, have weighed heavily on UK goods trade to the EU since Brexit.
In 2024, goods exports to the EU were 18 per cent below their 2019 level in real terms, with some sectors impacted even more severely. A recent analysis of HMRC data by the National Farmers’ Union showed UK farm exports to the EU have dropped by 37.4 per cent in the five years since 2019.
By contrast, services exports to the EU have performed much better, with the value of services exports 19 per cent ahead of their 2019 level in real terms.
The government has committed to pursuing a “reset” with the EU, potentially pursuing dynamic alignment on areas like electricity markets and food safety standards.
“If it’s in our national interest to have even closer alignment with the single market, then we should consider that,” Keir Starmer said in January.
Businesses have welcomed the government’s attempts to pursue a closer relationship with the EU, although many have urged ministers to be more ambitious.
In an interview today with CNBC, Emma Rowland, trade policy advisor at the Institute of Directors (IoD), said business leaders would “overwhelmingly choose closer alignment with the EU over the US.”
Financial services a ‘rare area’ of divergence
Financial services has been a “rare area” where the UK has successfully diverged from EU rules with the support of the sector.
“UK financial services are large enough to compete with the EU, leading both Conservative and Labour governments to seek a competitive edge by loosening the regulatory requirements imposed upon firms,” the report said.
For example, the Prudential Regulation Authority chose to delay implementing Basel 3.1 rules by a year, while the Financial Conduct Authority no longer requires major short sellers to disclose their identity, both measures which align the UK more closely with the US than the EU.
Ahead of any future agreements, City figures have lobbied the government to be left out of any deals securing closer alignment with the EU.
“The UK has made substantial progress on financial services reform over the past few years and most regulatory lawyers will tell you that we have significantly less friction in our regulatory framework compared with most jurisdictions in Europe,” Steven Fine, chief executive of Peel Hunt, told the FT.
“You don’t want to create potential uncertainty just as the City is recovering its mojo.”