The uk-eu relationship in financial services

Regulatory reform and divergence
Having onshored the EU’s regulatory framework for financial services at the 
point of Brexit, the UK’s current rules for financial services are very closely 
aligned with those of the EU. The Committee welcomes the short-term stability 
that this has provided but recognises that it has resulted in a complex and 
unwieldy regulatory framework. To rectify this, the Government is seeking to 
give more powers to financial services regulators. While this may allow for more 
flexible and proportionate regulation, greater powers for the regulators must be 
accompanied by appropriate mechanisms for scrutiny and accountability. The 
Government is also considering introducing an additional ‘competitiveness’ 
objective to the remit of the regulators; this has been the subject of debate and 
the Committee has asked the Government to clarify how this would operate in 
practice.
The Committee welcomes the launching of a number of reviews into the future 
regulation of financial services in the UK. We await the Chancellor’s first annual 
‘State of the City’ report, as recommended in the UK Listings Review, and 
recommend that the first five editions of this annual report include a dedicated 
section on the UK-EU relationship on financial services. More broadly, the 
Committee agrees with its witnesses that divergence between the UK and the 
EU is inevitable and may present the UK with opportunities to innovate and 
tailor the UK’s regulation to its own interests. However, it also stresses that the 
Government needs to weigh up the benefits of divergence against other factors 
including the costs of implementing new rules.
Divergence is also likely as the result of developments in the EU, particularly 
the emphasis placed by the EU on ‘open strategic autonomy’. This focus on 
control and market location is philosophically different to the UK’s approach, 
and we are concerned that it could increase barriers to cross-border trade in 
financial services. The UK has inevitably lost influence in the development 
of future EU rules post-Brexit, but we are concerned that the Government 
appears unwilling to utilise the influence it still has and have asked it to clarify 
its position. This is part of a detectable theme that emerged in other areas of our 
inquiry: that the Government is reluctant to fully engage with the importance 
of the UK-EU relationship, or to acknowledge that developments in the EU still 
have significance for the UK.