The Divergence of UK and EU Financial Regulations Post-Brexit: A Focus on Key Areas

In this article we identify, examine, and summarize the key differences between the UK and EU legal systems in regards to regulations affecting financial services: UK PRIIPs, UK MiFID, UK MiFIR, UK Consumer Duty, and MiCA (Markets in Crypto-Assets) regulation. Understanding these changes is crucial for international firms navigating cross-border compliance, as they must now manage both EU and UK-specific rules, leading to additional compliance, administrative duties, and complexities.

Prior to Brexit, the harmonization of rules within the EU allowed firms operating in the UK to rely on passporting rights to access the broader EU market without the need for further regulatory approval. Since the UK left the EU, however, passporting rights are no longer applicable, and firms must now seek regulatory approval in both jurisdictions. Compliance with separate legal frameworks in the UK and EU creates several challenges:

• increased compliance costs: firms must now allocate resources to comply with two sets of regulations, often requiring duplicate reporting, documentation, and legal advice.
• regulatory uncertainty: the regulatory landscape is still evolving in the UK, and firms must keep up with new rules and changes. While some UK regulations mirror their EU counterparts, others have begun to diverge, increasing complexity.
• operational complexity: operating within two regulatory regimes requires implementation of systems and processes that cater to both, complicating operations and increasing the margin for error and risks related to non-compliance. Among others, the firms’ business processes related to investor protection, regulatory reporting, and tax require different sets of data.

The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation was initially implemented across the EU to enhance consumer protection by requiring manufacturers and sellers of PRIIPs to produce a Key Information Document (KID). This document outlines the product's characteristics, risks, costs, and potential returns in a standardized format, enabling for retail investors’ understanding and comparison of different investment products.

Post-Brexit, the UK retained the PRIIPs regime but amended certain aspects of it to better align with domestic market needs. One such change includes greater flexibility in the production of KIDs. The UK Financial Conduct Authority (FCA), in fact:

• removes the requirement for PRIIPs manufacturers to display performance scenarios in the KID and instead requires PRIIPs manufacturers to describe, in narrative form, the factors likely to affect future performance;
• requires firms to adjust the ‘Summary Risk Indicator’ included within the KID, when it delivers lower risk ratings than expected, if the PRIIPs’ underlying or reference asset is illiquid (FCA Policy Statement 22/2); and
• addresses concerns about certain transaction costs calculation methodology.

FCA also refined the applicability of UK PRIIPs to specific asset classes and features, through a different treatment of bonds with a “Make Whole Call Provision,” and “grandfathering” for instruments issued prior to 1 January 2018.

In contrast, the EU doubled down on its standardized approach. The EU PRIIPs Regulation maintains stricter rules on how risks and potential returns should be displayed, ensuring consistency at the cost of flexibility. This divergence increases administrative burden by requiring firms operating in both jurisdictions to identify products subject to both regimes and prepare different KIDs for UK and EU clients.

Additionally, the gap between the UK and the EU is poised to grow wider; the UK Government and the FCA plan to reform UK retail disclosure rules and have temporarily exempted certain investment trusts from assimilated EU law requirements. The new rules focus on the definition of Consumer Composite Investments (CCIs), delivering more tailored and flexible rules to address concerns across industry about current disclosure requirements – including costs.

The Markets in Financial Instruments Directive II (MiFID II) is another significant EU piece of legislation aimed at improving transparency and consumer protection in financial markets. Since Brexit, the UK maintained much of MiFID II’s framework through what is now known as UK MiFID. However, the UK began diverging from the EU’s MiFID II requirements in specific areas.

Changes focus mainly on best execution reporting (so called RTS reports 27 and 28), which the UK abrogated in 2021 and the EU “deprioritized” more recently from the national competent authorities’ (NCAs) agenda.

The UK also relaxed research unbundling, a key feature of MiFID II that requires firms to separate payments for investment research and trade execution services. From August 2024 on UK firms may use bundled payments for third-party research and trading commissions, subject to certain satisfied requirements. Similarly The EU Listing Act, adopted by the EU Council in October 2024, allows investment firms to bundle payments for execution services and research, subject to certain conflict of interest and transparency disclosures.

Pre-Brexit, the UK legal system established financial products categories and regimes in the area of investor protection, which are not mirrored by similar categories in the EU. A certain financial product falling within the scope of these definitions triggers the applicability of additional requirements, e.g. specific warnings or enhanced disclosures. An example is structured capital-at-risk products (SCARPs,)a type of investment product with a return linked to the performance of underlying assets, but with a risk of investors’ partial or total capital loss.

The Markets in Financial Instruments Regulation (MiFIR) operates alongside the MiFID II and focuses on enhancing transparency in financial markets by imposing reporting obligations on firms’ trading activities. The UK retained core principles of MiFIR but diverges in transparency requirements.

Under UK MiFIR, the FCA proposed changes to the double volume cap (DVC) mechanism, which limits the amount of trading that can occur in dark pools (private trading venues with limited pre-trade transparency.) In August 2023 the UK removed the DVC on the principle that it could stifle liquidity. The EU MiFIR framework, however, is transitioning towards a single volume cap mechanism, maintaining its strategy to prevent excessive trading in non-transparent venues.

To increase the competitiveness of UK markets, the UK introduced reforms to post-trade transparency requirements and waivers to pre-trade transparency (FCA Policy Statement 23/4) by tailoring transparency rules to domestic market needs and adapting reporting workflows – both in terms of content and when trades are reported.More recently, the UK established a simpler and more timely post-trade transparency regime based on fewer deferrals for bonds and certain over-the-counter (‘OTC’) derivatives (FCA Policy Statement 24/14).

It is important to keep in mind that the transparency regime in MiFIR revolves around the definition of instruments ‘traded on a trading venue’ (‘ToTV’.) After the UK left the EU, the scope of ToTV instruments only includes instruments traded on UK trading venues. This change adds complexity to the determination of the scope of the obligation, and the risk of over- or under- reporting.

The UK Consumer Duty introduced shifts in the governance around treatment of retail clients. It imposed a new, higher standard of care on financial services firms, requiring them to act in the best interests of their customers at all times and deliver good outcomes. The Consumer Duty covers various aspects of firms’ conduct, including product design, marketing, customer support, and complaints handling.

The EU has its own regulations aimed at consumer protection, such as MiFID II and PRIIPs (retained by the UK with some divergences,) but the UK Consumer Duty represents a more proactive approach. It shifts the regulatory focus from merely ensuring compliance with specific rules to a broader requirement that firms’ actions always benefit consumers. Notably, the UK Consumer Duty requires that firms:

• make it as easy to switch or cancel products, as it was to take them out;
• provide helpful and accessible customer support;
• provide timely, clear, and attainable information about products and services, so that consumers can make good financial decisions;
• provide products and services that are right for their customers; and
• focus on the real and diverse needs of customers, including those in vulnerable circumstances.

On a similar note, in May 2023 the EU Commission rolled out the new EU Retail Investment Strategy that aims at tackling certain retail investors' pain points regarding the access to comparable and easily understandable information on investment products, the exposure to new marketing channels, the phenomenon of “finfluencers” and the “value for money” of certain investments.

Firms operating in both the UK and the EU must be mindful of these differing regulatory expectations, as the UK’s Consumer Duty places a greater emphasis on customer outcomes rather than strict adherence to specific rules.

Adherence to the new rules forces market players to adapt their business processes, which requires the ingestion of an ever-expanding amount of data to comply with the new legal requirements.

To collect data on UK Consumer Duty, the Financial Data Exchange (FinDatEx) developed new versions of its template – EMT (European MiFID Template) – for the exchange of information on financial instruments between issuers and investment firms. This includes additional data fields covering ex-ante and ex-post transaction costs (using the UK calculation methodology) and fields providing information on UK “value for money.” This is a useful tool in facilitating compliance of investment firms with the different legal regimes .

The UK and EU have significant differences in their respective regulation of digital assets. In June 2023, the EU adopted the Markets in Crypto-Assets (MiCA) Regulation to provide a comprehensive regulatory framework for crypto-assets. MiCA regulates cryptocurrencies like stablecoins and utility tokens, notably excluding security tokens, which are left to other regimes, including MiFID II. MiCA levies a broad scope of regulations for crypto-assets, including issuance, admission to trading and public offering, provision of investment services, licensing of service providers, and investor protection and market abuse.

The UK’s approach is more cautious and piecemeal. In October 2023, HM Treasury announced legislative activity on fiat-backed stablecoins, initially focusing on their issuance and custody (subject to regulatory authorization requirements under FSMA) and the provision of payment services in relation to fiat-backed stablecoins by firms in the UK (to be brought within scope of the Payment Services Regulations 2017 - PSRs). Separately, the UK will regulate other categories of crypto-assets and issue rules to combat and minimize market abuse.

As for other areas of financial regulations, digital assets regimes are going to diverge between the EU and the UK, forcing international investment firms offering crypto-asset services to adhere to multiple regimes. As a result, market players will require an increasing variety of data to ensure the correct classification and treatment of the crypto-assets marketed to their clients and compliance with the diversified investor protection rules applicable in the different jurisdictions.

The UK’s departure from the EU led to a gradual and growing divergence in financial regulations. While the UK has retained many of the EU’s regulations, it increasingly seeks to tailor its rules to its domestic market. For international banks and investment firms, this means navigating two distinct regulatory systems, increasing compliance costs and operational complexity.

Firms must stay vigilant and flexible in response to the evolving requirements of PRIIPs, MiFID, and the regulation of digital assets. While the UK and EU share many objectives – like protecting investors and maintaining market transparency – the specific rules and requirements increasingly diverge, creating new challenges for firms operating across both jurisdictions . The divergences will require international firms to reevaluate the data that feeds their internal processes, ensuring it is fit for purpose while complying with different regimes. Reliable data feed and regulatory data expert support will be key to comprehensive compliance in this volatile and complex regulatory environment.