Jeremy Mills-Sheehy and Joe Marshall / Jul 2021
The chancellor’s Mansion House speech confirmed his plans to diverge from the EU on financial services regulation, with Rishi Sunak repeating the familiar government mantra that Brexit has granted the UK the “freedom to do things differently and better”. This optimism largely echoed the recent report from the Iain Duncan Smith-led Taskforce for Innovation Growth and Regulatory Reform (TIGRR), which was established by the prime minister to identify post-Brexit regulatory reforms. Sunak, and TIGRR, are right: Brexit has created opportunities. As our recent Institute for Government report highlighted, the Trade and Co-operation Agreement (TCA) has largely achieved the government’s aim of allowing the UK to regulate as it wishes – even if this means departing from EU rules. But exercising these new freedoms also brings potential risk: to the UK’s post-Brexit aims and the stability of the Union itself.
It’s true – there are benefits from Brexit
Unsurprisingly, the TIGRR report largely focused on Brexit’s opportunities. Outside the EU, the UK can make regulation that betters suits the needs of the UK economy or domestic political preferences, rather than reaching agreement through a process involving 28 (now 27) member states. It may also be possible for the UK to be a quicker, nimbler rule-maker, ready to get a head start in regulating areas of new technology like autonomous vehicles, drones and precision medicine.
Some see Brexit as an opportunity to lighten regulatory requirements, particularly on small businesses, with the TIGRR report suggesting this should include re-introducing the “one in, two out” rule - even though this does little to identify where regulations are no longer required and is likely to invite gaming.
But in reality, securing a Brexit dividend is unlikely to involve a ‘bonfire of regulation’. Most of the post-Brexit opportunities involve changing regulations, rather than tearing up existing ones. And while there may be broad public support for regulatory ‘sovereignty’, reducing standards in areas like food and environmental regulation is deeply unpopular.
But only focusing on the benefits while ignoring the consequences is risky
Although new regulatory powers does offer the UK opportunities, that doesn’t necessarily mean they are always worth pursuing.
Diverging from the EU could also carry costs. It could trigger disputes with the EU that lead to a loss of market access, undermine the UK’s other international obligations, and make British exporters less competitive by requiring those trading with the EU to comply with two sets of regulation, not one.
Departing from EU rules could also create tension with the devolved administrations, which generally want to remain closer to EU rules. For instance, while the UK government is looking to liberalise rules around genetically engineered organisms in England, the Scottish government has made clear it has no plans to follow suit.
Perhaps the most significant consequence the government must consider is the potential for regulatory change to create divergence between Northern Ireland and Great Britain. Under the Northern Ireland Protocol, Northern Ireland must remain aligned with many EU rules, meaning that changes to rules in Great Britain could deepen the Irish Sea border.
These challenges are real – but also manageable
It is not clear, however, that the government has a coherent plan in place to make these trade-offs. The risk is that this leads to siloed thinking across government and that regulatory reforms have unintended consequences that undermine, rather than support, the government’s ambitions.
To address this, it is imperative that ministers do more to ensure coordination across Whitehall – such as issuing clear guidance for departments on how to navigate these new challenges now the UK is outside the EU. And while the government has taken some steps to manage post-Brexit regulatory reform, with a new ‘Brexit opportunities unit’ in the Cabinet Office and plans to revisit the cross-government Better Regulation Framework, it needs to ensure these processes fit together and that any concerns about the costs of diverging from EU rules can be escalated if necessary. Keeping tabs on developments in EU law – including through the UK Mission to the EU – will also be essential as divergence could occur when EU rules change without the UK following suit.
Now that the post-Brexit relationship has been (mostly) settled, focus is shifting towards how the UK will use its newfound freedoms. And while the opportunities are real, the challenges are as well. If the government is serious about taking advantage of this new landscape, it must be upfront about the trade-offs it faces.