Overview
Regulatory divergence since Brexit has not been as great as promised. As Professor Anand Menon points out, ‘the bonfire of needless, pettifogging EU rules that would enable the UK economy to flourish’, beloved of Conservative Eurosceptics, was never lit.
The UK began the post-Brexit period by on-shoring most EU law and, since 2021, has gradually diverged from the EU. However, the divergence has been passive rather than active. Passive divergence happens when the EU updates its rules, but the UK does not follow suit. There has been relatively little active divergence, where the UK deliberately changes existing rules or adopts new rules that are different.
The Sunak government’s scrapped plans to remove most EU laws from the UK rulebook. And, in product-related areas such as environment, labour and product safety, the UK has preserved pre-Brexit EU rules. However, passive divergence from new EU rules is creating technical barriers to trade that are growing as new EU rules accumulate.
There are two important exceptions where the UK is actively diverging: Artificial Intelligence (AI) and financial services. We discuss these in more detail below. In addition, the section on environment and climate change discusses divergence.
This section draws heavily, but not exclusively, on UK in a Changing Europe’s report on divergence of February 2026. This is a good source if you would like more detail.
Level playing field
The ‘level playing field’ (LPF) provisions in the EU-UK Trade and Cooperation Agreement (TCA) mean major divergence is unlikely in the key areas of labour, product safety and certain environmental rules. The LPF provisions give the EU the power to impose tariffs on the UK if it lowers, for example, existing levels of employment protections at the time of the TCA.
The non-regression clauses in the TCA apply to both the EU and the UK. Although the TCA does not oblige the UK to adopt new EU laws, it must ensure that significant divergence does not lead to unfair competition. Despite this, passive divergence on employment regulation has been increasing (notably regarding the EU Directive for Platform Work, such as for Uber).
Retained EU Law (REUL) is now treated as ‘Assimilated Law’ and ministers have the authority to amend, repeal or replace it. The government produces an REUL dashboard that tracks these changes. As of 31 December 2025, nearly 40% of 6,925 retained laws had been reformed.
In relation to Northern Ireland, the Windsor Framework incorporates structures to monitor and respond to new EU rules and regulations, but does not eliminate passive divergence. The Framework’s green lane/red lane system also helps reduce frictions because fewer EU rules apply to GB-NI goods movements.
Pro-alignment stance
The Starmer government is increasingly taking a pro-alignment stance both to reduce trade friction and to stop passive divergence growing. As part of Labour’s reset, at the UK-EU summit of May 2025, the government committed to dynamic alignment in the specific areas of electricity market cooperation, carbon pricing, food safety and SPS (Sanitary & Phytosanitary) standards.
This resulted in, on 9 March 2026, the government announcing that 76 UK laws relating to SPS would now align with EU law by mid-2027. This was the first major example of dynamic alignment.
The Product Regulation and Metrology Act of 2025 grants powers to ministers to replicate new EU environmental or safety standards of products being sold or used in the UK. This aims to reduce frictions in cross-border trade where the EU has higher standards than the UK. However, as of February 2026, ministers had not adopted new regulations under the Act.
Despite these developments, it is not yet clear how the government will apply systems and legislative processes to align more widely with evolving EU rules. Although the government encourages voluntary alignment, dynamic alignment (such as that followed by Norway, other EEA members and the Crown Dependencies) requires continuous monitoring of EU rule changes and regular transpositions into UK law and regulation.
There is support within the UK for institutional mechanisms to manage divergence. Business groups and policy bodies (such as, the UK Trade & Business Commission and CHEM Trust) have urged creation of joint UK EU bodies to coordinate regulation. The British Chambers of Commerce are in favour of Mutual Recognition Agreements. The UKTBC recommends a general policy of alignment and a Regulatory Cooperation Council to manage divergence jointly with the EU.
AI, digital, data
The Artificial Intelligence Act is the comprehensive EU regulatory regime for AI. However, the UK has not mirrored it. Instead, the UK has opted for a more flexible, principles-based approach to stimulate innovation. Recognising the compliance burden, the EU has since taken measures to reduce the complexity and weight of its rules.
On data, there has been little divergence. The UK GDPR is similar to the EU original. This is partly in order to retain the EU’s grant of equivalence to the UK.
On online content, the UK and the EU have taken different but similar paths to regulation. The same is true of competition rules for big tech. However, the EU has been more willing than the UK to follow through and intervene with the big tech firms.
An important difference between the EU and UK, is the EU’s greater ambition for digital public infrastructure expressed in its Digital Decade strategy supported by billions of investment. This aims for digital ID and e-government to be rolled out between 2025 and 2030. In the UK, poor government communication triggered a political debate about digital ID which has slowed progress.
Financial services
One important area of divergence was the UK’s decision to give the Prudential Regulation Authority and the Financial Conduct Authority additional goals of delivering growth and enhancing international competitiveness. The UK wishes to achieve a regulatory regime that is different to that of the EU. The government developed a new Financial Services Growth and Competitiveness Strategy.
It is not yet clear how this change in philosophy will play out. Enhanced profitability and growth inevitably involve taking on more risk. On the other hand, for international banks, international consistency reduces complexity and compliance costs.
One example of flexibility is the way in which the UK framework delegates to the regulatory rulebooks of the PRA and the FCA, rather than treating rules as laws, which is the EU approach. This means that the UK regulators have more scope to use judgment in how regulations are applied and to modify them if necessary.
The TCA gives UK institutions minimal financial-services access to the EU. As a result, UK firms rely on local commercial presence to serve EU markets. Despite this, there has not been widescale divergence. In addition, the fundamental components of financial services regulation remain broadly similar for the UK and the EU – both want market stability, sound financial institutions and effective consumer protection.
The financial services sector is complex with differing rules for its sub-sectors: investment banking, retail banking, insurance and asset management. As an indication, some tangible examples of divergence are that the UK
- has delayed implementing Basel 3.1 by a year longer than the EU, in line with the US. The regulation is fundamentally the same as that of the EU, even if the timing is different.
- is reforming MiFID II rules, consulting on new rules for short-selling and transaction reporting
- the UK is developing more proportionate prudential rules for small and growing banks, whereas the EU uses a ‘one-size-fits-all’ approach.
Meanwhile, the EU has an objective of achieving strategic autonomy in relation to financial services. The EU is pursuing Capital Markets Union more vigorously with a focused on minimising differences between member states.
Importantly, a Joint EU-UK Financial Regulatory Forum has been established which provides an opportunity for regular dialogue and has has met four times.