Reality check for UK’s Brexit ambitions amid complaints of red tape and rigid regulators

When the UK “took back control” after withdrawing from the EU three years ago, it hoped to see a “Brexit dividend” by adopting more agile and business-friendly rules.

Increasingly, though, businesses are saying the opposite and complaining of a lack of regulatory focus, burdensome red tape and frustratingly rigid regulators that make them consider their future in Britain.

Business secretary Kemi Badenoch banged the drum again last week, promising that the UK would continue to “take advantage of post-Brexit freedom” and push for “smarter regulation.”

But despite the rhetoric and the controversial political push to give some regulators a statutory duty to promote innovation, the government faces increasing criticism from businesses worried that the UK is losing its attraction as a place to invest and grow their business. What went wrong?

Tech listings

In one high-profile case, British microchip designer Arm decided in March to list its shares in New York only, despite political lobbying of successive prime ministers and a wide-ranging 2021 review of listings rules in the UK that aimed to attract more companies to London.

Listings in the UK have been declining for a while — they are down by 40 percent since 2008 — but Arm was reportedly put off by a regulatory obligation to report “related-party transactions,” which would require it to gain shareholders' approval for significant transactions.

In early May, the Financial Conduct Authority announced it would remove that obligation — but too late for Arm. The FCA’s chair, Nikhil Rathi, has declined to take all the blame for the drop in shares listings, arguing a firm’s decision to list is not solely down to regulation, but wider factors such as availability of capital and taxation.

Arm executives pointed the finger at onerous regulation, though, so companies will likely want that remedied before they consider such wider issues. That may be of interest to the FCA, too: It has called for an “open discussion” about changes to the regulatory framework to rebalance policy in favor of taking more risk, which could lead to more UK investment, although potentially greater losses.

Investment and regulation

Arm’s high-profile decision fits a theme of businesses migrating to the US, made even more pronounced by President Joe Biden's Inflation Reduction Act, which will incentivize American-made products.

Jonathan Hill, who led the UK’s 2021 listings review and is a former European Commissioner, said the $369 billion US package acts as a “dirty great Hoover on full suction mode”.

In stark contrast, the UK remains one of only a few countries without a consolidated industrial strategy. Last week, manufacturing lobby Make UK urged the government to urgently draft one to compete with green investment plans in the US and the EU.

Instead, they said, the UK offers a “haphazard” and “ad hoc” approach to regulation, with “regular cycles of new policy announcements that are often linked to political cycles, prematurely changed, or rolled back.”

It results in a mix of confusing policy announcements, highlighted by the dropping of a controversial commitment to phase out all EU-inherited laws by the arbitrary deadline of the end of this year.

But Make UK scoffed that it "has shown that it is not clear what is driving the desire for change in the UK's regulatory environment, beyond a desire to do something different."

Fintech

Even areas where the UK has long touted itself as a leading global hub are now being affected.

Take fintech. Total investment in the sector is second only to the US and more than the next 10 European countries combined. This success was largely possible due to UK regulators creating an environment that allowed innovation to flourish, such as the FCA’s pioneering sandbox model, which gave startups access to data to develop new products and services while also remaining compliant with regulations. It has been copied all over the world.

Open banking — another groundbreaking regulatory concept credited to the UK — allowed customers to share their financial data with authorized third parties, spurring untold opportunities for innovative fintech.

Recently, however, the tide of opinion appears to be turning. The UK saw investment in fintech fall by nearly 60 percent in 2022, while other countries such as France and Sweden saw more funds coming in, despite economic headwinds.

This time, the regulators are in the firing line. At the end of last year, a group of fintech players, including Monzo and Wise, wrote to the FCA complaining specifically about its open banking strategy. While open banking at one time made the UK the “envy of the world,” they said that the committee of three regulators in charge, including the FCA and the Competition and Markets Authority, had been unclear and vague about their directions and guidelines.

Revolut, one of the government’s most frequently lauded fintech companies, also gave a withering assessment of its experience with the FCA and the Prudential Regulation Authority. In a media interview in early May, chief executive Nik Storonsky complained that the process to obtain a banking license had been “long and tiring” with unclear rules and unexplained delays: “You wait for e-mails or letters for months. This is not the business environment to operate in the modern world,” he complained.

Cryptoassets and banks

The FCA also attracted the ire of hundreds of cryptoasset firms that failed to pass its money-laundering checks, which are required for them to operate in the UK. Only 41 firms got the go-ahead, representing a failure rate of around 85 percent.

Sector association CryptoUK said that the FCA should work with firms to enable them to complete the process, rather than asking them to withdraw “on the basis of minor and easily corrected points”.

But it’s undeniable that the government and the regulators are increasingly at odds with each other when it comes to handling fintech companies, a disconnect apparent in the rapid U-turn over Silicon Valley Bank’s UK operations.

The Bank of England appeared to be prepared to put SVB UK through an insolvency procedure, after it was clear that it wouldn't withstand the collapse of its US parent, risking the viability of the roughly 3,000 tech and startups which banked with it. But intervention by Finance Minister Jeremy Hunt, on the back of sustained lobbying, led to a frenzy of work culminating with HSBC rescuing the doomed bank at the eleventh hour.

Tech regulation

In tech regulation, the UK government’s flagship proposal to "make Britain the safest place in the world to go online" via its wide-ranging Online Safety Bill has also attracted stark criticism.

The proposed legislation aims to require online platforms to tackle harmful online content with fines up to 18 million pounds ($22 million) or 10 percent of their global annual revenue for platforms that don't comply with the rules.

But over the years, the bill has become bloated to the extent it was called a “lawyers’ paradise,” with the lawmakers scrutinizing it openly admitting they do not fully understand its provisions.

A group of encrypted messaging services including Signal and Meta Platforms’ WhatsApp warned of privacy risks to users as communications regulator Ofcom would be able to instruct companies to scan messages on encrypted apps to detect child sexual abuse or terrorist content.

They said the bill could "break end-to-end encryption, opening the door to routine, general and indiscriminate surveillance of personal messages".

Signal President Meredith Whittaker told MLex the company "would absolutely choose to cease operating in a given region if the alternative meant undermining our privacy commitments to those who rely on us."

Legislative delays and competition

At the same time, the UK’s plans to regulate other tech areas have been hit by lengthy holdups, with much-awaited data protection reform recently prepared to roll over to the next parliamentary session, and a digital markets competition bill only introduced almost a year after its first mention.

In future mobility, homegrown leaders such as Wayve repeatedly warned that the UK risks a brain drain of top companies due to its slow development of a regulatory framework for automated vehicles (see here and here), but the transport bill designed to do this still awaits a gap in the government’s legislative program.

In a particularly headline-grabbing moment, the CMA’s recent decision to block Microsoft’s $68 billion bid to buy Activision Blizzard prompted Microsoft president Brad Smith to complain about the “darkest day in our four decades in Britain.” He told the BBC: “There’s a clear message here: The European Union is a more attractive place to start a business if you want some day to sell it.

It's hardly the narrative the UK wanted after Brexit.

To reverse its fortunes and have a shot at reaping its wished-for "Brexit dividend," the Conservative government needs a dose of realism and urgently examine its legislative and regulatory priorities for the limited time it has left before the next parliamentary election.

Punishing recent local elections have bolstered an expectation that the opposition Labour party will take the reins of power in a general election next year, so pressure is heightened and some uncertainty is unavoidable.

But uncertainty can at least be limited. And if the current government can build business confidence back up to some degree, it may give them a fighting chance at the polls, too.