ESG tops regulatory demands in finance as UK, EU rules diverge, KPMG says

Financial firms in Britain and the European Union remained under significant pressure to comply with diverging environmental, social and governance (ESG) rules over the past six months, KPMG’s Regulatory Barometer showed on Monday.

The barometer, aimed at helping firms with compliance planning, also tracks the scale of the divergence between UK and EU regulations, with KPMG saying the biggest differences are in areas like customer protection and access to markets.

“As the UK forges ahead with new approaches post-Brexit, and regulators consider their new competitiveness objectives, firms will likely need to adapt to an increasingly different set of requirements in the UK versus Europe,” Kate Dawson, a director at KPMG’s regulatory insight centre, said.

“The volume of emerging requirements for ESG and Sustainable Finance may lead to further divergence despite global standard-setters’ best efforts,” she said.

The first update of KPMG’s biannual measure of upcoming regulatory demands on finance rose slightly to 7, on a scale of 1 to 10, from 6.9 at its launch last October, as sustainability disclosure requirements and related rules on data, ratings, product labels and carbon markets are rolled out or due to be proposed in the EU and Britain.

Tougher resilience requirements come second as regulators apply lessons from the COVID-19 crisis, cyber attacks, glitches at external tech suppliers and the impact of Russia’s invasion of Ukraine on energy markets.

Britain rolls out its new “consumer duty” in July, a landmark toughening up of protections on financial products.

The Edinburgh Reforms, which reopen 43 sets of rules inherited from the EU to help the City of London remain globally competitive post-Brexit, create significant potential for further divergence, KPMG said.

Being aligned with EU rules would be a pre-condition for Britain if it wanted to regain access to the bloc’s financial market. Britain has said it wants to tailor some rules inherited from the EU to better fit into UK markets, while maintaining high international standards.