Brexit – the way forward

Corporate partner Jan Hoppe, considers the impact of Brexit for UK businesses

Written by Jan Hoppe

The Brexit vote in the EU Referendum has sent and continues to send shockwaves through the international business community.  What will the world look like for the UK?  And what will it look like for other EU member states?

The only thing that today can be said with certainty is that the UK’s path ahead is not yet clear.

At the same time, principle changes that were confidently predicted by those arguing in favour of the UK leaving the EU, namely the extraction from EU legislation and bureaucracy and a curb on immigration into the UK, are unlikely to happen at least in the short to medium term future.

To start with, the UK will initially have to abide by a two year term in which it will have to try to agree (subject to the consent of all other 27 EU Member States) the exit process and its future relationship with the EU.   During those two years, the UK will remain a member of the EU.

Further, the implied or explicit promises of the Brexit supporters of an abolition of those commercial and social burdens cannot be easily achieved.  There are thousands of statutory instruments made under section 2.2 of the European Communities Act 1972, which many people assume would simply be allowed to lapse on the repeal of that Act.

The reality, however, is that almost each of those instruments would be required to be maintained for a number of reasons (at least for a certain period of time) and perhaps in modified form.

The first reason for this is simply that, like other jurisdictions seeking to enable manufacturers and service providers to access the single market, the UK would need to maintain much of its current regulatory regime to ensure compliance with EU standards.  Secondly, and in many ways more importantly, the UK has enacted instruments in a whole range of areas (from electrical standards through to environmental assessments) as to which there either is, or would now have to be, parallel domestic policy requiring legislation.

A simple comprehensive revocation of all domestic law linked to the UK’s EU membership is not a realistic prospect.  Instead, the UK government and civil servants would – it is predicted – now have to spend years trawling through every one of the thousands of sections of instruments enacted under the European Communities Act in order to determine what should be removed and/or retained, and what should be modified.  Experts agree, that this would amount to a Herculean legal task for the civil service which would incur significant cost to the British state.

Acts of Parliament that implement EU obligations would need to be re-examined to assess their impact from a non-EU member state perspective.

In summary, therefore, the immediate effect of leaving the EU in terms of substantive de-regulation (and with that a predicted easing of the burden of bureaucracy and red tape for businesses) is likely to be far less than Brexit supporters may have assumed or be hoping for.  At the same time the effect on the statute books in terms of complexity and amount of work to adjust UK legislation to the post-Brexit position is likely to be a significant and costly task.

Although the wholesale removal of a large tranche of regulation will not be the immediate aftermath of leaving the EU, there will nevertheless be a change in the legal landscape and also in the business landscape.

1. Transitional provisions are required.  All legislation which is based on the UK’s EU membership would lose the EU as a legal justification.  As a result, such legislation would in principle become open to challenge and scrutiny.    This is expected to result in an increase in legal challenges and litigation.  Of course, with the possibility of being able to challenge and scrutinise EU legislation, there may also be opportunities that arise for businesses.

The challenge with creating new laws and transitional regulations is that they make the law and the legal status on which UK and foreign companies are carrying out their business activities uncertain, which can have a detrimental impact on business growth.

2. Sector-specific regulation:  The UK financial and insurance industry and the UK service legislation on which it conducts its business is based on EU legislation.  Under the relevant EU legislation which creates so called “passporting rights” for the financial services industry a UK authorised firm has the right to carry on business in another EEA state with or without a branch, provided that it meets the requirements of the single market directive under which the activities will be carried out.  This applies vice versa to EEA member state firms operating in the UK.  These passporting rights would be become uncertain or even fall away in their entirety as a result of the Brexit and will need to be replaced by new equivalent legislation.

A similar risk would also apply to the principle that businesses can freely move within the EU:  At present a UK company can operate in any EU member state through a branch.  This was not the case prior to the “Überseering BV” decision of the ECJ in 2002, when certain EU member states (including Germany and Italy) had adopted their previous policies of requiring any foreign businesses to re-register in a local company form of the relevant jurisdiction in order to be able to carry on business in that country.  Within the EU, this position was abolished by the aforesaid ECJ decision.  As a result of Brexit UK companies currently operating through branches in the EU could in time potentially be required to re-register as a GmbH or similar legal form in Germany and/or other EU countries.

3. Contracting and other obligations: A key question for businesses is whether contracts could be terminated as a result of a Brexit, especially as the changes to the commercial landscape could prompt parties to look for ways of exiting those contracts that are no longer required or profitable.  There is no such automatic right, and any right of termination would depend on the terms of the relevant contract, including any force majeure or material adverse change clauses, and any right to terminate on notice.   Generally, however, it is unlikely that Brexit will result in legal challenges to existing commercial contracts.   The commercial impact that Brexit may have on the economics on which commercial contracts are based, is yet to be assessed.

4. Trade arrangements of the EU with non-EU members:  As well as negotiating a new relationship with the EU, the UK will now be required to put in place new trade arrangements with potentially the rest of the world.   Since the EU has exclusive competence in the area of trade policy, the existing EU trade arrangements (from which the UK has benefitted to date) are entered into by the EU as a “block”, rather than by the individual member states.  Following Brexit taking effect, the UK would not (unless otherwise agreed) continue to participate in the EU “block”, leaving the UK – at least temporarily – without any trade arrangements where there were EU agreements in place.  Any such new arrangements and agreements would require separate negotiation by the UK with the relevant countries.  The UK alone may, however, not have the same negotiating power as the much larger EU market, and both the timing and terms of what future arrangements might be achieved is difficult to predict.

Brexit – What are the options now?

Assuming that the UK will wish to retain its strong trading links with the EU market, then it seems that then there are 3 realistic options.  These are:

1. The UK trades under World Trade Organisation (WTO) Rules

This would be the “fall-back” position, if the UK is unable to conclude a deal with the EU.  Under the WTO Rules, the UK would face import tariffs when exporting to the EU, similar to the position when it exports to the US.  Similarly, the EU would have to pay these tariffs when exporting to the UK.   These tariffs would have a negative impact on trade as the current advantages of free trade with the EU would be removed.  There would be additional bureaucratic burden created as goods would require customs clearance once again.

2. The UK joins the European Economic Area (EEA):

The EEA is based on an agreement between the EU and Norway, Iceland and Liechtenstein which extends the EU single market and free movement of goods, services, people and capital together with laws and areas, such as competition policy, state aid, consumer protection and environmental policy to the non-EU EEA states.

The EEA member states are required to adopt much of the EU law and contribute to the EU budget, but do not have voting power or formal access to the decision-making process.  They do not have representatives in the European Parliament.

Whilst seemingly an attractive option because the UK would no longer be obliged to adopt EU legislation per se, there will still be free movement of goods and people and the latter, it seems, will not address one of the main concerns that the UK currently has with its EU membership, namely the issue of uncontrolled immigration from within the EU.

3. Free trade agreement

A number of countries have stand-alone free trade agreements with the EU.  Agreements most recently concluded have been with Singapore and Canada and various South American countries.  A significant trade agreement will be the Transatlantic Trade and Investment Partnership (TTIP), which the EU is currently negotiating with the US.

The importance to the UK economy of maintaining the ability to export services, and in particular in the financial services sector, may not be easily achieved through free trade agreements which are usually created for the goods trade.  The current trade arrangements with Switzerland, often hailed as a viable option for a UK outside of the EU, is extremely complex.  Switzerland has agreed a vast number of specific bilateral agreements with the EU in areas in which it wanted to access the single market.  There exist now over 120 separate agreements between the EU and Switzerland.  These agreements provide for free movement of goods, but importantly do not cover the free movement of services.  Swiss goods must still meet the EU regulatory requirements and are not assumed to comply with them (as is the case with goods coming from an EU member state).  As a result, whilst Switzerland is not required to adopt EU legislation, it usually copies it, as its laws will need to be equivalent to those of the EU in order to ensure that all its trade agreements function properly.  The complexity of having to put in place such a large number of agreements that continuously need to be updated and amended, has led the EU to conclude that the Swiss model is not viable in the longer term.  The EU therefore intends to replace the existing bi-lateral trade agreements with Switzerland with a framework agreement (along the lines of the EEA agreement) that Switzerland will be required to agree going forward.

It is clear from the above, that it will be difficult for the UK and the EU member states to come up with a “one size fits all” solution to overcome all of the legal issues arising as a result of through Brexit.  It will take a long time and much effort to accomplish trade arrangements that fit both the economic and political interests of the UK and of the remaining EU member states.

Also, as Jean-Claude Junker has recently stated that “deserters” would not be welcomed and based on comments from German finance minister, Dr Wolfgang Schäuble, hinting that access to the single market has its price, the UK can expect a strong and frosty wind blowing from Brussels when it attempts to re-negotiate its relationship with the EU and of course we have yet to see who will be in charge of those negotiations following David Cameron’s decision to step down later this year.

Whist these are undoubtedly uncertain times and challenges that lie ahead, we may also find that new and interesting opportunities arise so watch this space…….

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Jan Hoppe

Gordon Dadds