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Brexit: legal challenges

What are the implications of a British exit (Brexit) from the EU following the referendum on 23rd June?

A UK referendum vote to Brexit will not have special legal consequences on Day 1 after the result.

However, it is expected to start a chain of events with profound consequences across the board. There is no precedent for this, and hence there can be no certainty in what exit means in practice and on what timescale.

Membership of the EU has been the foundation stone of the legal and economic framework within which the UK operates for 40 years. As a result, removing it will take away very many certainties that have previously been taken for granted. Uncertainty is rarely good for business, and considerable, long-term uncertainty is the only prediction that can reliably be made. Below are just a few examples of key policy areas that will require consideration and stand to change considerably depending on the outcome of the vote, and if it is to “leave”, what that may mean in practice. 

  1. Timescale and procedure for exit Go to section »
  2. New relationship? WTO membership? Go to go to section »
  3. Competition Go to section »
  4. Intellectual property Go to section »
  5. Imports and exports Go to section »
  6. Tax Go to section »
  7. Data protection Go to section »
  8. Product regulation Go to section »
  9. Employment Go to section »
  10. Immigration Go to section »
  11. Financial services Go to section »
  12. Real Estate Go to section »

Timescale and procedure for exit  

It is anticipated that a vote to Brexit will lead the UK government to serve notice, under Article 50 of the Treaty on the Functioning of the European Union (TFEU), to leave the EU. This has not been invoked before but what it means, according to the TFEU, is a two year process is then triggered, in which the outgoing Member State (the UK) must negotiate the terms of its exit with the EU Council (as a representation of the other 27 Member States) and try to reach agreement on how exit will be managed and what the future relationship will be. Such agreement is to be secured by qualified majority within the EU Council, in default of which the UK would cease to be a Member at the end of the two year period following the issuance of the notice (or the two year negotiation period could be extended if all Member States would unanimously agree).

New relationship? WTO membership?

At the end of the negotiations (or the two years) the TFEU would cease to apply to the UK and the UK’s new relationship with the EU would either be contained in the negotiated withdrawal agreement (it is to be assumed), or be subject to a new vacuum (the disorderly exit scenario). In parallel the UK would be expected to revert to individual membership of the World Trade Organisation (WTO), the successor of GATT, which would require certain commitments but would also seek to secure certain minimum standards for the UK’s relationship, not just with the rest of the EU (as a WTO member bloc) but also other countries too. To date, the UK’s trade relationship with the rest of the world (the other WTO members) has operated through the EU’s WTO membership.

Other European countries, such as Switzerland and Norway, have their own relationships with the EU (eg. EFTA, EEA) which have been negotiated over years and these offer example frameworks of what might in theory be achieved. These frameworks provide certain pillars of EU membership such as the free movement of goods to extend, but they require many conditions to be acknowledged, such as respect for competition rules and other regulatory controls, whilst not affording the “seat at the table” to those countries to negotiate the same.

Competition

UK laws are already closely modelled on the EU law prohibitions designed to protect competition and the level playing field and there is much similarity in how competition law is set and enforced in the most developed economies worldwide. The UK authorities, in particular the Competition and Markets Authority (CMA), would have a greater responsibility, including for merger control, but the thrust of the rules would probably not change much. Large UK businesses with international reach would still be subject to EU control however, in so far as their activities had effects in the remaining territories of the EU, but this would need to be run more in parallel with dealing with the CMA as UK merger control would not longer be disapplied whenever a merger qualified for EU notification.

One area to change more would be the application of State aid, which currently is not within the competencies of national competition authorities. Depending on the new relationship to emerge, this could either become the subject of continued surveillance by the European Commission (as with frameworks such as EFTA) or a new competence of the CMA. Since the UK was an original pioneer within the EU for improved regulation in this area it is difficult to see this not being the subject of at least equally tight regulation in the UK after exit. Unfettered subsidisation in the UK is likely to be met with trade sanctions by other countries on affected goods for export. 

Intellectual property

The harmonisation of IP rights across the EU has attracted its supporters as well as detractors. “Fortress Europe” has certainly assisted brand owners in policing their marks and taking closer control over the trade in parallel imports into the EU. Likewise the availability of European wide protection for registered trademarks and registered designs also has its advantages particularly for the larger companies who trade and have important brands to support and enforce across the EU.

Brexit would certainly present challenges for IP owners. What would happen to EU wide registered rights which already exist? Would EU–wide rights no longer apply in the UK, which would have enforcement implications, as well as cost implications if separate registrations were required for the UK. On the other hand, Brexit could well be welcomed by the many who are concerned about the viability of the new Unified European patent system and all that it entails with the establishment of the Unified Patent Courts in London, Paris and Munich. Many commentators feel that the Unified Patent is just a step too far in the harmonisation life-cycle, given in particular, the implications for those seeking to enforce their new European Unitary Patents and those facing enforcement proceedings being brought against them outside of the UK, and the imbalance this heightens between the financial resources of big business and smaller entities. One thing is certain, Brexit will herald uncertainty for IP owners in multiple sectors of the business community.

Imports and exports

Exit from the EU would be the end of the UK’s membership of the EU Customs Union and common VAT rules. While it is likely that the UK would keep under domestic law a value added tax, cross-border trade would be complicated, with implications on importers and exporters, financial services providers operating between jurisdictions, and those who provide or have accessed cross-border funding.

The UK would need to agree a new customs union arrangement with the EU (as with Norway for example) and the rest of the world. UK-manufactured goods have non-tariff access throughout the EU and this could no longer be taken for granted but would be subject to negotiation. Similarly the UK could put up its own import tariffs against imported goods but the notion of free trade (which the UK has long espoused) runs against this. The UK would also be able to invoke its own trade defence proceedings, to protect the UK market from (for example) unfairly dumped or subsidised imports from other countries, but would face the same prospects against their own exports. To date, all such issues have been dealt with by the EU on behalf of all Member States including the UK, and the EU has been one member of the WTO on behalf of all its constituents.

Tax

A host of corporate tax measures currently taken for granted would be up for reconsideration, potentially affecting British banks doing business in Europe, and all other businesses in working out their international corporate structures to best (tax) effects. Outside the EU, the UK will be unable to effectively influence the development of EU tax measures that may harm the City of London, such as the Financial Transactions Tax. Additionally, preferential tax treatments offered by the UK (from the ‘patent box’ for companies to the special status of resident non-domiciled people) and by the UK’s network of offshore jurisdictions under Crown control are more likely to be subject to countermeasures from EU countries (although the proposals of the Commission and EU Parliamentary tax working groups indicate this action may be on the table whether the UK leaves the EU or not). Reciprocal arrangements relating to income taxation of individuals and national insurance/social security contributions for mobile workers who work across jurisdictions, which currently apply by virtue of the freedom of movement of individuals within the EU, would also potentially cease to apply unless separately renegotiated, complicating inter-country secondment of employees for example.

Data protection

Trade will still need to be conducted with the rest of the EU, and the transfer of personal data will be key. In the event of Brexit, the UK would probably negotiate with the Commission to be treated in a similar way to countries such as Switzerland (that are deemed to have adequate privacy laws). Until such time, companies will need to consider putting in place alternative methods for data transfer. An exit has the advantage of the UK being able to implement a more business friendly regime governing the use of personal data than is envisaged under the forthcoming data protection regulations. However, the loss of the single playing field across Europe could mean that companies become subject to two sets of sanctions in the event of a breach.

Product regulation

Exports of goods from the UK to the EU are estimated to account for close to 50% of those produced in the UK. All products are regulated to a greater or lesser degree by EU legislation. The UK remains one of the most influential countries in formulating EU regulation with many of our national measures being used as a template for EU Regulations. If the UK were to leave the EU, products would still need to meet these regulatory requirements in order to export. However, the UK would no longer exert any influence over the content of these regulations. Although the UK legislation would not immediately change in many areas, there is likely to be a divergence over time, potentially leading to a tier system of regulation, i.e. one for UK-only markets and another for EU exports. In the meantime, the UK would have to negotiate mutual recognition agreements in a number of areas. If the UK remained in the EEA, the regulatory framework for consumer products would not change substantially. If TTIP is ratified it remains unclear if the UK would still benefit from its terms or whether a separate agreement would need to be negotiated.

Employment

European laws on social policy have had a significant influence over UK employment law. EU-derived laws such as discrimination rights, holiday and working time entitlement, agency, part time and fixed term workers, parental leave, maternity and paternity etc. would be up for reconsideration. Whether the UK would seek to remove such rights is unclear and would likely depend on the political will of the government in force, and while more conservative governments might dismantle some of the more unpopular labour protection laws put in place by the EU (in the name of the same being damaging to business and investment), a labour government might be expected to adopt greater protections again. In conclusion, UK employment law may not change much, at least in the short term. Changes may be made over time in a more measured way through changes to legislation or new legislation and through case law.

Immigration

One of the big issues of the debate is control of borders and whilst the UK already controls its own borders (as it is outside the EU Schengen area) it is subject to the free movement of persons between EU nationals. The rights of EU citizens to move, reside and work freely anywhere within the EU/EEA is enshrined in EU legislation and is also at the centre of the debate about the UK’s continued membership. The principle of free movement is also highly politicised and often confused with the issue of refugees and asylum seekers. The impact of exit will depend on the future relationship with the EU/EEA and, in particular, whether the UK wishes to retain the present right of its citizens to freedom of movement in the same way as the EEA states and Switzerland which are within the “border-free” Schengen Area. There are many EU nationals living and working in the UK and availing of free movement but there are estimated to be as many UK nationals doing the same elsewhere in the EU and their continued residence on the continent would be under threat.

If the UK were to make a clean break then it would be free to control immigration from within the EU/EEA by imposing the same visa rules currently applicable to non-EU/EEA migrants, requiring EU nationals to obtain a visa as a visitor, worker, student, investor, entrepreneur or family member of a visa–holder or someone already settled here. The UK could also follow its existing policy of applying quotas to the number of work visas issued and imposing minimum income thresholds which would have the combined effect of limiting the number of migrants from the EU/EEA and admitting only those with jobs on higher incomes. However, such tight controls on people coming in, would normally result in it becoming similarly difficult for UK nationals to leave, which might prove and important influencing factor.

The UK operates its own border controls and is not part of the Schengen border-free area. It can opt in or out of EU laws on border controls, asylum and non-EU immigration. It is a matter of great debate what the impact of an exit would be on the number of refugees and asylum seekers seeking entry to the UK as well as on national security.

Financial Services 

The development of a pan-EU financial services system, with a common regulatory platform has been one of the undoubted successes of the EU. That system was born of the Lamfalussy review in the mid-1980s, starting from scratch to develop the system rather than seeking to achieve it through compromise amongst a number of systems. While CRD IV, MiFID and AIFMD are clearly EU imposed laws, they largely represent good practical legislation capable of application across a number of jurisdictions. While a Brexit would represent the ability for the UK to decline any future financial services legislation, the interaction of markets and the need for free movement of capital against a common set of rules, would most likely represent the UK continuing within the system on a voluntary basis by separate treaty. Brexit is generally felt not likely to have a significant impact on the regulation of financial markets, albeit those markets would no doubt react to the economic consequences flowing from Brexit.

Real Estate

Real estate and property law is one of the few areas to remain relatively unaffected by EU law, so the consequences of exit would seem to be minimal. The impact of Brexit on financial markets and investment conditions would therefore seem to be the more likely area in which effects on real estate markets will arise. The pre-eminence of the London property market is at least partly linked to the success of the City of London financial markets and therefore Brexit impacts on the latter (particularly if compounded by falls in Sterling value) are the more likely consequences for real estate. 

Concluding thoughts

The only thing that is clear in terms of overall Brexit impact is that its long term impacts especially are very unclear. This is precisely what will be argued about intensely throughout the campaigns leading up to the referendum. What the UK’s new relationship with the EU would look like (and indeed its relationships with the rest of the world) will depend not just on what the UK wants them to be but what the other parties are willing to negotiate too. 

Find out more

Find out more about the agreement reached by the 28 EU Member States at the summit on “European Council Conclusions 18/19 February 2016.  Visit the European Commission's Website »

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Public RM Magazine

Jonathan Branton published an article in the Summer 2016 Edition of Public RM, the Journal of Alarm.  To access the article, you will need to be member of Alarm.

You can find Jonathan's article on pages 27-29.  

Access the online version of the Journal here »

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Jonathan Branton

Partner - Head of EU/Competition

I lead the firm in EU/Competition issues, specialising in behavioural antitrust, merger control, public procurement and State aid, and all related issues of public funding, including the UK’s Regional Growth Fund, ERDF and ESIF. I also head up the firm’s Brussels office and the firm’s cross-discipline Central and Local Government sector group.

Brona Heenan

Director

I am a highly experienced EU competition and procurement lawyer with extensive experience in representing leading US, Japanese and European clients across a broad range of industries, including media, telecommunications, energy and biotechnology.