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DWF Brexit Hub

The legal challenges and what happens next?

The UK voted on 23 June to leave the European Union. This is a hugely significant decision likely to have profound economic, political and legal consequences in due course.

Membership of the EU has been the foundation stone of the legal and economic framework within which the UK operates for 40 years.  Dismantling it and replacing it with a complete new legal order and set of world trading relationships for the UK will take a long time and how precisely to do this, and what will the new rules look like, will depend on any number of key political decisions yet to be taken.  Indeed, the new rules will depend not just on the UK Government but also the rest of the EU and other trading partners worldwide.  It is too soon to predict the detail of how this will turn out. 

Click on the headings below to read about the key legal challenges:

Article 50 EU Treaty » Capital markets » Competition law »
Data protection » Employment & immigration »    Environment & climate change »      
EU funding programmes »       EU Law: general application »        Financial services »
Health & safety » Imports & exports » Industry»
Intellectual property »

International trade »

Mergers & acquisitions »
Northern Ireland » Product regulation » Public procurement »

Real estate & housing »

Scotland » State aid »

Tax »

 

Trading relationships: 

Norwegian or Swiss options »

Trading relationships: 

WTO option »

Article 50 EU Treaty and immediate legal consequences

The vote to leave has no immidiate legal consequences as it is technically an advisory vote in an EU Member State.  However, it has huge political implications, and moves towards formal exit must now be expected, albeit with major questions as to timetable.  There is no precedent for this in the modern EU and there can be no certainty about what exit will deliver as an alternative nor on what timescale.  

In order to leave the EU the UK government must serve notice under Article 50 EU Treaty.  A two-year process is then triggered, in which the UK will seek to negotiate the terms of its exit with the EU Council and reach agreement on the terms of the future relationship. Such agreement is secured by qualified majority within the EU Council, in default of which the UK would simply cease to be a Member at the end of the two-year period following issuance of the notice.  The two years could be extended if all Member States agreed unanimously. 

EU law and all Treaty commitments between the UK and the EU and vice versa are binding until such time as formal exit occurs, which will either be at the end of 2 years following the giving of Article 50 notice, or another date mutually agreed by the UK Government and the EU.  This means EU remains in force and the UK Courts remain bound to enforce it, as do the EU institutions in respect of UK matters.

It remains to be seen when the UK Government will serve notice under Article 50.  Current expectations are that this will not be before Autumn 2016 at which time a new Prime Minister is expected to be in power.  The date of serving Article 50 notice to kick-start the formal exit timetable will no doubt be the subject of much political wrangling in the immediate weeks and months to come.  

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Capital markets and mergers and acquisitions

During the negotiations to exit the EU it is likely that the financial markets will remain volatile and there will be greater pricing uncertainty, which in turn is likely to result in an overall reduction in the level of mergers and acquisitions.

In particular, Investors will face greater challenges in assessing the future financial performance of targets and investee companies, including the tax and trade duty implications of Brexit.  This is likely to result in lower valuations and/or deal structures which contain a significant element of deferred consideration linked to future financial performance.

During this period transaction documents will also need to contain specific “future proofing” for Brexit related provisions. For example, warranties referring to specific EU legislation should cover equivalent new UK provisions and TUPE provisions in  business and asset transactions (which stem from an EU Directive) will also need to be addressed by new UK provisions.

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Competition law

Uniform respect for Competition Law is a fundamental pillar of the EU and all EU Member States must subscribe to the European Commission’s enforcement thereof for pan-European issues, and must enforce EU Competition Law themselves and domestic variants thereof in their home markets.  The UK therefore has the Competition Act 1998 for example which mirrors on a domestic basis the provisions of Articles 101 and 102 EU Treaty. 

Thus there is a UK Competition Law already in place that need not change much in substance on EU exit.  However, UK authorities like the Competition and Markets Authority (CMA), would have a greater responsibility for enforcement, especially in areas such as large-scale mergers.  For example, large scale mergers currently subject to mandatory EU clearance would no longer be exempt from the need to seek UK clearance as well, so would now need to pass through the two regimes in parallel thus creating an additional regulatory hurdle.

Otherwise, UK businesses with international reach across the EU would still be subject to EU control when their activities have effects in the EU.  However, this would often need to be run in parallel with dealing with the CMA.  The CMA for its part would be expected to seek to maintain close relations and cooperation with DG COMP, the department of the European Commission responsible for EU Competition Law enforcement. More »

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Data protection

Trade will still need to be conducted with the rest of the EU - this will mean that the transfer of personal data will be critical.  The UK may negotiate with the EU to be treated in a similar way to countries such as Switzerland (deemed to have adequate privacy laws) but until then, companies may need to consider alternative methods for data transfer.  An exit has the possible advantage of the UK being able to implement for itself a more business-friendly regime for personal data but when operating internationally companies will likely become subject to dual regimes. 

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Employment and immigration

EU-derived laws such as discrimination rights, TUPE, holiday and working time, agency workers, parental leave, maternity and paternity etc. could be under scrutiny.  The reality is that the vast majority of existing laws originating from the EU will remain unchanged for some years to come.  Although there has been a great deal of speculation around the ultimate destiny of EU-derived employment law it is likely that the government will take a measured approach.  Given this legislation is firmly enshrined in our domestic legislation there is little likelihood of significant reversal of the core principles. Although there is no indication at this stage, the timetable for legislation already planned, such as gender pay reporting, may be affected by the changes in government. 

The rights of EU citizens to move, reside and work freely within the EU and the European Economic Area (EEA) is enshrined in EU legislation. The impact of exit will depend on theUK’s future relationship with the EU and, in particular, whether the UK wishes to retain the present right of its citizens to freedom of movement in the same way as EEA states. The EEA includes EU countries, plus Iceland, Liechtenstein and Norway. Switzerland is neither an EU nor EEA member but is part of the European single market, which means Swiss nationals have the same rights to live and work in the UK as other EEA nationals. However Switzerland, unlike the UK, is within the border-free Schengen area. EU nationals from other countries live and work in the UK but there are estimated to be as many UK nationals living elsewhere in the EU. This reciprocal freedom would be under threat in the event of an exit.

If the UK leaves, 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. The UK could also follow its existing policy of applying quotas to work visas and imposing minimum income thresholds.  This could both limit the number of migrants from the EU/EEA and admit only those with jobs on higher incomes. Depending on negotiations of the new relationship, and any future government’s attitude to EU nationals already living and working in the UK, this could affect the rights of would-be workers from the EU seeking to carry out lower paid jobs in the UK. This could impact social care and health sectors in particular. More »

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Environment and climate change

The EU has been central in driving environmental law and setting standards on pollution, recycling and emissions.  It has long been clear that following environmental policies in isolation from the international community will not solve environmental issues on a larger scale, so the UK would need to participate in international treaties and commitments on the environment in future, rather than via EU delegations.  

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EU funding programmes

If outside the EU, the UK would cease to benefit from the EU funding programmes such as the European Structural and Investment Fund (providing public funds to statistically poorer regions) and other EU funds for R&D and the arts, for example.  However the UK would be free, as it is now (within State aid law) to make funds available to such regions and other policy objectives via other routes by way of replacement.  Indeed, some “vote to leave” campaigners have pledged that EU funds would be replaced like for like but it remains to be seen if this would be delivered politically.

For existing funds and projects subject to EU programmes, the UK’s commitment to such funds, and the EU’s commitment to the UK in respect of such funds, continues until formal exit, which as noted above is expected to be years away.  The method of transition of such projects away from EU control would no doubt be an issue of negotiation in respect of exit terms. 

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EU Law - general application

Regardless of what new EU relationship the UK (or those parts of the UK which remain) achieves, there will be serious implications for UK law generally.  A large volume of UK laws flow from EU Directives implemented into UK law directly already hence leaving the EU, when it finally happens, will not dis-apply those laws already in place even though the original Directives would no longer bind the UK.  However, more recently and in many areas the EU has also favoured directly effective EU Regulations to achieve  harmonisation. Upon exit from the EU such Regulations will cease to have effect hence there will be a void in relation to these areas of law which will require new UK legislation. This provides both a threat and an opportunity for industry and thought needs to be given now  by industry sectors about what the legal landscape should look like and how different interested parties wish to influence UK legislators as to what to adopt in future.

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Financial services

The pan-EU financial services common regulatory platform has been, in the main, one of the EU's successes.  Generally, businesses operating in more than one EU jurisdiction have benefitted from the level playing field of MiFID, CRD and the like.

The UK has been at the forefront of the development of EU financial services legislation and clearly its influence on EU legislation will diminish within the existing framework.  The extent of any future influence will be determined at governmental level and depend on the new UK/EU relationship, but clearly maintenance of some common standards on a pan-EU level would be beneficial in maintaining free movement of capital.

Businesses operating in the UK only may view Brexit as an opportunity for regulators to review EU legislation considered as unnecessarily burdensome.  For example, the imposition of AIFMD on smaller fund managers has not generally been considered a success.

Certain elements of regulation, such as the market abuse regime, are directly imposed through EU legislation, rather than through UK implementing legislation.  In due course if EU law ceases to apply, UK Government will need to consider the extent of that legislation and its ongoing application to prevent a vacuum arising.  Generally, as the UK has been historically viewed as being at the forefront of financial services legislation, before and after the inception of the Lamfalussy review, it is thought unlikely there will be a dilution of the regulatory regime in the UK. 

The scope of UK regulated activities is wider than those imposed by the EU, and this is unlikely to change.  Areas such as consumer credit, mortgages and specialist lending products are generally borne of UK regulation, with that either being adopted by the EU or being adopted and further developed.  Little change is anticipated flowing from Brexit.

The UK will need to consider its interaction with the pan-EU payment services and e-money regimes.  An unbundling of those systems on a practical level would not, in our view, be feasible.

Businesses which currently passport will, depending on the nature of the final UK-EU relationship need to consider their operations in other EU jurisdictions and their own regulatory framework.

The FCA's statement immediately following the Referendum result has made it clear it is business as usual until such time as the new framework is determined.

Businesses wishing to influence legislation should keep a keen eye on consultations from the FCA, PRA and UK Government.  Contributions do make a difference, and DWF will be reviewing and responding to consultations.  Clients with an interest in specfic disciplines will be canvassed for their views.

Brexit presents a number of challenges as well as potential benefits, however uncertainty generates risk.  To the extent not done prior to the Referendum, now is an opportune moment to consider the risks presented to your business and mitigation plans put in place. More »

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Imports and exports and international trade

Exit from the EU (and failure to secure access to the single market via a new relationship with the EU) would be the end of the UK’s membership of the EU Customs Union, application of the Common Customs Tariff, and common VAT rules.  As things stand, the EU is a free trade area in which goods can move freely without the application of internal customs borders and tariffs (and measures having equivalent effect).  The external borders of the EU are where imported goods from outside the EU must be cleared by reference to the Common Customs Tariff (CCT) secured and applied by reference to WTO rules.  On exit from the EU and in the absence of a new relationship securing continued access to the EU customs area the UK would become another third country when exporting to the EU and vice versa, meaning its good would be subject to the CCT on export to the EU. 

The UK is therefore expected to seek to agree a new customs union arrangement with the EU, or else face dealing with import/export requirements and payment of tariffs (and be subject to trade defence mechanisms such as anti-dumping in the event of perceived unfair trade practices).  The UK would in turn 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 (possibly including from the EU), but would face the same prospects against its own exports and would always need to abide by WTO rules or else face further trade sanctions.

While it is likely that the UK would keep a value added tax under domestic law, cross-border trade would be rendered more complicated, with implications for importers and exporters, financial services providers operating between jurisdictions, and those who provide or have accessed cross-border funding. 

If not done already prior to the Referendum, now is a good time for manufacturing businesses in particular to consider to what extent both their raw material inputs may be imported from other EU Member States (and so at risk of tariffs in the event of exit from the single market), and equally sales to other EU Member States (and so at risk of a tariff on importation from the UK into the EU).  The potential of future tariffs is likely to create a risk issue as to cost/price to be dealt with in supply contracts. 

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Industry

The UK must negotiate an agreement that satisfies at least three key spheres of influence. However a solution that is acceptable to UK businesses, to UK leave voters and to the EU Council and its 27 Member States, is difficult to establish. We consider the Brexit trilemma and if there is an agreement that can work for everyone. More »

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Intellectual property

A UK exit from the EU will create uncertainty for IP owners in multiple sectors of the business community. IP rights, registered trademarks and registered designs would no longer necessarily be harmonised with the rest of the EU - an important fact to consider for companies who trade and have important brands to support and enforce across the EU.  It is not clear whether EU rights would still apply to IP and trademarks that exist already and therefore this would be an important issue for negotiation of the UK’s new relationship with the EU.  More » 

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Northern Ireland

The situation in Northern Ireland is similarly complicated by the fact that voters in Northern Ireland indicated their overall preference to remain in the EU, even though the balance of English and Welsh voters meant that the vote to leave won out overall across the UK.  Northern Ireland is complicated further by its troubled history and the fact that it will contain the UK’s only land border with the rest of the EU (Ireland) in the event of the UK exiting the EU.  There are likely to be calls for a referendum in Northern Ireland (or indeed in all of Ireland) as to future independence from the UK and this may be another hard fought political issue in the months and years to come.

The UK and Ireland currently enjoy many bilateral relationships that go beyond mutual membership of the EU and many such arrangements would be expected to continue.  However, if the border of Northern Ireland does become an EU external border and if the UK does not secure unfettered access to the single market then it is difficult to envisage that this border would not need to become a new physical border for access to the respective markets for persons and goods.

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Product regulation and health and safety

For health and safety legislation most UK law flows from EU Directives hence leaving (when it finally happens) will have little impact as the underlying UK laws which have implemented those Directives will still remain. 

It is a very different position for food, cosmetics and some areas of product liability, trading standards, environmental, cosmetics, medical devices and medicines regulation, for example, where most UK laws are derived from (directly effective) EU Regulations that are not copied out in UK law on the basis they currently do not need to be. This means that the UK will need to re-draft such laws which may result in considerable change. However, that will not happen for some time and the EU laws stand until we do.  In the short term it is unlikely that a “zombie” government will proceed with the sugar tax and industry will find itself in the invidious situation where it will be subject to new EU legislation such as advertising to children but only until the negotiations have concluded.

A priority for affected businesses will be to review those areas that will have an effect and seek to influence future UK legislators as to any new regulatory framework to adopt.  Companies seeking to continue to sell UK manufactured goods to the EU will continue to need to abide by EU Regulations in respect of such exports.

Brexit Table

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Public procurement

The UK’s public procurement regime currently derives from EU Directives and is thus implemented into UK law by the Public Contracts Regulations 2015 and other legislation.  Such legislation would not fall away on exit from the EU although certain issues would require attention such as definition of contract value thresholds as currently set periodically by the EU.  Thereafter the UK may be free to attempt amending such laws but as a WTO member would need, at the very least to respect the minimum requirements set out in the WTO’s Agreement on Government Procurement. These single market measures are designed to ensure equal access to undertakings across the EU to the public sector markets of all of the Member States.  It is likely that in any free trade negotiations with the EU, access to public markets would be an important requirement.  Equally, maintaining certain minimum levels of open access to public markets is a pillar of WTO membership. More »

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Real estate and housing

Real estate and property law is one of the few areas to remain relatively unaffected by EU law, so the legal consequences of exit should be relatively minimal.  However, the impact of Brexit on financial markets and investment conditions could subsequently affect real estate markets.

EU law does not intervene in the market for social housing other than to recognise its social importance in the form of, for example, exemptions from State aid regulation. Without EU pressure the UK would arguably be able to remove registered providers of social housing from obligations to follow the public procurement rules, although it might be considered at a UK level that this is a positive discipline and should be kept.

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Scotland

There is also the thorny issue of the make-up of the UK itself.  With all 32 councils in Scotland voting overwhelmingly to stay in the EU, there are real concerns about whether it will remain part of the UK. Leader of the Scottish Government and Scottish National Party Nicola Sturgeon has already indicated that an independence vote is "highly likely" within two years as it is "democratically unacceptable" that Scotland is taken out of the EU against what has been shown to be its will.  However, independence via Brexit is not the SNP's chosen path as it requires Scotland choosing between its biggest trading partner (the rest of the UK) and its second biggest (the EU).  The current state of the Scottish economy, largely because of the fall in the price of oil, arguably makes a vote for independence even harder than at the time of the last referendum in 2014. 

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State aid

State aid regulation is currently not within the remit of national competition authorities so in a new relationship it could either be subject to continued surveillance by the European Commission (for example in an EFTA or EEA scenario) or be a new competence of the CMA.  It is highly likely that, absent being subject to EU law, the UK would invoke its own State aid laws (enforced by the CMA) that would largely mirror or be tighter than the existing rules.  It would not be logical to maintain other Competition rules against cartels and abuse of dominance, only to allow the level playing field in the UK to be damaged by unfettered subsidisation.  Furthermore, the UK would at a minimum need to commit to the minimum standards on subsidies set out by the WTO Agreement on Subsidies and Countervailing Measures, or else face trade sanctions. More »

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Tax

Any reciprocal arrangements relating to income taxation and national insurance or social security contributions for mobile workers who work across jurisdictions would cease to apply unless renegotiated.  It would be a complex negotiation to secure the correct benefits for the mobile workers who have built up their social security and pension entitlements over many years but who would be in an uncertain position until new arrangements secured their futures.

Changes to corporate tax measures could affect British banks doing business in Europe, and all other businesses in working out their international corporate structures.  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.  Preferential tax treatments offered by the UK and its network of offshore jurisdictions under Crown control are more likely to be subject to countermeasures from EU countries following an exit.

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Trading relationships – the so-called Norwegian or Swiss options?

Other European countries such as Switzerland and Norway have their own relationships with the EU (eg. EFTA, EEA) that offer example frameworks of what the UK might achieve and most significantly these retain prized access to the EU single market.  UK businesses are expected to lobby hard to ensure access to the single market for UK business as a minimum requirement for the new relationship.  Thus either one of these relationships, or a hybrid of both, offers a potential way forward, even if it would require the rest of the EU to agree to the same.  These frameworks provide pillars of EU membership, such as the free movement of goods and services and access to the single market, but they also require free movement of persons (an issue at the top of the Brexit agenda) and require many other conditions to be respected, such as respect for competition rules and other regulatory controls, while lacking ability to negotiate them.  Such an arrangement also requires a significant monetary contribution to the EU budget to be maintained, which again would run counter to the Brexit vote leave agenda.

Negotiating these agreements is difficult and time consuming. Switzerland has negotiated over 100 individual agreements with the EU for access to the EU market and it is unclear how the UK could conclude such complex negotiations in the two year time frame without needing to accept many blanket requirements without opportunity to negotiate the detail.  

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Trading relationships – the WTO option?

On formal exit, the UK’s new relationship with the EU will either be contained in the negotiated withdrawal agreement, or be subject to a new vacuum (known as the “disorderly exit” scenario).

At the very least, the UK would be expected to take back individual membership of the World Trade Organisation (WTO).  This requires many legal commitments that the UK is currently bound into already via EU Membership.  The WTO would secure certain minimum standards for the UK’s relationship with the EU (in the absence of a fuller negotiated agreement) as well as for its relationship with other countries. WTO membership, and related ‘most favoured nation’ treatment, would be a starting point.  WTO membership brings multiple disciplines too, however, for example if wishing to implement its own additional anti-dumping tariffs against imported Chinese steel the UK would still need to do it within WTO frameworks, as the EU is required to do now.  Failure to do so, and failure to respect WTO rules generally leads to WTO dispute settlement proceedings and ultimately to trade sanctions.

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Concluding thoughts

On Brexit, the UK’s new relationship with the EU and others will depend not just on what the UK wants, but what others are willing to negotiate. Other EU States are politically and ideologically committed to the EU and will be concerned by a threat of its break-up.  The coming weeks and months will reveal how much mutual economic interest is able to override political considerations on both sides.  The only truly predictable impact from the vote to leave is that it will necessarily herald a substantial period of uncertainty. This may stifle some investment decisions in the short term until more clarity emerges. 

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Authors: Jonathan Branton, Head of EU/Competion and Hilary Ross, Head of Retail, Food & Hospitality  

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.