The impact of Brexit on local government

"There are known knowns… there are known unknowns… But there are also unknown unknowns. There are things we do not know we don't know."

In the aftermath of the UK's referendum vote to leave the European Union, Donald Rumsfeld’s infamous quote is more prescient than ever. Throughout the referendum campaign, both sides focused on the "bigger picture" and national questions. In our discussions with local authorities throughout the UK, it was apparent there was a distinct lack of focus on the practical impact of Brexit on local government within both campaigns.

In the immediate aftermath, local authorities would be forgiven for focusing on the increased financial pressures that may arise following the referendum vote. However, as central government begins the slow process of thinking about how to unravel EU legislation from the UK statute books, local government should get to grips with the legal impact of the vote.

What happens now?
The key message at this stage is that it is business as usual in terms of UK legislation, even if the political situation has changed radically. The UK is still part of the EU until further notice, even though we know a break up is coming at some point down the tracks.

In order to leave the EU, the UK government must provide formal notification under Article 50 of the EU Treaty. When this happens, a two year negotiation period is triggered and three clear options arise:

Option 1: The UK and EU achieve a negotiated settlement and exit within a two year time period, approved by a qualified majority vote of the Member States.

Option 2: The UK and EU fail to reach a negotiated settlement and exit within the two year time period, but Member States unanimously approve an extension to the two year period, to keep on negotiating.

Option 3: The UK fails to reach a negotiated settlement within the two year time period, Member States do not approve an extension and the UK ceases to be a member of the EU without a "new deal".

Article 50 does not contain provision for what would happen were the UK to decide for any reason to try to revoke Article 50 notice, hence this is not analysed as an option. 

The Article 50 notification has not yet been made, and reports suggest that it will not be made until at least the autumn of 2016, if not later. The EU is keen to resolve the issue quickly, but cannot compel the UK to give notice sooner or at all (but there will no doubt be mounting political pressure to this end).

The first task for local government (and indeed business) is to understand to what extent EU legislation affects its operations. A 2013 Local Government Association report suggests that around half of all regulations affecting local councils originate from the EU. Will all this change? Not necessarily. Much EU law is implemented by specific national law, which will not lapse in the event of leaving the EU. Other directly effective EU law will leave a gap when the UK is no longer within the EU. A massive exercise will be undertaken to analyse this and identify where gaps will arise, in order to ensure the same are filled. It has been speculated that in order to minimise disruption most directly effective EU laws will simply be adopted into UK law at first, in order to give more time to reflect on desired changes and their effects. Many EU laws are likely to be required to be maintained in the context of a new trade deal along the lines of the European Economic Area (EEA)/European Free Trade Association (EFTA) solutions.

The opportunity therefore is perhaps to consider which areas are going to be affected and what local government would wish to see changed in an ideal world. This may in turn help to seize the initiative to try and influence the debate for how a new regime should be shaped.

What will happen to public procurement and State aid?
Public procurement is one of the most visible (and important) interactions between the EU and local authorities. Local authorities have within the past three years dealt with significant changes to the public procurement regime and may fear yet another overhaul. However, some form of public procurement regime will remain in place for local authorities regardless of the UK's future relationship with the EU not least because the current rules are already implemented into UK law (so need no direct replacement) and even basic World Trade Organisation (WTO) membership (the ultimate back stop new scenario) requires minimum public procurement commitments. (For more info on public procurement, please click here).

A State aid regime in one form or another will likely still apply to the UK regardless of the trading model adopted too, be it membership of EFTA/EEA and/or membership of the WTO. For example, if the UK joins EFTA, it will effectively be subject to continued application of EU law on State aid. Even if the UK pursues the most extreme WTO model, the WTO requires some sort of State aid regime to exist within the UK, or else trade sanctions are risked. The choice of enforcement authority may depend upon the model chosen – for example the Competition and Markets Authority (CMA) may take on this mantle in a new UK State aid regime that would likely be modelled on the EU at least at first. It is very difficult to see the CMA countenancing a general reduction in the level playing field it protects in so many other ways being brought about by unfettered subsidisation (For more information on State aid, please click here). 

Will we be asked to pay back EU funding?
Many local authorities have publicly voiced their concerns regarding the withdrawal of access to EU funding. At this present time, projects currently funded by the likes of the European Structural and Infrastructure Fund (ESIF) will continue to be bound by their existing arrangements and some suggestions have been made that the UK government could step in to the position of the EU if and when the UK exits the EU, assuming it is within the current 2014-2020 Operational Programme. Exactly how the ESIF programme is wound down and transferred to the UK would be a matter for exit negotiations. However, bodies receiving EU funding should review their agreements (and any agreements with sub-contractors or delivery partners) to ensure that they are in a position to terminate associated contracts if funding is suddenly removed. It is too early to say whether the current climate changes overall audit risk, but the best advice to funding recipients must be to continue stick to the rules to the letter for the time being in order not to afford any excuse for claw back claims from any source.

The European Investment Bank (EIB) has invested circa €42bn in the UK over the past ten years: it has stated that the status quo will remain (and has previously emphasised that EIB loans will not be repayable on demand in the event of a Brexit vote). Local authorities relying upon EIB funding for future projects may be reassured to hear that EU membership is not a pre-requisite for access: however, non-EU applicants face a more difficult application process at this point in time and the EIB may require either the UK or local authorities themselves to provide guarantees (raising governance and powers issues).

What will happen to waste management?
One area vulnerable to change in the short to mid-term is waste management and treatment. The main legislation governing the area is derived from EU legislation with many waste management projects procured by waste disposal authorities within the UK being designed to comply with European legislation, placing significant emphasis the environmental benefits of landfill diversion rather than focusing upon low cost solutions. Tough decisions are being made by local authorities across the UK, and crucial frontline services and financial savings may be prioritised over environmental concerns in certain instances. To add to which, central government will be keen to derive the possible savings from the Circular Economy and may change the obligations placed upon local authorities as a result. This could manifest itself in the shape of changes to collection, treatment or potentially landfill-only arrangements in some instances for some authorities. Given the different legislative requirements across the devolved administrations, however, this will not be an overnight change.

How will Trading Standards be affected?
The EU has extensively legislated in the realm of consumer protection and health and safety, with UK legislation therefore largely based upon EU Regulations. A 2013 report from the Trading Standards Institute suggested that local authorities had 89 trading standards statutory duties, ranging from the issuing of horse passports to the regulation of performing animals. Given the never-ending complaints of red-tape and resource constraints upon local authorities, local authorities in the future could see a reduction in their trading standard obligations in the future. The UK could be required in the future to legislate to regulate food, cosmetics, chemicals and textiles – but it remains business as usual for the time being. Manufacturers wishing to export to the EU however will need to continue to satisfy EU rules as regards those products it exports, and as a consequence may not wish to apply different standards to products intended for domestic sale only.

What will happen to employees?
EU legislation has changed the landscape of workers' rights: whilst it is unlikely that the current government would significantly reverse the core principles surrounding discrimination rights, TUPE, agency workers, holiday provisions etc. in the immediate future, local authorities should be prepared for changes and deviations from the current regime that could benefit (or potentially adversely impact) local government, depending upon political will of right- or left-wing governments. With over 2.2 million employed in local government, small changes to the established employment regime could cause significant repercussions to the financial wellbeing of the public sector. Sectors dependent on comparatively inexpensive labour from other EU countries may in due course experience labour shortages, which will drive costs up (due to lack of unrestricted access for such workers).

Will there be an impact on our compliance with the Data Protection Act?
May 2018 will see the proposed deadline for implementation of the General Data Protection Regulation (GDPR) within the EU, and many local authorities are in the process of preparing for the same. The Information Commissioner's Office's current position is that organisations should assume the GDPR will apply in May 2018, as the UK will need to prove equivalent data protection standards to the GDPR if it wishes to trade within the single market. Given both the amount and sensitivity of information held by local authorities, the consequences of getting it wrong on data protection are significant and until the dust settles, preparing for GDPR compliance is the best bet for local authorities at this stage. (For more information on the GDPR, please click here.)

What effect will Brexit have upon my debt recovery process?
A key topic of discussion during the exit negotiations will be the enforcement of UK judgments within the EU and vice versa. There are a number of different vehicles for local authorities to enforce judgments against defendants within the EU and further afield: some of these (such as the European Enforcement Order and the Brussels Regulation) are EU-specific and allow for UK judgments to be enforced in EU countries as if they took place in the local jurisdiction, but the likes of the Lugano Convention allows for EFTA countries to enforce Member State judgments and vice versa albeit with a certain degree of discretion. Local authorities attempting to recover debts from defendants in overseas jurisdictions may face increased costs and delays in service and recovery proceedings, and international enforcement arrangements post-Brexit will be heavily dependent upon the outcome of the exit negotiations. (For more information on international enforcement of judgments post-Brexit, please click here.)

Is it all doom and gloom?
To some local authorities, Brexit may seem like yet another distraction when local government is facing increasing financial pressure and an uncertain landscape due to proposed devolution changes. The true impact of Brexit will only be known at a later date – over the coming months and years, we'll inevitably come to discover the "unknown unknowns" referred to by Rumsfeld.

However, there could be some opportunities for local authorities to thrive. Local government could (theoretically) have a bigger say in the legislation that affects them on a day to day basis, instead of relying upon the UK government to fight its corner. In the event of difficult economic conditions ahead the public sector normally assumes a greater importance in legitimate pump priming of the economy, especially outside London. A liberalisation of the public procurement regime could allow for the use of more entrepreneurial alternative delivery models and an increase in services falling under the light touch regime (reducing procurement costs). Local government must understand the effect of European legislation on its day to day activities, prepare for what could happen next in each area where those effects are significant, and finally consider what attempts should be made to seek to influence the new UK legislative agenda where appropriate.

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.

Michael Mousdale

Partner - Head of Local Government

A Partner at the firm and Deputy Head of the Public Sector team, I specialise in local government and public procurement matters.