Identification

Brexit : What Next ?

Analyse, La parole aux secteurs  | 

La Chambre est heureuse d’ouvrir sa rubrique « Analyse » à un article aimablement fourni par Landry Guesdon, Iwata Godo Law Offices.

An Unclear Roadmap and An Uncertain Schedule

The UK has just voted to leave the EU by a thin margin. It is still a member of the EU as the exit is not an automatic process. The process for exiting the EU is covered by the Treaty on European Union (TEU) and needs to be completed within 2 years. The EU wants to speed up the process while the UK wants to take its time and select the best exit route. Article 50 of the TEU provides that a member state may withdraw from the EU following the negotiation and conclusion of an agreement with the EU, setting out the withdrawing state’s arrangements for withdrawal and its future relationship with the EU. Failing an agreement, the EU Treaties would cease to apply to the UK two years after notification of its decision to withdraw. Reaching any agreement will be a difficult process as the EU arrangements are far-reaching. The single market is based on the so-called “four freedoms”: freedom of movement of goods, persons, services and capital. These arrangements also provide for a customs union and cover common policies in the following areas: agriculture and fisheries, external trade, foreign affairs and security, justice and home affairs and a monetary union.

None of the commonly proposed models are easy to implement (or attractive from a UK perspective). Prompted by a “benefits without burdens” political platform, the UK’s approach will be to seek to retain full, or at least to secure a significant, access to the EU’s single market. The UK is facing a conundrum as the most commonly proposed alternatives would compel the UK to continue to contribute financially to the EU and to be subject to the bulk of EU legislation while losing the ability to influence that legislation as a member state (through EU councils or by voting on the legislation).

What kind of EU/UK Relationship ?

There are five main models for a post-Brexit relationship between the EU and the UK that the UK could negotiate (although some are doomed or rather unlikely ):

  • Membership of the European Free Trade Association (“EFTA”) and the European Economic Area (“EEA”), like Norway, Liechtenstein and Iceland.
  • EFTA membership with access to the EU through bilateral agreements, like Switzerland.
  • A free trade agreement with the EU, like Canada and Korea.
  • A customs union with the EU, like Turkey.
  • World Trade Organisation membership with the WTO rules applying as default rules while seeking to negotiate bilateral agreements securing some freedom of trade and/or establishment.

Membership of the EFTA and the EEA
Like the EU, EFTA’s primary objective is the establishment of free trade. There are currently four EFTA countries (Norway, Iceland, Liechtenstein and Switzerland) which are all members of the EEA except for Switzerland. The EEA is made up of the EU members plus the three EEA-EFTA states. The UK is currently a member of the EEA through its EU membership and it could decide to rejoin the EEA by joining EFTA as an EEA-EFTA state following Brexit. Through its EEA membership, the UK would secure the broadest access to the single market. This would mean new treaties and tough negotiations with the EU and its member states in the process. The downside which is unlikely to be politically acceptable in the UK, is that the UK would be bound to comply with the majority of EU laws regulating the single market and would have to pay into the EU’s social and economic cohesion funds in return for single market access. EEA members need to comply with the so-called four freedoms and other EU rules in key areas such as employment, competition and consumer protection. This model would therefore entail the free movement of people and that would not solve immigration concerns. Various laws (in addition to the TEU and the EEA Agreement) allow authorized financial industry players in the EEA the right to “passport” into other EEA member states without the need for further regulatory approval. Passport rights can be exercised by establishing a branch or providing services cross-border in the other EEA state. For the financial services sector, the UK becoming an EEA-EFTA member state would allow UK providers of financial services to retain their cross-border passporting rights based on the EEA Agreement instead of the TEU. However, as the EEA is making slow progress in incorporating EU legislation into the EEA Agreement (the EEA Agreement does not include the European Supervisory Authorities), access to certain areas of this sector is limited and the EU framework for entities established outside of the EU to access European investors and markets would apply to UK entities. 

EFTA membership with bilateral agreements
In this scenario, the UK would join the EFTA without re-joining the EEA. To gain access to the EU internal market, the UK would have to negotiate bilateral agreements with the EU. This is the Swiss model. The significant body of bilateral agreements between Switzerland and the EU only give partial access to the single market. For instance, agricultural products remain subject to tariffs (a common external tariff applies to exports from countries outside the EU in the absence of a preferential trade agreement) and financial services are generally excluded (consequently, a number of Swiss banks operate through EU-basedsubsidiaries (currently in London)). Under this model, the UK would enjoy access in those areas where it will negotiate bilateral trade agreements. Given the paramount importance of the financial services sector in the UK, it would have to be included in agreements, otherwise the model will be unacceptable from a UK perspective. There are strings attached in return for access which would be abhorrent to the Brexit lobby : this model requires Switzerland to accept most of EU law, without a seat at the negotiating table or voting power to exert its influence in the decision-making process, and to make financial contributions to the EU. Switzerland could not achieve free movement of goods, services and capital with the EU without agreeing to the free movement of people. 

Free trade agreement
This model could entail even more limited access to EU markets compared with the above alternatives. However, this would mean fewer constraints and obligations (although, as explained, the greater the market access, the more likely the EU will insist on EU law compliance). Access to free trade in the EU would depend on the scope and terms of the new FTA as the content of an FTA is a matter for negotiation (covering market access, tariff levels with the EU and trade quotas). Examples include FTAs with Canada and South Korea. The EU is currently in negotiations with Japan and the USA. FTAs are designed to remove tariffs and open up markets and they take a long time to negotiate. It took more than 5 years with Canada and this FTA (CETA), which does not grant full access to the EU markets, is yet to be ratified.

Customs union
The UK could seek to participate in a customs union with the EU as Turkey has done. Customs union states operate under a common trade policy, common external tariffs and common rules of origin of goods. In this scenario, the UK would have to follow EU trade policy without a vote or influence on trade deals pursued by the EU. The Turkish model covers industrial goods but does not address services (including financial services) and that would clearly be an issue for the UK. A customs union allows for tariff-free access to the EU in return for implementing rules equivalent to those prevailing in the EU (environment, competition and state aid) and compliance with common trade policy and common external tariff rules. The implications for the financial services sector described in relation to the Swiss model would be relevant here.

World Trade Organisation
This model applies to all WTO members (and the UK is a member). It will apply if no other arrangement can be put in place between the UK and the EU. WTO members should not discriminate against other trading partners in the absence of separate free trade agreement. The UK would not have access to trade in the EU on terms more advantageous than third party countries without a free tradewith the EU. It would be subject to the EU common external tariffs and, as a result, be less competitive. The UK would have to negotiate concessions in relation to goods, services and other issues with the EU’s counterparties : this may take time and the outcome of negotiation is uncertain.

Future Impact of Brexit on UK Laws

Brexit may have far reaching implications on UK/English law but not in the immediate future and to what extent is yet unpredictable. It is likely the UK will favour preserving the overall stability of its legal system while shedding part of the EU legislation it deems too onerous to establish less stringent or different rules. That is, of course, subject to the Brexit model which will be selected from amongst the various models and the scenarios that can be viewed as the least unattractive models for the UK do not afford much flexibility in terms of freeing itself from the shackles of EU-derived legislation. It is likely that future EU legislation will be less influenced by the common law as the UK will no longer be represented in the legislative process. In any event, UK companies doing business in the EU would need to continue to comply with EU laws (including product standards and competition laws).

EU legislation can be incorporated in UK law according to two legislative routes (in addition to the European community treaties) : through EU directives or regulations. Regulations, i.e. directly effective EU legislation is automatically incorporated into national law without the need for an Act of Parliament. In contrast, directives are binding on member states but they are typically more flexible texts requiring implementation at national level (generally through the adoption of new statutes). In regulated sectors, such as financial services, detailed implementing rules and guidance are often issued by the regulators. EU legislation will not be instantly stripped from English statutes and the Government, the courts and the regulators will play a key role in the process. The extent to which the UK Government would wish to repeal EU legislation already transposed into UK law is unknown but most of it is accepted. It is likely that at least part of existing EU legislation will be grandfathered. In any event, EU laws will remain in effect during the period after the Article 50 termination notice has been served. Once Brexit becomes effective, UK law will prevail and EU regulations will cease to apply in the UK if nothing is done. The UK will have to enact EU legislation it wants to keep and which is not part of UK law. In areas governed by both regulations and directives, grandfathering rules will need to be put in place or else new laws will be needed to replace EU legislation.

The following is a quick review of some of the legal areas that may be impacted in the future: In relation to immigration laws, the priority will be to determine the rights and status of the large number of EU nationals working in the UK, including the significant Polish contingent. A grandfathering system for foreign workers with jobs in the UK would seem to be the most straightforward solution with restrictive immigration rules applying to newcomers. This issue ranks at the top of the Brexit lobby priorities but the future regime will largely depend on the exit model adopted. The UK has already been warned by the EU, there will be no concessions : no single market access without free movement of people.

In relation to company law, there are EU-derived laws and regulations that the UK will seek to revisit or repeal (especially dealing with the financial sector) although the main bulk has  been broadly accepted, including money laundering and market abuse. M&A laws and regulations are unlikely to be materially affected by Brexit. There is no compelling need to change a framework that is generally accepted and internationally praised. EU law influence is rather limited and, to the contrary, UK rules have often influenced or permeated EU legislation (for instance, the EU Takeovers Directive was strongly influenced by the UK Takeover Code).

EU competition laws will continue to apply to transactions exceeding the relevant EU thresholds (merger control) or having an appreciable effect on trade in the EU or its member states regardless of Brexit. In the context of cross-border transactions of a certain magnitude, the “one-stop-shop” will no longer be available if a merger control filing exceeds UK jurisdictional thresholds (and the UK does not re-join the EEA). Should the UK follow the EEA-EFTA model, the impact on UK competition law would be limited as the EU’s substantive competition law rules are duplicated in the EEA Agreement. Differences could nonetheless emerge over time. In the unlikely event there is no constraint associated with the relevant exit model, UK rules would be decided entirely at national level. The current UK legislation framework (the Competition Act 1998 and the Enterprise Act 2002) is largely based on EU competition law and is likely to stay.

The choice of English law as the governing law by parties to a contract is unlikely to be affected by Brexit in the short run although English law may become less attractive over time. When no clear choice of law is made, the law applicable to contractual and non-contractual obligations is currently determined in the UK by reference to the EU’s Rome Regulations. After Brexit, the Rome Regulations could simply be incorporated into UK law or the UK could revert to pre-Rome conflict of law rules.

The UK could become less popular as a forum for dispute resolution: court jurisdiction and the enforcement of judgments between the UK and the EU could be affected by Brexit given the primary role of the Brussels Regulation on jurisdiction and the enforcement of judgments in civil and commercial matters pursuant to which EU member states apply common jurisdictional rules to determine whether they have jurisdiction over a dispute or whether a judgement entered in one state is enforceable in all states. The Brussels Regulation would cease to apply to the UK upon Brexit and UK judgements would become less effective. However, in practice the position may not change substantively should the UK sign the Lugano Convention in its own right as it is substantially the same as the Brussels Regulation. Even if that were not the path followed by the UK, traditional principles of comity acting as “default” rules, would certainly help securing a reasonable level of recognition and enforcement for UK judgements. The conduct of arbitrations having their seat in London should not be affected by Brexit, and as the UK is a party to the New York Convention in its own right, this means the enforcement of awards rendered in those arbitrations would not be affected when the UK leaves the EU. However, the popularity of the London Court of Arbitration which is recognized as one of the leading centers for international dispute resolution, could suffer and dwindle over time.

Large swathes of UK employment law are derived from EU law and some of the EU-driven legislation has been controversial in the UK. Brexit will probably not lead to a major employment law overhaul but may lead to pressure to repeal certain areas of EU legislation transposed into UK law and amend certain laws to introduce increased flexibility and discretion for employers or to minimise red tape. The real risk for UK workers resulting from enhanced labour market flexibility would be the removal of protective EU social and employment legislation (e.g. the working time directive). The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) protecting workers in the context of business transfers are a well-established part of UK law but some of its very stringent requirements may be slackened in the future.

Each member state has the power to levy direct taxes with limited EU interference and therefore the immediate impact of Brexit should be minimal. VAT rules could be revised over time or abolished (albeit a very unlikely move as VAT is an invaluable source of revenues). Certain limits may also apply: under the EEA Agreement, tax policy may not be used as a means to discriminate against products from other members. If the UK remains outside the EEA, EU VAT would be imposed on imports from the UK and a number of key directives preventing the application of withholding tax on cross-border flows of income in certain circumstances would cease to apply .

UK data protection law (the Data Protection Act 1998 and data protection regulations) implements EU rules in this field. Unless the UK is part of the EEA, the UK would have the option of implementing less burdensome rules (and ignoring the new EU General Data Protection Regulation although companies doing business with the EU will have to factor in its wide extra-territorial application). If the UK does not join the EEA, the UK may still want to be designated by the European Commission as an “adequate” destination for personal data transferred from the EU for business to avoid the imposition of restrictions on data flows from the EU to the UK. To achieve this adequate country status, the UK would have to maintain the same or a broadly equivalent regime as the EU.

Given its historical roots, land law in the UK should not be affected by Brexit (although commercial implications are already being felt in the London property market). In contrast, a post-Brexit Government may be tempted to renege on some of the positive effects of EU membership on environmental and climate change laws and policies.

In relation to intellectual property rights, a basic distinction may be drawn between national rights and pan-European rights. The former would not be affected by Brexit. UK statutory provisions derived from EU legislation would remain unchanged until revised over time if there is any appetite for reform. European patent law would not be affected either as it is derived from the European Patent Convention which is an international treaty distinct from EU legislation, under which patent rights are managed at national level. In contrast, the Community Trade Marks (CTM) and Community Design Rights cover the whole of the EU through a single unitary system. Brand owners having secured their rights in the EU through the CTM may lose protection in the UK and, unless the UK automatically recreates or grants some equivalent national rights and protection, brand owners would have to seek protection in the UK under the system then put in place. More red tape and expenses.

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