As the dust settles after the vote for Brexit, the fashion industry and luxury brands sectors have been assessing the likely impact of the UK leaving the EU. Brexit will have profound implications for both parts of this industry: the fashion industry contributed £26bn to the UK's economy in 2015, and employed nearly 800,000 people in jobs ranging from the design team to the shop floors, whilst the luxury sector generated £32.2bn in sales, and was projected to employ around 158,000.
The EU creates a framework through which the UK and the 27 other Member States cooperate. At its core is the principle that the combined territory of those states forms a Single Market within which goods, services, capital and people can move freely, there is fair competition and consumers and workers are protected. The fundamental principle is that EU citizens must not be discriminated against on the grounds of their nationality, including in relation to their free movement around the EU.
The UK has not left the EU yet and, as the UK has not yet triggered any legal exit process, it will likely remain a member of the EU for at least the next two years. The process and timing of Brexit, and the shape of the UK’s future relationship with the EU, are yet to be decided but some changes are almost inevitable. For the fashion sector, much will turn on the details of the arrangements negotiated for the UK during the two-year exit period before Brexit. With no clear plan for exiting the EU yet in sight, there are a number of possible options for what might follow Brexit.
A vast amount of consumer legislation relevant to the fashion and luxury brands sector is derived from EU legislation. The vast majority of this legislation derives from EU directives and so is implemented into UK law by domestic legislation. Depending upon the outcome of the withdrawal process and the negotiation of the post-Brexit relationship there is likely to be increasing deviation between EU law and UK law. With the direction of travel still very uncertain, there is currently no pressing reason for businesses to rush into costly or radical change. However, there are some steps a business should consider taking immediately to mitigate potential risks and optimize opportunities. For example, businesses should review their sales strategies and product standards in light of the potential effects of Brexit. Engaging early with the Brexit process is important to keep your business priorities on the agenda during the UK/EU negotiations. Looking to the longer term, you need to be ready to move quickly, as soon as the shape of the post-referendum world starts to become clear and so you should begin to prepare for a range of possible outcomes.
Potential future trading relationship with the EU and/or EU Member States
- The EU Single Market – the UK is currently a member of the EU Single Market which means that EU citizens can work and live anywhere in the EU and goods and services can be moved freely across borders without tariffs being charged. The UK could choose to stay in the EU Single Market or be granted access to it upon mutually agreed terms. However, in return for membership of the Single Market, the EU is highly likely to insist upon the UK complying with terms or principles that are problematic for the UK politically, in particular the "free movement of people" principle;
- Bilateral agreements – the UK may eventually conclude a series of bilateral trade agreements with different EU Member States and/or other countries with differing requirements, which are likely to focus on business and regulatory matters (such as imposition of tariffs or compliance with local regulatory requirements); or
- No relationship – if no deal is done with the EU, or EU Member States, then the UK will trade with them as a member of the WTO, in its own right. This would mean that the UK would have to meet the requirements of WTO membership (which it already does) but both sides will be free to change aspects of their relationship that they do not like or which promote their own interests, e.g. tariffs on imports. Current understanding is that the UK will have to confirm to the WTO that it will maintain the EU tariffs in the short term, but that these may change over time.
There is a spectrum of possibilities, and it is quite probable that the eventual trading relationship, whilst lying somewhere on this spectrum, will not precisely reflect any of these models but a “pick and mix” combination of elements from them. More information on the potential forms that that UK's relationship with the EU, post-Brexit, are available atwww.hoganlovells.com/brexit.
How will Brexit affect my production and supply chain?
- In the short-term whilst Brexit is being put in place and new deals are being negotiated, we would expect to see some currency fluctuations which may benefit businesses that export goods or services from the UK, but which are likely to be more burdensome on businesses where elements necessary to the manufacture of goods or production itself is carried out overseas;
- In the longer-term, post-Brexit, if tariffs are applied to goods produced in the EU that are imported into the UK, e.g. Italian-made luxury goods, then you would expect to see prices of such goods go up and potentially demand to shrink; and
- Requirements to have the details of an EU manufacturer, importer or distributor, included on certain product labels, including cosmetics, will need to be factored into any packaging procurement strategies to ensure businesses can readily adapt to any required labelling changes.
How will Brexit affect the UK retail environment?
- In the short-term, the drop in the value of Sterling as against other major currencies is expected to produce increased retail sales, particularly from tourists visiting London; and
- In the longer-term, UK fashion retail will be affected by the conditions of the wider economy, particularly if production is carried overseas.
Will my employees who are EU citizens from outside the UK be able to work and live in the UK?
- One of the most significant changes that has been mooted concerns immigration and residency rights in the UK for non-UK citizens. This is of particular interest in the retail environment where businesses rely heavily on migrant workers, particularly in warehouses and distribution centres; and
- Like any other EU Member State, the UK presently permits any EU citizen to work and live in the UK under the "free movement of people" principle. EU citizens who have lived in the UK for more than five years may also have stronger permanent residency rights. If the UK stays in the EU Single Market, then part of the price for doing so may mean that the UK continues to abide by the free movement of people principle meaning that the present situation will not change. However, if it does not, then changes to immigration policies may affect the employment of both key employees and the many retail workers who are EU citizens who may need permission to work and live in the UK.
How will my IP be affected?
- The UK has not yet decided what sort of IP regime it should have after Brexit;
- Currently, many businesses in the fashion and luxury sectors use a variety of IP rights to protect their goods and businesses. Some of these apply EU-wide, such as the European Union Trade Mark (EUTMs) (formerly called CTMs) and Registered and Unregistered Community Designs. Whilst the UK has a robust and effective IP protection and enforcement regime which is considered to be one of the best in the world, these EU-wide rights will cease to apply in the UK after Brexit. National IP rights will be unaffected; and
- Much will depend on the larger economic choices made by the UK government, but it is likely that it may institute some form of a program of re-registration or re-validation of EU-wide rights in the UK so as to ensure that business will continue unaffected. However, no such plans have yet been published and in the interim, we advise businesses to retain their existing UK IP rights, and to seek advice regarding specific UK IP protection for key brands or IP assets if needed.
Risk of relocation of businesses
- The UK's creative, education, retail and media fashion businesses have helped to cement its reputation (and, in particular, that of London) as a centre for fashion excellence. The UK's luxury brands sector is growing apace, building off an aura of British quality and excellence. Whilst businesses may be reluctant to lose this, Brexit could lead major fashion and luxury brands to reconsider whether their businesses, or significant parts of them, should be located in the UK. They may choose to relocate production facilities elsewhere in the EU, or to downgrade or limit their UK operations and upgrade operations elsewhere. At the very least, UK-based businesses may need to build up a presence or key relationships in other EU member states.
As recent events have demonstrated, there are no straightforward answers to any of these questions yet. We expect the uncertainty surrounding these arrangements to continue for some time. Close and continued monitoring of developments and where necessary lobbying and responding to government consultations on various options is likely to be useful in the longer run. More information about engaging with the relevant policy-makers is available at www.hoganlovells.com/brexit.
Hogan Lovells' cross-sector fashion and luxury brands team can support you as part of this process. We aim to provide feedback, input and strategic advice on these issues. Our goal is to help you understand the potential legal and practical ramifications of Brexit and the post-Brexit environment so that your business prospers as a result of the changes that are to come.