BREXIT A practical guide to the potential legal implications 01 www.blplaw.com | Brexit The ‘Brexit’ could have a significant impact on the current legal and regulatory framework in which businesses operate. Chris Bryant Partner, Antitrust & Competition Foreword On 23 June 2016, the UK population will go to the polls to vote on whether or not the UK should remain a member of the EU. This issue has been one of the hottest and most fiercely-contested political topics of recent times, with entrenched and strongly-held views on both sides of the debate. However, despite the dichotomy of views on the desirability of the so-called “Brexit”, it is widely agreed that, if it were to happen, the implications will be profound and far-reaching on a political, social and economic level. The “Brexit” could also have a significant impact on the current legal and regulatory framework in which businesses operate. Although much will of course depend on what the alternative would be if the UK were to leave the EU, there are few economic sectors or areas of law that will be entirely unaffected. In this guide we look behind the soundbites and the headlines to explore the possible implications across several key areas of law and examine their potential impact on businesses. We also consider ways in which businesses can plan for the “Brexit” potentially becoming a reality. Chris Bryant Partner, Antitrust & Competition [email protected] 22 February 2016 Should the United Kingdom remain a member of the European Union or leave the European Union? The EU Referendum Question Contents Foreword ...........................................................................................................01 What are the exit options? ......................................................................02 Renegotiation options ..............................................................................05 Different implications for different sources of law ....................05 How could the law be affected? ..........................................................06 Helping you prepare...................................................................................08 JUNE 2016 02 03 Brexit | www.blplaw.com www.blplaw.com | Brexit The debates surrounding the “Brexit” have focused primarily on the arguments for “in” or “out” of the EU. What has been missing, and what remains to some extent the “elephant in the room”, is exactly what form the “out” option might take. The legal implications of a potential UK departure from the EU will vary significantly depending on which “out” option is chosen. The form of the “out” option may also be a significant factor in which direction the vote ultimately takes. A number of options have been suggested. We set out here an overview of the most likely options: What are the exit options? EEA but not EU The UK could leave the EU but remain part of the European Economic Area (EEA) and have a relationship with the EU like Norway, Iceland and Liechtenstein. • The UK would remain bound by much of EU law (e.g. laws concerning employment, the environment and competition) but would cease to have a vote or formal role in the legislative process. • The UK would become exempt from certain EU policy areas including fisheries, energy, justice and foreign policy. • The free movement rules would continue to apply, meaning that the UK could not restrict EU immigration. • The UK’s financial contributions to the EU budget would be likely to reduce, albeit it would still be required to contribute substantially towards the central running of the Internal Market. EFTA but not EEA The UK could also re-join the European Free Trade Association (EFTA) but remain outside the EEA in a manner similar to Switzerland. The UK was a founding member of EFTA before joining the then EEC in 1973. By becoming an EFTA member, the UK could enter into bilateral trade agreements with the EU, as Switzerland has done. • Although there exist a broad set of rules governing the relationship between the EFTA states, they do not go so far as to create laws by which the UK, and businesses operating within the UK, would be bound. The UK would, however, be required to adopt the free movement rules to gain access to the Internal Market. • The UK would be free to conclude trade agreements with other countries, either independently or jointly through EFTA. However, each agreement would need to be negotiated separately. Customs Union The UK could leave the EU and follow Turkey’s example by entering into a customs union with the EU. • This arrangement would give access to the EU Internal Market for goods without customs duties. • However, access to the Internal Market would be conditional on the UK imposing the EU-set common external tariff on imports from outside the customs union. The EU would have the right to negotiate trade agreements in goods without input from the UK. • The arrangement would cover goods but not services. UK service providers (including financial services) would lose their current right to provide services on equal terms with EU members, although the UK would then be free to regulate its own services sector. Free Trade Agreement The UK could seek to negotiate a comprehensive Free Trade Agreement with the EU, covering both goods and services. The UK would then only be subject to EU law if specifically maintained in the agreement. • This option would give the UK the freedom to set its own laws. • Unless covered by the agreement, UK businesses would lose their current Internal Market rights (for example, the freedom to establish in other EU countries). This could have an impact on whether international companies use the UK as their European base. • Most commentators believe that the UK is unlikely to achieve such an agreement without significant concessions, including in relation to the free movement of workers. WTO-only relationship This is the purest form of “out” requiring no formal connections or negotiated agreements. The UK would leave the EU and rely on its membership of the WTO as a basis for trade with the EU, providing the UK with the same access to the EU as China or the US. • The UK would be free to act independently without being directly subject to EU laws. • The UK would have complete control over its borders, with no obligation to adhere to the principle of freedom of movement. • However, the UK would no longer automatically be party to existing EU trade agreements and would need to negotiate its own agreements separately. Mechanics of leaving Under Article 50 of the Treaty on European Union (TEU), introduced in 2009, the UK would have to give two years’ notice of its intention to leave the EU, during which the terms of exit would be negotiated. At the end of that period, unless a different date were agreed, the UK would cease to be part of the EU. The European Communities Act 1972 (ECA) would have to be repealed, or at the very least amended. If the UK government wants to ensure that the Statutory Instruments implementing existing EU legislation remain in force as part of national law, the repeal would need to include a “saving provision”; if not, any such legislation would no longer have legal effect once the ECA had been repealed. Did you know? The UK would not be the first territory to leave the EU/EEC. There have been three previous examples • Algeria, which left upon independence from France in 1962; • Greenland, which voted to leave the EEC in 1985 (although remaining part of Denmark); and • Saint Barthélemy, which seceded from Guadeloupe, a French overseas department, and left the EU in 2012. NOTICE 04 05 The New European Commission | www.blplaw.com www.blplaw.com | Brexit Renegotiation options Different implications for different sources of law The UK Government has renegotiated certain terms of the UK’s membership of the EU with other EU governments ahead of announcing the date for the in/ out referendum. This reflects David Cameron’s desire that the upcoming referendum, to be held on 23 June 2016, will be based on membership of a reformed EU. In particular, the UK Government wanted to restrict access to inwork and out-of-work benefits to EU migrants in order to reduce the number of people coming to the UK. The Government also hoped to free businesses from “red tape” and “excessive interference” from Brussels, and to “protect” London’s financial markets from EU legislation. In a similar vein, it hoped to give greater powers to national parliaments to block EU legislation. Treaties and Regulations EU Treaty rules and Regulations are directly applicable in the UK. They do not require any national legislation to implement them. These rules would cease to apply in the UK if the UK were to leave the EU or EEA. Directives EU Directives do not automatically apply in the UK and must be implemented into national law. This is typically done through Statutory Instruments adopted on the basis of the ECA 1972. If the ECA 1972 is Following months of negotiations, in early February 2016, the President of the European Council presented a “draft deal” agreeing to many of the Government’s demands. On 19 February 2016, after an EU summit to negotiate the terms of the “draft deal”, David Cameron announced he had secured a package of reforms he believes will give the country “special status” within the EU. In particular, he secured a commitment to exempt the UK from “ever closer union” with other EU member states, a four-year “emergency brake” on in-work benefits, guarantees that countries outside the Eurozone, such as the UK, will not be required to fund Euro bailouts and a promise to establish burden reduction targets in key sectors and take steps towards better regulation, including by cutting red tape. repealed, these SIs would fall away unless they are expressly “saved” by the repealing legislation. Court of Justice Judgments of the EU Court of Justice can have far-reaching consequences. Those judgments would no longer apply automatically in the UK following a “Brexit”, even if the Government decides to retain a particular EU law. This could result in conflicting judgments. The UK courts would also lose the right to seek decisions on interpretation from the Court of Justice. I’ve tried to aim at things that are deliverable and doable rather than things that are impossible. David Cameron 06 07 Brexit | www.blplaw.com www.blplaw.com | Brexit Financial Services Regulation The “Brexit” could have significant implications for financial services regulation in both the UK and the remaining members of the EU. Most current legislation governing financial institutions derives from EU law. If the UK were to leave the EU and EEA, the Government would need to decide whether to retain the existing laws or to replace them with its own different rules. Many UK firms in the sector have benefited from a single EU regulatory framework, making it easier for firms from one Member State to operate in another. The EU financial services “passport” has been particularly important, allowing firms authorised in the UK to carry on business in another EEA state. Leaving the EU could result in restricted EU market access for UK institutions. The UK is the EU’s largest financial centre, with many international banks using London to gain access to the Internal Market and as a base from which to sell financial products and services across the region. This may be at risk if the UK loses access to the Internal Market. How could the law be affected? Competition Law If the UK were to leave the EU (and EEA), little would change to the substantive law concerning anti-competitive agreements and abuse of dominance, as the UK’s Competition Act 1998 substantively replicates EU rules. In any event, EU rules would still apply to UK companies trading in the EU. There is, however, a strong likelihood of parallel civil investigations by both the UK’s Competition and Markets Authority (CMA) and the European Commission, for example in relation to international cartels. Currently, either one or the other authority will conduct an investigation. As regards merger control, some transactions might require separate review by both the European Commission and the CMA, whereas currently they will be subject to either the EU “one stop shop” regime or the UK merger regime. State aid and public procurement rules could cease to apply in the UK, making it more straightforward for the UK Government to intervene in business. Intellectual Property The UK’s intellectual property (IP) laws are largely driven by the EU, deriving primarily from international treaties or EU law, or a combination of the two. In the event of the UK leaving the EU, national IP rights such as trade mark registrations, patents and registered designs granted by the UK’s Intellectual Property Office (UKIPO) would not be affected. The UK would remain bound by the laws governing the granting and enforcement of those IP rights. Moreover, the reciprocal rights granted by UK law under its international treaty obligations would be protected under IP law. However, all pan-EU IP rights, such as the European trade mark and design right, would cease to apply in the UK. Businesses would need to make an application to the UKIPO to ensure their IP rights are protected as national rights (unless the government were to allow all existing EU rights to continue to benefit from protection in the UK). Data Protection At present, the UK’s data protection law primarily derives from the EU’s 1995 Data Protection Directive, which is implemented in the UK by means of the Data Protection Act 1998 (DPA). The Directive is expected to be replaced by the EU’s General Data Protection Regulation, which would be directly applicable in the UK. It is unclear, however, what would happen in the event of a “Brexit”, as it is likely that the two year transition period for giving effect to the Regulation will coincide with the referendum. It may be that in those circumstances the UK would retain the DPA on an interim basis, before eventually considering whether to implement an adapted version of the Regulation into national legislation. The EU data protection rules restrict the transfer of personal data to countries outside the EEA. If the UK were to cease to be part of the EEA, the UK would be considered a non-EU destination that would have to be approved as providing adequate protection for personal data by the European Commission. The Commission may, however, refuse to designate the UK as having adequate protection. Employment Law Many aspects of UK employment law, such as discrimination rights, holiday entitlement, and minimum paid annual leave derive from EU legislation. Depending on the nature of the UK’s exit from the EU, the effects on employment law could be varied. Legislation such as the Equality Act would remain, but other regulations such as TUPE and the Working Time Regulations could be repealed, which would cause serious uncertainty for businesses and may weaken certain employment rights. It remains unclear how the UK would amend or repeal EU-derived employment law; and indeed which laws would be the subject of such change given that so many of the principles are now embedded into UK law. In addition, the EU principle of free movement has led to workers from across the EU Member States becoming employed in Britain. Although what rules would apply to existing and future migrant workers is far from clear, these rules are likely to have a substantial impact on many UK businesses. Environmental Law The UK has implemented a series of EU Directives on environmental issues since it joined the EU. The EU imposes stringent targets and objectives on Member States on matters ranging from habitats and birds through to bathing water. Large parts of the UK’s law on waste derive from EU legislation, which affects the way in which waste can be managed in UK, particularly with regards to landfill waste and recycling. If the UK were to leave the EU, this would cause significant uncertainty in terms of environmental policy and legislation in the UK. There would be the potential for repeal or significant amendment of many of the UK’s environmental laws. However, the UK would remain bound by international agreements to which it is a party in its own right, such as the Kyoto Protocol and the Aarhus Convention. 08 Helping you to prepare Brexit | www.blplaw.com Although much remains uncertain about what exactly might happen in the event of a “Brexit”, and indeed whether it may happen at all, businesses can already take steps to assess the risks and opportunities to them. It is advisable to ensure that contracts are “future-proofed” to provide for the implications of the “Brexit” if it happens. Businesses can also take steps to examine the potential effects of a potential “Brexit” on their particular circumstances. This will allow them to plan for negative consequences (such as the ability to recruit staff from other EU countries) or identify opportunities. Specialist lawyers from throughout our firm are well versed in these issues and can help you to prepare for a potential “Brexit”. [email protected] About BLP Berwin Leighton Paisner is an award-winning, international law firm. Our clients include over 50 Global Fortune 500 or FTSE 100 companies. Our global footprint of 13 international offices has delivered more than 650 major cross-border projects in recent years, involving up to 48 separate jurisdictions in a single case. The Firm has won eight Law Firm of the Year titles, is independently ranked by Chambers and the Legal 500 in over 65 legal disciplines and also ranked in ‘the top 10 game changers of the past 10 years’ by the FT Innovative Lawyers report 2015.