The British people voted on Thursday to leave the EU. What happens next and what are the implications for business are crucial questions that need to be addressed. Dechert recognises this raises huge challenges and is a top priority for our clients.
What does this mean?
Whilst the vote is not legally binding the UK Prime Minister has said that he would give effect to any decision of the British people to leave. In the event that the internal political volatility in the UK does not disrupt those plans, once he formally notifies the European Council of the UK’s intention to leave, the EU treaties set a two-year time limit for the UK’s exit to begin. Whilst that can be extended if all sides agree, the volatility of the market following the vote and the prospect of years of uncertainty about the nature of the UK’s relationship with the EU may see that timetable for departure shortened.
The treaties also only set out the timetable for the UK’s departure, they do not set a time limit for the UK and EU to settle what the new relationship will look like. Whilst the precise impact of the Brexit vote will largely depend on the new arrangements agreed by the UK and the EU, we do know that there will be an impact on a wide range of sectors and industries, whether they are based in the UK or simply trade with the UK. Brexit will also have an impact on a number of cross-cutting issues that affect all business interests, such as the implications for contractual, data protection and employment law.
Exactly what effect could it have?
It will not affect all sectors or businesses equally, but most will be affected to some degree and will want to move quickly to put into practice their Brexit plans or to establish quickly how to engage with and impact on the upcoming negotiations between the UK and the EU and how to prepare for the outcome of those negotiations.
Dechert’s sectoral experts work closely alongside the International Trade and EU law team to map out the impact the Brexit may have on any given sector and business and advise on the trade and regulatory consequences. In broad terms, some of the notable areas likely to be affected include:
Financial Services: London is the preeminent financial center in the EU and crucial to the UK's economy. Post Brexit, financial services firms may be freed from the “single European rulebook” and the supervision of the supervisory authorities (ESMA, EIOPA and EBA, with the latter currently based in London). The UK may look to change some requirements it has never much liked but, subject to the shape of the final deal and any assessments of equivalence, firms may also lose crucial beneficial features such as passporting rights.
Asset Management: Asset managers will need to consider how their current client and distribution arrangements will be impacted if the UK becomes a “third country” for financial services purposes and UK funds cease to qualify for UCITS and AIFMD passports. Understanding how to make best use of third country access rights, national private placement regimes and targeted restructuring will give greater certainty to managers and their funds during the period of negotiation and under any new settlement.
Other Sector Laws: In the name of uniformity, consumer protection and public health the EU has been an investor in research and development in, and has been an active law-maker for, various industries including pharmaceuticals, telecommunications and energy. With Brexit, companies will want to understand the impact of the loss of any investment – from the EU or from private investment in infrastructure – as well as the potential fragmentation of the regulatory environment in their particular sector. Understanding the impact of existing bilateral investment treaties and the protections they afford can help firms to plan for and mitigate the potential risks of a Brexit.
Trade Agreements: The UK also enjoys the benefits of the various Free Trade Agreements the EU has negotiated with third countries. Understanding the supply chain; the impact on tariffs that bilateral trade agreements bring; the provisions that would apply through the WTO as a base and what agreements could be prioritised in any renegotiation will help companies plan for the impact of leaving the existing trade agreements between the EU and third countries as a result of Brexit. Following any decision to leave the EU, it is highly likely that the UK would lose the benefits not only of existing agreements but also those under negotiation between the EU and others such as the US.
Intellectual Property: Many trademark owners have, since the creation of the EU (former Community) Trademarks, favoured a protection at a European level rather than at national levels. In light of the Brexit vote, the EU trademark may no longer be in force in the UK and may have to be converted into a UK trademark to preserve rights (though further taxes may have to be paid, as is already the case in case of voluntarily conversion). Brexit also throws into doubt the future (or at least the timing) of the introduction of the unitary patent, which is only due to come into effect when the Agreement on the Unified Patent Court comes into force.
Life Sciences: The UK has had a traditionally strong interest in the life sciences, providing a voice for the industry at the EU table that would be lost in the event of a Brexit. The strength of the sector is reflected in the location of the European Medical Agency in London, which would have to be relocated. Brexit would also throw into doubt the EU regulations under the Community code for medicinal products.
Competition Law: In the event of Brexit and if the UK chooses a model under which EU completion law does not apply or need to be followed there is a prospect of parallel regulation and enforcement on merger control and cartels, requiring many cross-border transactions or cartel investigations to be considered not only at the EU level but also by the UK’s Competition and Markets Authority. It may provide an opportunity for dilution of regulation affecting specific areas, such as state aid and procurement rules, but much will turn on the exact scope of the new UK-EU arrangements.
Imports and Exports: Currently, the EU customs union and free movement principles ensure that most goods can be traded and moved between EU member states without tariffs, customs duties or customs declarations and largely free of process, irrespective of the origin of the goods. The potential of tariffs on imports and exports or the increased administrative costs of a customs regime with the EU will vary from business to business but are likely to impact on many to some degree.
Data Protection: The incoming EU General Data Protection Regulation will come into force throughout the EU in May 2018 and whilst it is likely to take effect within the UK, the post-Brexit status of the incoming Regulation in the UK will need clarifying. Ultimately, the ability to transfer personal data to the UK will depend on whether the European Commission deems the UK protection of personal data post-Brexit to be adequate.
Employment Law: Much workforce planning after the referendum will focus on political decisions around the outcome of any UK-EU approach to immigration and the uncertainty around the eventual economic and legal impact of Brexit on employers’ hiring policies. The extent to which there might subsequently be employment law reform will depend in part on the nature of the UK’s post Brexit relationship with the EU – for example, membership of the EEA would require the retention of much of the EU derived employment and discrimination legislation currently in place including the transfer of undertakings legislation. Wider employment law reform, if possible, would depend on the political appetite for the further winding back of employment law protections but possible candidates for reform include the agency workers legislation (including, in particular, parity of terms after twelve weeks), various provisions of the Working Time Directive, the obligation to conduct collective redundancy consultation with unions or employee representatives, and the difficulties which the transfer of undertakings legislation presents for harmonising employees’ terms and conditions post transfer. To help prepare, businesses may also want to seek advice on the sponsorship of employees, should that become necessary in light of the new UK-EU deal.
Environmental Law: EU environmental law has a far-reaching impact across businesses in the EU and the UK, whether the transport, agricultural, waste management or energy sectors. Whilst Brexit may provide greater scope for the UK to develop environmental laws, much of the content derives from international agreements to which the UK would remain a party. However, the UK may have much more choice in how it gives effect to those obligations, for example on reaching emissions targets, and understanding the legal framework and policy choices available becomes central to planning for the impact of Brexit in this field.
Legal Framework: In the event of Brexit, firms may want to consider the laws that apply to their contracts and other arrangements, currently governed by the Rome I and Rome II provisions respectively, and the rules on jurisdiction and enforcement of judgments, currently set out in the Brussels Regulation. Whether English courts remain subject to the Brussels Convention in the longer-term can impact on the issuing of injunctions and the conduct of arbitrations. There may also be an impact on (or an opportunity to influence) UK procurement rules in the longer term depending on the nature of the future relationship with the EU. Brexit may also impact on investment opportunities in some areas, such as those in “sensitive areas” such as defence and energy investments where EU Member States impose more stringent requirements for non-Member State investors.
What should I consider?
If companies have not done so already, they should be asking themselves – and answering – these questions:
- Have we identified the potential changes relevant to our business?
- Will those changes be an opportunity for us or a risk (or both)? Will those changes equally affect our competitors?
- Are there any steps we could or should be taking in advance (or immediately after a vote) to mitigate adverse impacts?
- Have we done enough to reassure our investors that we have considered and taken measures to best prepare for any anticipated risks? How will the legal and economic uncertainty of the negotiation period impact on us?
- What do we want the priorities to be in the negotiation of UK/EU future relations for our sector? Are there particular EU laws which it would be important to us that the UK should retain or replace?
- Do we rely on any EU free trade agreements with third countries, and how would we be affected if the UK ceases to benefit from them? How can we prepare for and mitigate the impact?