As announced, UK Prime Minister Theresa May lodged with the EU Council a notification under Article 50(2) EU Treaty, i.e. the UK's formal notification of its intention to withdraw from the EU. This notification triggers a two-year period for negotiations between the UK and the rest of the EU which should culminate in a withdrawal agreement. Failing such an agreement, the UK will leave the EU by operation of law after the two years, unless that period is unanimously extended by the 27 remaining member states. Since the EU has never dealt with such a "divorce" process before, today's step gives rise to many questions, covering a wide range of topics and rules. To shed some light on what will happen in their fields of expertise, several NautaDutilh specialists have assessed the most important consequences of the Article 50(2) notification. If you have any questions about the possible implications for your business, please contact one of us directly or send an e-mail to Brexit.
1) IS THE ARTICLE 50(2) EU TREATY NOTIFICATION REVERSIBLE?
In the wake of the UK High Court and Supreme Court decisions in the Miller case, a discussion has arisen as to whether the Article 50(2) EU Treaty notification, which is the official notification of the UK's intention to withdraw from the EU, can be retracted pending the withdrawal negotiations. An important question because it has important consequences for the UK's negotiation position.
General rules on withdrawal General rules on withdrawal from a treaty are laid down in the 1969 Vienna Convention on the Law of Treaties and in the 1986 Vienna Convention on the Law of Treaties between States and International Organizations. Article 54 of both treaties provides that a party to a treaty may withdraw from it (i) in conformity with the treaty provision; or (ii) by consent of all the parties. In terms of procedure, Articles 65(1) and 67(1) of both treaties provide that when a party to a treaty wants to withdraw from that treaty, it must notify its intentions in writing to the other parties, while Article 68 of this Conventions states that such notification may be revoked at any time before it takes effect.
Article 50 EU Treaty Article 50 EU Treaty, which was included in the EU Treaty upon request of the UK during the last EU Treaty negotiations, expressly provides for the right to withdraw from the EU and for the procedure to be followed. That procedure is triggered by a formal notification at the sole initiative of the member state concerned (Article 50(2) EU Treaty). This notification triggers a two year period in which the withdrawing member state must negotiate with the other member states on the conditions for its withdrawal and on its post-withdrawal relations with the EU. The EU Treaties cease to apply to that member state from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification, unless the remaining member states unanimously decide to extend this period. On that day, EU Regulations, which have direct effect in the UK, and EU Directives, which entail obligations to implement certain provisions into national legislation, cease to apply. Existing national implementing legislation, on the other hand, does not automatically cease to apply. It is the UK's intention to regulate, in a single Act, which national implementing legislation it will repeal and which legislation it wishes to keep (see our entry on "The Great Repeal Bill"). Unlike the Vienna Treaties, Article 50 EU Treaty does not contain a provision on whether the paragraph 2 notification can be withdrawn.
The Miller case The reversibility of the Article 50(2) notification played an important role in the Miller case, in which the UK High Court and Supreme Court had to decide whether the UK government can decide on its own to make that notification, or whether it needed a mandate by Act of Parliament. This question can only arise if the Article 50(2) notification has irreversible consequences. Ms. Miller claimed that this was indeed the case and that it therefore was the notification, and not a subsequent act, that would inevitably lead to the UK's withdrawal, with consequences for the rights that Ms. Miller derived from EU law. The government accepted this claim before the High Court, which then held that it was common ground between the parties. There was some discussion as to whether the government would change its position on appeal before the Supreme Court, but it did not, and the Supreme Court again held that this position was common ground between the parties.
Practical implications of reversibility This means that neither the High Court nor the Supreme Court took a position on the issue of reversibility, which is therefore still open for discussion. The practical implications of whether or not the Article 50(2) notification can be withdrawn are significant. A widely held view in the UK is that the Government could negotiate a withdrawal package with the EU and submit that outcome to the UK population by means of a second referendum, in which the UK population could choose between : (i) accept the package and withdraw under those conditions; (ii) reject the package and withdraw without conditions, or (iii) withdraw the notice and continue as a member state. The latter option, however, is only on the table if the Article 50(2) notification is reversible. Reversibility also has implications for the negotiation process: if the notification is irreversible, the only "best alternative to a negotiated agreement" for the UK is to withdraw without any arrangements. If, on the other hand, it is reversible, the UK has a more comfortable negotiating position because it may also choose to remain. It may therefore very well be that during the negotiations the other member states will take the negotiating position that the notification cannot be revoked.
An extensive discussion between EU lawyers is ongoing on the matter, focusing on whether:
- Article 68 of the Vienna Treaties, which provides for the reversibility of a notification, applies;
- The fact that Article 50 EU Treaty does not expressly provide for the possibility to withdraw the notification means that this possibility does not exist under EU law;
- The obligation of loyal cooperation between the member states would compel the other member states to accept a withdrawal of the notification; and
- The UK could abuse a notification withdrawal to avoid withdrawing without arrangement if it fails to reach an agreement within two years and also fails to secure a unanimous decision of the other member states to extend the two year deadline.
Lord Kerr, the UK civil servant who drafted the provision, has publicly taken the position that the notification can be reversed. Meanwhile, however, Prime Minister May has repeatedly stated that the British people have spoken and that, whatever happens, the UK will withdraw. The question on the reversibility of the Article 50(2) notification may therefore very well be moot.
2) EARLY TRADE NEGOTIATIONS WITH THIRD STATES: A BREACH OF EU LAW?
One of the hotly debated issues relating to Brexit is whether the UK can negotiate trade agreements with non-EU countries while it is still an EU member state, so as to avoid a legal vacuum from occurring upon its withdrawal from the EU.
Introduction When it comes to its future trade relations, the UK is faced with the problem that several of its current arrangements with third (i.e. non-EU) countries are governed by treaties entered into solely by – or alongside – the EU. Bilateral treaties entered into solely by the EU and to which the UK is not a separate signatory will generally no longer apply to the UK after Brexit. This could therefore necessitate the conclusion of new treaties. In the case of multilateral treaties to which both the EU and the UK individually are signatories, such treaties would in principle continue to apply to the UK (e.g. the WTO Agreement). However, certain provisions might have to be amended, for example where there is a "package deal" for the EU as a whole. It is unclear to what extent a withdrawal agreement between the UK and EU can and will alter the UK's position under these treaties, but it is in any event unlikely that the UK will be able to retain all current trading arrangements as is, not least because this would generally require the consent of each third-state party for each separate treaty. Additionally, there is no guarantee that the UK and EU will eventually reach an agreement at all. In light of these uncertainties, it is conceivable that the UK might want to start laying the ground for the negotiation of new trading terms. Indeed, UK ministers have apparently already informally discussed future trade relations with the governments of several non-EU countries. This is potentially problematic from the perspective of EU law, which restricts the right of member states to negotiate independently in certain areas.
Restrictions on independent negotiation by EU member states Pursuant to the Treaty on the Functioning of the EU, member states are not allowed to individually legislate or adopt legally binding acts, including international agreements, in areas where the EU has exclusive competence. Examples of these areas are the common commercial policy and the customs union. Additionally, in areas where the EU and the member states have shared competences (such as the internal market, or agriculture and fisheries), member states are not allowed to legislate or adopt legally binding acts if and in so far as the EU has exercised its competences. Consequently, there are few areas in which member states are fully free to engage in legal relationships with third states or international organisations of their own accord. This raises the question: is the UK prohibited from entering into, or even starting to negotiate, trade agreements with third states before the date of the actual Brexit? The case law of the Court of Justice of the European Union (CJEU) appears to answer this question in the affirmative. In the PFOS case decided by the CJEU in April 2010, Sweden had unilaterally submitted a proposal to amend an international treaty in an area of shared competence (environment) at a time when the EU had already started exercising its competences. The CJEU held that the simultaneous submission by Sweden of a proposal weakened the EU's external negotiating power and that this constituted an infringement of the principle of sincere cooperation laid down in the EU Treaty. One of the aims of this principle is to provide unity in the international representation of the EU, a unity which, under EU case law, must be ensured "both in the process of negotiation and conclusion and in the fulfilment of the commitments entered into".
Balancing future relationships It can be argued that, strictly speaking, it would be an immediate breach of its obligations under the EU Treaty for the UK to initiate negotiations, or in any event present proposals, for trade agreements with third states. In line with this, Chancellor of the Exchequer Philip Hammond admitted earlier this year that: "the UK cannot begin negotiating with the US or any other country until its obligations as a member of the EU end". However, will the UK government's adherence to the principle of sincere cooperation remain equally strong once it has notified the EU of its intention to leave? Prime Minister May has already started meetings on trade arrangements with e.g., the US, apparently taking the view that as long as no concrete arrangements are discussed, there is nothing to prevent the UK from talking business. There is no legal precedent available that could predict with certainty how such a defence would turn out for the UK if it is faced with infringement proceedings before the CJEU. On the other hand, the EU might choose not to initiate such proceedings in the course of Brexit negotiations. It will be interesting, to say the least, to see what the UK will prioritise when balancing its future relationship with the EU against relationships with third states.
3) THE GREAT REPEAL BILL
On 2 October 2016 Theresa May announced plans to introduce a "Great Repeal Bill" to replace all EU legislation currently applicable in the UK in one go. The Act resulting from that bill, which is intended to enter into force on the day of the actual Brexit, is the proposed solution to the question: which laws will continue to – or, more importantly, will no longer – apply to the UK on that day?
"Repeal and replace" approach The Great Repeal Bill will do two things. Firstly it will repeal the European Communities Act 1972, which currently regulates the application of EU law in the UK. This Act (i) provides for the recognition and enforceability in the UK of all EU rules intended to have direct effect in member states, such as the EU Treaties and Regulations, and (ii) creates a legal basis for the adoption of domestic legislation implementing EU rules that do not have direct effect, such as Directives. The Great Repeal Bill will literally "cut the cords" between the EU and UK by removing the link through which EU legislation has effect in the UK. Secondly, it will simultaneously fill the resulting void with – perhaps surprisingly – legislation similar to the rules currently applicable under EU law. Some of the EU rules currently applied through the European Communities Act 1972 will thus be "copied" straight into domestic law.
Rationale and purpose The Great Repeal Bill is presented as offering a stopgap for the legal vacuum that the UK could otherwise face on Brexit day. Such a vacuum would certainly ensue if no agreement is reached on the terms of the UK's withdrawal from the EU, because in that case all EU legislation will simply cease to apply to the UK upon its withdrawal. Even if a withdrawal agreement is concluded, however, it is unlikely that it will provide for all of the rules currently in place: it will probably be limited in scope and leave several areas uncovered. Either way, the UK would be in the dark until as late as 2019. This is relevant not only for all EU rules currently having direct effect in the UK, but also for all the internal implementing legislation, for which there would no longer be a legal basis. In addition, the Great Repeal Bill could serve as the instrument by which the outcome of the Brexit negotiations is implemented in UK law. In such a case the "copy" of current EU legislation would probably be amended to the extent agreed in the withdrawal agreement.
Enhancing legal certainty - but for how long? The Great Repeal Bill is intended to achieve a central aim behind Brexit – enabling the UK to take back control over its own laws – and, in addition, to pave the way for a smooth transition from EU law to domestic law. There would be no legal twilight zone: instead, all existing implementing rules would, in principle, continue to apply as they are until expressly repealed. According to Prime Minister May, the bill would thus provide clarity for businesses and individuals on their rights and obligations post-Brexit. The UK government is even contemplating the scenario that EU-law based rules which are preserved following Brexit continue to be interpreted in accordance with the judgments of the EU Court of Justice, to avoid diverging legal interpretations. It can be argued, however, that the bill will provide only a rather limited degree of certainty, because businesses and individuals cannot anticipate which of their rights and obligations will be covered by a possible withdrawal agreement. All those that are not covered can freely be abolished or altered by the UK post-Brexit. If anything, the main effect of the Great Repeal Bill will therefore be to buy the UK time.
4) BREXIT KEEPS UNIFIED PATENT COURT IN LIMBO
Despite the Brexit vote and contrary to the expectations of many IP professionals, the UK recently announced that it intends to ratify the Agreement on a Unified Patent Court. It is by no means certain, however, how this rather unexpected move will play out once Brexit materialises.
UPC The Unified Patent Court (UPC) will be a court common to all EU member states with jurisdiction in relation to what are called unitary patents. The new UPC system allows for uniform patent registration, grant and enforcement throughout the EU. Holders of such a unitary patent will be able to obtain an EU-wide injunction and it will be possible to attack the validity of such a patent at central EU level before the UPC. This differs from the current system in which European patents, once granted, consist of a bundle of national patent rights governed by their respective national patent laws, so that validity and infringement must be established separately for each country for which the European patent is designated. The UPC will have several divisions; an important one, with jurisdiction over patent disputes in relation to pharmaceutical and life science products, is planned to be located in London.
Entry into force The UPC Agreement provides that the new system will come into existence once 13 EU member states, including the three member states for which the most European patents are designated (currently the UK, Germany and France), have ratified it. Now that the UK has confirmed its intention to ratify, the UPC could therefore in theory become active within the next 12 months.
Brexit implications How this theory will work out in practice, however, remains to be seen due to Brexit uncertainties. To start with, the UPC will be obliged to refer all questions regarding EU law to the European Court of Justice. This feature of EU law, however, is precisely one of the things Brexiteers wanted to get rid of. Furthermore, the UPC Agreement provides that it is only open for accession by EU member states – something the UK will clearly not be post-Brexit. Thus, if the intent to ratify is indeed followed by ratification, it is uncertain what will happen after Brexit. Scholars have argued that, unless the Exit Agreement provides otherwise and/or the UPC Agreement is amended accordingly, the UK would have to withdraw from the UPC Agreement upon its withdrawal from the EU. Others, however, have argued that a solution will be found to keep the UK in because otherwise the system will lose much of its appeal and probably be abandoned. Either way, the fate of the UPC and the unitary patent system will most likely be clarified in the coming months as the Brexit negotiations start.
5) FINANCIAL SERVICES POST-BREXIT: WITH OR WITHOUT A PASSPORT?
In the post-Brexit world UK financial institutions will, in principle, no longer be able to benefit from a European passport. Third-country equivalence provisions may in some cases offer relief but are far from a panacea.
The concept of third-country equivalence under EU regulations and directives Under a large number of European financial regulatory regimes, financial institutions that are incorporated in an EU/EEA member state can benefit from a European passport. Such financial institutions need only obtain a licence, for example as a bank or insurance company, in one member state in order to offer their services in other member states. Completing a swift passporting procedure is sufficient.
Third-country equivalence is a framework designed for countries that are not EU/EEA member states. A third-country equivalence decision by the European Commission (EC) means that the rules and supervision in the third country concerned have been deemed equivalent for EU regulatory purposes. Depending on the type of services and the equivalence provisions in the relevant EU/EEA legislation, a similar passport may become available to financial institutions from this third country. However, this is by no means the standard situation.
Do all EU financial regulatory regimes allow for third-country equivalence? No. The relevant EU financial services legislation must contain specific provisions empowering the EC to decide on the equivalence of foreign rules and supervision. Some EU financial services directives and regulations contain such provisions (CRR, Solvency II, MiFID) and some do not (UCITS, Payment Services Directives).
The effect of third-country equivalence Equivalence decisions by the EC do not necessarily result in a passport-like situation for the beneficiary countries. Even where the recognition of non-EU financial frameworks is possible, the equivalence provisions often differ from one directive/regulation to another and thus have very different consequences. Only a few regimes provide access rights for institutions from third countries that are deemed to have an equivalent regulatory regime. For example, MiFID and MiFID II (once implemented) provide access rights for investment firms from third countries. The same goes for Solvency II as applied to third-country reinsurers. The AIFMD also recognises third-country access rights, but the full passporting regime is not yet available.
Most EU financial services legislation, however, contains more limited equivalence provisions:
- For example, the result of third-country equivalence may be that a less burdensome prudential regime applies in relation to exposures to an equivalent third country than would be the case for exposures to non-equivalent third countries. This would enhance the opportunities of financial institutions from the equivalent third country to enter into relationships with EU institutions, but would not give them access rights to the EU as such.
- Other third-country equivalence provisions aim to eliminate an overlap in compliance supervision by EU and third-country regulators. For example, where activities are already subject to supervision in the equivalent third country, such activities do not have to be re-supervised by the EU regulator.
The procedure for adopting an equivalence decision Before granting an equivalence decision, the EC carries out outcome-based assessments (i.e. assessments to determine whether similar regulatory outcomes are achieved) on the basis of technical advice from European supervisory authorities (ESAs). Equivalence decisions can be granted in full or part and for an indefinite period or with a time limit. They can apply to the entire supervisory framework of a non-EU country or to only some of its authorities. The time required to obtain an equivalence decision varies from case to case as the EC is not subject to a specific deadline. For example, it took almost four years for the EC to assess the US regime before taking its decision on equivalence under EMIR.
With regard to the Brexit, how would such an equivalence decision play out? If the UK is no longer a member of the EEA, UK financial institutions will, in principle, no longer benefit from the European passport regime. If the UK wishes to rely on third-country equivalence, it will first of all be required to keep its regulatory regime in line with that of the EU. Because of the large variety of equivalence provisions within EU law, this will have to be assessed separately for each directive or regulation.
And even if third-country equivalence is established, a passporting regime will only be available to UK financial institutions for a few types of services. If a UK financial institution wishes to offer any other type of service in an EU/EEA member state it will have to apply for a licence in that member state or set up a subsidiary there. The subsidiary may subsequently make full use of the passporting options available under EU rules and regulations.
The Dutch bonus cap The Netherlands has implemented a bonus cap of 20 percent for financial institutions. But fund managers of AIFs and UCITS, among others, are excluded from the cap. In principle, the bonus cap applies to all employees and must be applied on a group-wide basis in corporate groups with a Dutch holding company. However, if such a group has substantial activities outside the Netherlands, it can benefit from an exemption from this rule. Under that exemption, it can apply a cap of 100 percent if (i) at least 75 percent of the total number of employees falling under the responsibility of the group (ii) worked at least 50 percent of their time outside the Netherlands (iii) for at least three of the preceding five years.
6) NEGOTIATING THE UK'S EXIT FEE: ARE ALL BETS OFF?
European Commission President Juncker has recently warned the UK that it may have to pay a "Brexit fee" of up to EUR 60 billion upon leaving the EU. This warning has given rise to a discussion on whether there is a legal basis for such a payment obligation.
Ingredients of a potential Brexit fee An exit fee for the UK could consist of several elements. On the one hand, in its current capacity as an EU member state, the UK has already agreed to payment obligations under various multi-annual EU programmes extending beyond the expected Brexit date. The EU's Multi-Annual Financial Framework 2014-2020, which forms the basis for the EU's long-term expenditure, already contains financial commitments extending to 2020, especially in the area of the EU structural funds. On the other hand, the exit fee could also cover future financial obligations negotiated between the parties. In this regard, the question arises whether the UK can in future be expected to contribute to the pensions to be paid to former EU civil servants who are UK nationals. It is worth noting, in this respect, that the pensions of former EU civil servants are paid not out of a separate pension fund, but out of the normal EU budget, which contains a separate entry for pension obligations.
Is there a legal basis for a Brexit fee? The exact scope and amounts of the UK's and EU's respective financial obligations post-Brexit can be freely negotiated between the parties and will, if all goes well, be included in the withdrawal agreement. In determining their negotiation positions, however, the parties have focused on the UK's rights and obligations in the opposite situation: what happens if no withdrawal agreement is reached? Several legal experts have responded to this question. One approach is that the UK is bound by the Vienna Convention on the Law of Treaties, which provides that unless a treaty "otherwise provides" or the parties otherwise agree, the termination of a treaty: "does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination." According to this same approach, Article 50 EU Treaty does not contain specific rules regarding financing and therefore the obligations undertaken by the UK at the time that it was still bound by the EU treaties will remain in force after withdrawal. At the same time, the proponents of this approach acknowledge that there would be problems in the enforcement of residual obligations, as the UK would no longer be under the jurisdiction of the EU Court of Justice and the beneficiaries of these obligations would therefore be left with imperfect international enforcement rules. The EU Committee of the UK's House of Lords, on the other hand, has explored another approach. This approach also recognizes the applicability of the Vienna Convention but goes on to give precedence to Article 50 EU Treaty as a treaty provision "providing otherwise", meaning that in the absence of an agreement the legal basis for application of all EU law to the UK would come to an end. This would include the UK's current and future legal financial obligations under the EU budget or other financial instruments.
What will happen to EU-budget based pensions and individual grants? One of the main questions on the Brexit fee relates to the pension rights of former EU civil servants who are UK nationals. One consequence of the approach explored by the House of Lords is that the UK would not in future have to compensate the EU for these pension costs. Another consequence, also anticipated by the UK government, is that the UK will have to meet outstanding contractual obligations entered into under domestic grant schemes now co-funded out of, for example, EU structural funds, without receiving payments from the EU budget.
If there are no legal obligations, what leverage does the EU have? It therefore appears that whilst the European Commission has warned the UK to prepare itself for a hefty divorce settlement, the UK is thus far unwilling to acknowledge any legal grounds for payment obligations post-Brexit. This does not mean, however, that the UK can expect to get a free ride to Brexit. Both the UK government and the House of Lords have acknowledged that there will be political dimensions to the budgetary discussions if a beneficial future relationship with the EU is to be sought. Consequently, while the EU may approach the Brexit fee as payment of the UK's existing legal obligations, the UK may consider it as a concession to gain certain economic benefits in the negotiations.
7) BREXIT AND THE UK IMMIGRATION POLICY
In the wake of the Brexit referendum, practical and legal concerns have arisen as to how the rules on migration between the UK and the rest of the EU will change and from what date. The announcement by Prime Minister May that the Article 50 notification date will be used as a cut-off date has especially given rise to debate.
Introduction Pursuant to Directive 2004/38 on the free movement of persons within the EU, all EU citizens are entitled to a right of permanent residence in a member state other than their own if they have legally resided in that state for a continuous period of five years. The Directive also provides for certain family reunion rights. The UK Home Office has said that as long as the UK is still an EU member state, all EU citizens migrating to the UK will continue to enjoy this right. However, Prime Minister Theresa May has refused to give a firm guarantee until the post-Brexit status of UK citizens living elsewhere in the EU is agreed in return.
Cut-off date The cut-off date is the date after which new EU migrants to the UK should no longer benefit from the automatic right to permanent residence there after five years. Initially, the UK government planned to use the date of the Brexit referendum (23 June 2016) as the cut-off date, but because legal experts concluded that this date could not be set retroactively, Prime Minister May has said she will use the Article 50 notification date as the cut-off. This, however, raises the question as to whether using that date would violate the UK's obligations under the Directive in the period between the Article 50 notification date and the actual Brexit date.
Can the cut-off date precede the actual Brexit? Until the date of its actual withdrawal, the UK will continue to be an EU member state and as such will be bound by EU law, including the Directive. Does the Directive leave room to set the cut-off date on a date prior to the actual Brexit, which will not take place before 2019? Under the Directive, the only grounds on which the right to free movement can be restricted are public health, public policy and public security, none of which seem to apply here. Restrictions based on public policy or public security must comply with the principle of proportionality and be based exclusively on the personal conduct of the individual concerned. None of these grounds may be invoked to serve economic ends. Furthermore, all require a case-by-case assessment, which is inconsistent with a general cut-off date. The Directive thus does not seem to leave room for a cut-off date prior to the actual Brexit date, despite Prime Minister May's announcement that the Article 50 notification date will be used as a cut-off date. However, other legal issues that arise in this connection make the situation more complicated than the Directive may suggest. For example, it is questionable whether EU citizens migrating to the UK after the Article 50 notification but prior to the actual Brexit will be able to enforce their rights under the Directive if, by the time such rights become relevant, the EU Court of Justice no longer has jurisdiction in matters relating to them. Such individuals might be dependent upon infringement proceedings initiated by the European Commission against the UK during the negotiation period, for example, if the Court imposes provisional measures in such proceedings. Another complex legal issue is the status, post-Brexit, of EU citizens' rights to legal certainty, for example where they have moved to the UK under the presumption that their family members would be able to join them. Once EU-law protection is no longer available, will other legal frameworks (such as human rights conventions) be able to fill in the gap? Until such legal issues are clarified, the status and rights of EU citizens planning to move to the UK in the next two years will remain uncertain.