THERESA MAY’S FLORENCE SPEECH: THE RENAISSANCE OF EU LAW IN THE UK? In her Florence speech of last Friday, the Prime Minister set out the UK Government’s proposals for a new “Economic Partnership Agreement” between the UK and the EU postBrexit, which is to be agreed and implemented within a two-year “Implementation Period” post-Brexit Day (in all likelihood in March 2019) (the “Proposals”). Whilst the political dimensions of the Proposals are and will continue to be the subject of great debate, this note instead focuses upon two significant legal issues which can be distilled from the Proposals. In summary, these issues are that: i. During the Implementation Period, which is likely to be for at least two years (and perhaps significantly longer), the totality of EU laws are likely to continue to apply in the UK as they do presently and private parties will continue - throughout that period - to enjoy the same rights and protections as they do currently; and ii. The new Economic Partnership Agreement envisaged by the Proposals is likely to take a sectoral approach to establishing a UK / EU free trade area in both goods and services and it is likely, therefore, that only when that new Agreement is ratified by both the UK and all EU Member States that EU law will cease to be directly effective in the UK. 1. THE REGENERATION OF EU LAW, RIGHTS AND OBLIGATIONS THROUGHOUT THE IMPLEMENTATION PERIOD The Proposals make clear that, formally, the UK will cease to be an EU Member State post-Brexit Day, but it will continue to be bound by EU laws and regulations throughout the Implementation Period (essentially a transition period, which the Proposals envisage will be for two years). Significantly, this implementation period will most likely form part of the Withdrawal Agreement which can be adopted by the EU Council by qualified majority voting without the need for Member State ratification. This is because Article 50 TFEU sanctions a withdrawal agreement to provide for a “framework of the departing Member States’ future relationship with the Union”. Therefore, whilst in principle (and as is stated in the Proposals), the UK will cease to be an EU Member State on 29 March 2019, in practice, during the Implementation Period, the UK will continue to be bound by “the existing structure of EU rules and regulations” – which will include continued membership of the Customs Union and the Single Market so that during the Implementation Period “access to one another’s markets should continue on current terms”. Since the Implementation Period will be part of an EU legislative act, the totality of EU law (including the Withdrawal Agreement) will in all likelihood continue to be directly effective before EU and UK courts throughout the Implementation Period. Therefore, throughout this period the Court of the Justice of the European Union (the “CJEU”) can be expected to retain the final say in respect of the interpretation and application, in the UK, of the totality of EU law (including, of course, the Withdrawal Agreement). There is an inevitable tension between this legal outcome and the provisions of the UK Withdrawal Bill, currently before Parliament. This adopts EU law in its totality as at Brexit Day (the so called EU “Acquis”) but (inter alia) repeals from Brexit Day the principle of supremacy of EU law and the jurisdiction of the European courts and delegates to ministers the power to modify or repeal any EU law post-Brexit Day. It would now appear likely that the Withdrawal Bill will have to be the subject of significant amendment to provide for the continued full force and effect of EU law throughout the Implementation Period, including the continued jurisdiction of the European courts as currently enjoyed. Specifically in relation to EU nationals who wish to continue living in the UK post-Brexit, while there remains a gulf between the UK and EU’s current positions, the Proposals confirm acceptance that their EU law rights will continue to be protected during the Implementation Period - although the UK will look to introduce a mandatory registration system (which in itself can be devised in a way which is compatible with EU law). The key issue in this area is that, whereas it is suggested in the Proposals that the English courts will “take into account” CJEU judgments (with an assumption that the rights of EU citizens in the UK will be subject only to UK law after the completion of the Implementation Period), the EU remains insistent that such rights should continue to be directly enforceable before the CJEU and therefore enshrined in the Economic Partnership Agreement. This maintenance of this legal status quo as regards EU law rights and obligations will, as the Proposals acknowledge, provide businesses and public services with continuity pending the implementation of the new Economic Partnership Agreement with the EU. Therefore, businesses can take some comfort that a “hard Brexit” in March 2019 is less likely and that Brexit planning should take account of the negotiation of the new Economic Partnership Agreement with the EU (which is unlikely to be complete until sometime after March 2019 and which it is hoped will address many of the outstanding commercial, legal and regulatory issues for all business sectors). 2 It is worth noting in this context that, as indicated in the Proposals, the legal status quo and therefore the continued application of EU law in the UK during the Implementation Period will continue until the Economic Partnership Agreement enters into force. In practice this period may well extend beyond the two year period envisaged in the Proposals, notwithstanding the suggestion in the Proposals that a two year Implementation Period will be “guaranteed”. This is because, quite apart from the time required to negotiate the new Economic Partnership Agreement, it is highly likely that a subsequent lengthy period will be necessary for ratification of the Agreement under each Member State’s own constitutional requirements, which as we know from the recent CETA Agreement with Canada can be problematic. 2. THE LEGAL FRAMEWORK OF THE NEW ECONOMIC PARTNERSHIP The Proposals make clear that the regeneration of EU law in the UK as described above is to be strictly limited to the Implementation Period; that the UK does not intend to join the European Economic Area (the “EEA”) post the Implementation Period and that, post-Brexit Day, the UK should not be prevented from negotiating free trade agreements with third countries. Whilst the Proposals do not provide any clear guidance on the substance of this new Economic Partnership, there are some useful signposts for businesses: Given that EEA membership is excluded, as is a Canadian style CETA free trade agreement because “it is too restrictive” to be of benefit (in particular given that it does not cover services), it is possible that the UK will be seeking an agreement structured on a sector by sector basis with exclusions for certain sectors or areas of policy and regulation. It would appear that the Government envisages at least a free trade area in goods with no tariffs and harmonised standards and a liberalised services market. It can be anticipated that financial services will be a key sector in the new Agreement. Against this background, it would appear that now is the time for businesses to assess and address with the Government the optimal policy and regulatory outcome for their sectors. It remains to be seen whether this form of “mix and match” free trade approach - while excluding certain areas and policies (such as State Aid) from the new Agreement - is obtainable. To take an example of how this approach may develop in practice, in the EU financial services market the adoption of “passporting” rights (which facilitate direct access to the EU market for UK-based financial services funds and which would come from EEA membership), appear to have been excluded as a result of the rejection of the EFTA model. However, the Proposals expressly make the point that, unlike other external trading partners, the UK is not starting from "a blank sheet of paper" but with "the same rules and regulations as the EU". This could hint at the UK's attitude to questions over whether it would be deemed to have an equivalent regulatory regime for the purposes of key European financial services legislation taking effect on Brexit. There has been considerable market discussion - which will need to be addressed - as to whether the UK will be able to negotiate automatic or "grandfathered" equivalency for regulatory purposes immediately post-Brexit or whether it would be subject to lengthy assessment periods by European regulatory bodies (including, for the purposes of MiFID II, third country passporting). The Proposals acknowledge that a key question is what may happen - once the new Economic Partnership is in force - when one party wishes to make changes to the current rules and regulations and the other party does not. Under the draft Withdrawal Bill, Parliament (or ministers in Parliament) would have the right to revoke or amend any provision of the Acquis post-Brexit. It appears likely, however, that a process for reaching common agreement between the UK and EU for such changes to the Acquis will be required. Whilst, as suggested, the UK may well be allowed to negotiate free trade agreements with third countries during the Implementation Period, it is unlikely that it will be permitted to give effect to such agreement during the Implementation Period (that is, at least until March 2021) given the commitment that market access will continue on current terms throughout that period. It is however significant that post-Brexit Day, the UK will cease to benefit from agreements concluded between the EU and third countries, the benefit of which the UK currently enjoys. These range from significant EU treaties such as the European Common Aviation Area Agreement of 2006 to the various bilateral agreements the EU has entered into with third countries. The Withdrawal Agreement will only govern the transition between the EU and the UK but, absent further agreement, cannot extend to other EU international agreements. MACFARLANES LLP 20 CURSITOR STREET LONDON EC4A 1LT T +44 (0)20 7831 9222 F +44 (0)20 7831 9607 DX 138 Chancery Lane www.macfarlanes.com This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained. Macfarlanes LLP is a limited liability partnership registered in England with number OC334406. Its registered office and principal place of business are at 20 Cursitor Street, London EC4A 1LT. The firm is not authorised under the Financial Services and Markets Act 2000, but is able in certain circumstances to offer a limited range of investment services to clients because it is authorised and regulated by the Solicitors Regulation Authority. It can provide these investment services if they are an incidental part of the professional services it has been engaged to provide. © Macfarlanes September 2017 SEPTEMBER 2017 Finally, once the Implementation Period gives way to the new Economic Partnership Agreement, private parties will no longer be able to directly invoke EU law before the UK’s domestic courts. Under the Withdrawal Bill, the UK courts will then determine any such questions of interpretation as a matter of English domestic law. It is likely, however, that as suggested in the Proposals, a new mediation / arbitration dispute resolution process analogous to that contained in the CETA agreement will govern dispute between the UK and the EU. Therefore, whilst the renaissance of EU law in the UK may be relatively short-lived, much will depend on how long it will take for the new Economic Partnership proposed in Florence to be agreed and ratified; which may be a significant period of time.