brexit briefing 29 Mar 2018 Brexit: one year to go, or is it?

In one year's time, the UK will cease to be a Member State of the European Union ("Brexit Day").  But with one year left to go, the terms which deal with the UK's withdrawal from the EU (which includes the terms of the transition period) are yet to be legally agreed and ratified.

Whilst it is the case that a majority of the text of the Withdrawal Agreement has been agreed, there are several complex areas which are not, for example, the Irish border.  Formal talks in respect of the UK's future relationship with the EU27 are yet to begin.  Changes to the UK's domestic law, required as a result of Brexit are yet to be formally proposed by the UK Government.  With one year left to go before Brexit Day, much remains unknown rather than known; the UK's position on Brexit Day is, as yet, legally uncertain.

None of which is particularly helpful for firms who are trying to plan for Brexit.  The most pressing question for most firms is whether the UK will remain to all intents and purposes, a Member State, for a transition period, or is the 'cliff edge' still something to be prepared for? 

The Withdrawal Agreement – the transitional arrangement 

The purpose of the Withdrawal Agreement is twofold.  First, to deal with the rights and obligations of the UK when it ceases to be an EU Member State. Secondly, to provide for a transitional arrangement, which will (in effect) mean that the UK retains the same rights and obligations as if it were a Member State beyond 29 March 2019.  

In relation to the latter, the announcement of agreement between the UK and the European Commission on a transition period (which for present purposes can be summarised as the UK retaining the same rights and obligations as it does presently under EU law until 31 December 2020) is welcome.  However, whilst a step forward politically, there remains legal uncertainty which may undermine its current usefulness.

These transitional arrangements are contained in the Withdrawal Agreement, which deals primarily with the terms of the UK's departure from the EU.  The transitional arrangements are not mutually exclusive from the terms of the UK's withdrawal.  Whilst there is agreement on the majority of the points contained in the Withdrawal Agreement, there are significant items yet to be resolved.  For example, in relation to the rights of the Courts of Justice of the European Union ("CJEU") to continue to hear cases brought by or against the UK, rights in relation to geographical origin of goods, the application of EU data protection laws in relation to data subjects who are outside the UK, certain rights in relation to nuclear fissile material, and the deeply emotive issue in relation to the Irish border. All of these matters will need to be resolved, and the Withdrawal Agreement ratified (by both the EU27 and, in some form, by the UK), prior to the terms of the Withdrawal Agreement (and, accordingly, the transitional arrangements) becoming effective.  With that process in mind, it may be that a transition period which maintains the current status quo, and the legal certainty that accompanies it, is not formally ratified until the end of this year (or maybe early next year based on the European Commission's initial timetable for the negotiations).

This creates an issue

Should those businesses which, as part of their Brexit contingency plans, require authorisations from regulators within the EU27 to be obtained in order to continue to access the Single Market, rely on something which is politically agreed (i.e. the transition period) to allow them more time to obtain those authorisations, or continue to prepare on the basis that the UK will become a 'third country' in a year's time?  

Currently, at least from a legal perspective, the UK will become a third country on 29 March 2019.  That is what Article 50 provides for and, until the withdrawal agreement is agreed and ratified, that remains the outcome for the UK.  Whilst the current political will is to find solutions to the outstanding points on the withdrawal agreement (as noted above), it is not yet legally certain that the UK will have the benefit of a transitional arrangement which bridges the gap between its status as a Member State, and its status as a third country. 

For some businesses (particularly those that need to obtain new regulatory authorisations), it may be necessary to make those applications in any event.  Banks, for example, have been told by the European Central Bank ("ECB") that it expects them to continue to prepare for all possible contingencies, including a no-deal scenario leading to a hard Brexit with no transition and that banks 'are responsible for ensuring that all authorisations required for them to carry out their activities as envisaged are in place in a timely manner'.  Indeed the ECB has explicitly said that it and national regulators expect banks who need expanded EU27 authorisations for their post Brexit structures to submit their applications "at the very latest by the end of Q2 2018". Which leaves banks who are relocating operations to the Eurozone with little alternative other than to apply now, if they have not already done so. By contrast, the Bank of England is slightly more pragmatic, committing that, even in the event that the Withdrawal Agreement has not been ratified by Brexit Day, European banks can continue their business – at least until a permanent solution is achieved.  For other financial services firms, for example, the time it takes to navigate through the relevant licensing process may not be quite as lengthy as for banks, but may still incur a significant period of time which could mean that those applications may need to be submitted shortly (if they have not been submitted already).  It also takes a significant amount of time to build new platforms and infrastructure to allow those businesses to operate.

This raises the additional difficulty for firms that if the transition period is eventually ratified, and the UK granted continued access to the Single Market on the current basis, firms would incur cost in two different centres for 21 months, when only one is needed.  What the announcement of the agreement on the transitional arrangements may mean is that businesses do not completely execute their plans, particularly in respect of those aspects which can be put in place in a relatively short timeframe – for example, certain actions could be left outstanding.  This would apply to more nimble firms which do not have a need for complex infrastructure to be set up (for example fund or asset managers), who may already have some European presence but for whom Brexit planning is looking at how to bulk up those operations should a hard Brexit occur, or where a transition period is ratified. 

The Withdrawal Agreement – the terms of the withdrawal

In relation to the first of its objectives, the Withdrawal Agreement provides clarity around a number of points.  Whilst most focus has been on citizens' rights (in relation to both UK citizens residing in the EU, and vice versa), the UK's contribution to the EU budget, and the Northern Ireland border issue, the agreement also makes provision for:

• goods which enter the Single Market from the UK prior to the end of the transition period but which do not reach an 'end-user' until after that date, and VAT payable in respect of such goods which are in transit over the date of the end of the transition period;
• legal proceedings which are instituted prior to the end of the transition period, the enforcement of judgments arising from such proceedings, and the CJEU's rights as a final court of appeal in relation to such matters;
• the UK's responsibilities as a result of it exiting the Euratom Treaty at the end of the transition period;
• the applicability of the EU data protection framework to the processing of personal data in UK (including on data flows from the UK); and
• conversion of unitary EU intellectual property rights into UK rights without loss of priority.

As noted above, large amounts of the text of the Withdrawal Agreement are agreed as between the UK Government and the European Commission (and a handy colour coded version has been provided by the Government).  However, significant areas which are yet to be resolved.  For example, in relation to the rights of the CJEU to continue to hear cases brought by or against the UK, rights in relation to geographical origin of goods, the application of EU data protection laws in relation to data subjects who are outside the UK, certain rights in relation to nuclear fissile material, and the deeply evocative issue in relation to the Irish border. All of these matters will need to be resolved (and ratified) prior to any transitional arrangement becoming effective.

In addition to what the Withdrawal Agreement does cover, it is important to note what the Withdrawal Agreement fails to do.  It does not clarify the position in relation to contracts for services, where the activity (or activities) being conducted by the service provider are activities of a type which the provider provides on the basis of its passport rights (for example, a UK bank providing a revolving credit facility to a French borrower).  This is quite unsatisfactory for firms, and only adds to the complexity they are experiencing. 

The UK's future relationship with the EU27

On 23 March, the European Council adopted new negotiating guidelines for discussions on the framework that would govern the future relationship between the EU and the UK after the transition period ends.  There are a number of key points that can be gleaned from these guidelines at this stage, each of which suggest that long-term post-transitional period planning for business still remains the most challenging prospect of Brexit.

Early days

Whilst the guidelines provide a welcome insight into the breadth of the future relationship the EU27 is willing to discuss with the UK, it is still early days in the negotiations and so the scope of this future relationship, let alone the terms on which it might function, are by no means final.  The scope of future relationship is also dependent on the UK and EU27 also reaching agreement on the withdrawal and transition arrangements (i.e. the scope of any future relationship cannot be agreed without agreement on withdrawal and transition, whilst agreement on withdrawal and transition does not require agreement on the future relationship). So whilst the terms of the future relationship might be the most important to the UK of the three agreements with the EU in the long-run, it is third placed in the queue in terms of the EU's procedural priority. 

An ambitious scope

The proposed scope of the future arrangement covered by the guidelines are ambitious but this is expected, they reflect the deep nature of the UK-EU relationship over the last four and a half decades. The guidelines envisage the future relationship encompassing the following, much of which will be limited by the UK's current wish to leave the Customs Union and Single Market: 

• a balanced, ambitious and wide-ranging free trade agreementaddressing, inter alia:
  - trade in goods, covering all sectors, and seeking to maintain zero tariffs;
  - maintaining existing reciprocal access to fishing waters and resources;
  - customs co-operation;
  - technical barriers to trade and sanitary and phytosanitary standards;
  - a framework for voluntary regulatory co-operation;
  - trade in services, based on market access under host state rules, but to an extent consistent with the UK's position as a third country and the absence of a common UK-EU regulatory, supervisory, enforcement and judiciary framework; and
  - access to public procurement markets, investments, and protection of intellectual property rights, and other areas of interest.
• close co-operation on environmental issues;
• provisions on movement of natural persons, based on full reciprocity and non-discrimination among the EU27, and related areas such as coordination of social security and recognition of professional qualifications;
• socio-economic co-operation regarding:
  - ensuring continued connectivity of transport services between the EU and UK (including in relation to air travel)
  - research and innovation, education and culture.
• law enforcement and judicial co-operation in criminal matters;
• co-operation in the areas of security, defence and foreign policy; and
• data protection.

The guidelines suggest that these principles might significantly change direction if the UK Government compromises on its red lines, such as by remaining in the Customs Union and Single Market.

Detailed agreements(s) will take years

Moreover, the European Commission and EU27 have always been clear that it will not be possible to agree a detailed agreement on the future UK/EU relationship before Brexit Day given the ambitious scope of what is likely to be covered.  Instead, the aim is to reach agreement on the "framework" that would govern this future relationship (i.e. the heads of terms). The detailed terms of such a future relationship will take much longer than the one year left before Brexit Day, reflecting a number of factors, including:

• the sheer scope, and therefore details, of subject matter covered by the guidelines;
• the likelihood that elements of this relationship will require ratification by each of the 27EU alongside the EU institutions;
• it is envisaged that there might be numerous UK/EU27 agreements, each covering different aspects of the relationship, potentially ratified in a staggered process depending on their urgency. For example, the agreement on free trade may be distinct to any separate agreements on security cooperation on areas, which would be distinct from any agreement on air and other transport connectivity.

If previous free trade agreements are anything to go by, ratification of the envisaged agreement(s) between the UK and the EU27 is unlikely to take place within the envisaged transition period. Whilst the UK, EU27 and businesses alike will be keen to avoid a regulatory gap or further cliff edge between the end of the transition period and start of the rules governing the future relationship, a smooth transition between the two is not guaranteed.  Planning a business around this will remain a challenge and any longer-term contingency plans are likely to have to cover a wider range of possible outcomes than those covered by the transition agreement.

Dealing with the 'inoperables' in UK domestic legislation

As noted in our April 2017 briefing "Article 50 triggered: Deal or no deal - the count down to Brexit begins", the Government proposes to give legal effect in the UK to its decision to exit the EU by a piece of primary legislation now known as the European Union (Withdrawal) Bill ("EUWB").  The purpose of the EUWB is (1) to repeal the European Communities Act 1972 ("ECA"), which incorporates EU law into the UK domestic legal order, on exit day, and (2) to convert the ‘acquis’ – the body of European legislation, case law and jurisprudence – into UK law at the moment of repeal of the ECA so that, to the greatest practical extent, the same rules and laws will apply in the UK on the day after exit as on the day before.  The latter aspect is important as it underpins certain of the UK's obligations under the Withdrawal Agreement, as well as likely forming the basis for the UK's position in respect of negotiation of its future relationship with the EU27.  Assuming that the Withdrawal Agreement is ratified by both the UK and the EU27 (and therefore creating in law a transition period which effectively preserves the current status quo until 31 December 2020), it is likely that further legislation will be implemented to postpone the effective date of the EUWB until 31 December 2020. Our understanding is that the Government will likely introduce further primary legislation to do this in due course (which may provide business with further opportunity to lobby Government with regard to how 'inoperables' are proposed to be dealt with).

The EUWB recognises that there are many areas where simply preserving EU-related law in UK domestic law will not work either at all, or at all satisfactorily.  To deal with these 'inoperables', the EUWB provides for powers to be granted to the Government to implement secondary legislation (known as statutory instruments or SIs).  

No official figures have been published, but it is widely believed that the number of SIs required to address these concerns is likely to exceed 1,000.  The Government has not yet published drafts of any of these SIs but it has published a set of illustrative samples of what it envisages they might look like.  These samples gives a hint of the level of detail and the painstaking nature of the sorts of amendments that will be made to UK law by these SIs.  For example, the UK government has announced it intends to incorporate both the Rome I Regulation¹ and the Rome II Regulation² into domestic UK law upon exit.  The Rome I Regulation contains rules that determine which country’s laws should apply when adjudicating on contractual disputes raising cross-border issues, and the Rome II Regulation contains similar rules for non-contractual disputes.  However, the Rome I and Rome II Regulations apply only to EU member states.  So the amendments illustrated in one sample SI include, for UK law purposes, replacing references in the regulations to “member state” with “relevant state” (defined to mean either the UK and all the Member States or, where necessary, the UK and only the Member States bound by the regulations, which currently excludes Denmark). Other examples of inoperables include, for example, how 'incoming' firms which utilise a Single Market passport under a Single Market Directive (for example, a bank under CRD IV) will be treated in terms of permissions from the UK regulators, how references to the EU's supranational regulators (for example, ESMA) are to be construed in respect of relevant domestic legislation, etc.

Given the level of detail and their volume, it is probably fair to anticipate that these SIs will not be immune from error and will likely give rise to numerous questions of interpretation (or mis-interpretation).  In any event lawyers and their clients can probably expect to be spending much time cross-referring to these SIs and related EU and UK legislation.

The UK's relationship with other countries

The UK cannot agree trade agreements with any other country until it ceases to be a Member State.  Whilst the draft Withdrawal Agreement gives the UK the green light to negotiate, sign and ratify trade agreements with non-EU countries during the 21 month transition period, a great deal of uncertainty remains in this regard. For example: 

• any such agreements cannot become effective until after the end of the transition period;
• these agreements may take longer than the 21 month transition period. This might either be because of the scope of the third country agreement, or because the third country might want to wait to see what the final UK/EU trade agreement comprises. However, some third countries such as Australia, have said that they are prepared to move quickly in this regard; and
• the details of any such agreements to date remain uncertain. 

Conclusion

As things currently stand, political progress is being made on each of these items.  This is undoubtedly helpful in reinforcing the belief that agreement can be reached between the UK and the EU27.  However, there remains little in the way of legal certainty in each of these areas.  It may be the case that all the UK can do is to prepare domestic legislation as best it can, but many will be hoping that the other objectives can be settled as quickly as possible.