Brexit: Beyond the Rhetoric
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In preparation for the EU referendum, King & Wood Mallesons spent a six-month period studying the implications of Brexit, working with clients, industry leaders, academics, heads of both the ‘in’ and ‘out’ campaigns, media influencers and others. Following the decision to leave the EU, we offered a webinar to our clients, to outline the real implications of the vote, beyond the headlines and the rhetoric. It is important to remember, of course, that overnight, nothing has changed: EU law continues to apply, as do UK laws derived from the EU. However, companies should begin considering which pieces of legislation and regulation are valuable – or unhelpful – in the context of your business. There will also be a role for the business community to play in helping to shape Britain's future relationship with Europe. We talk through the expected developments and address some of the immediate queries we are seeing from clients.
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Brexit: Beyond the Rhetoric
- 1. London, 29 June 2016 Brexit: Beyond the Rhetoric
- 2. King & Wood Mallesons / www.kwm.com 2 Agenda Business “hot topics” • “Passporting” for financial institutions • Data protection rules • Employment implications The exit options What are the alternatives on the table? The Brexit: the basics • The vote • EU institutions • Article 50 notice • “Reverse gear”? • EU law going forward 01 02 03
- 3. King & Wood Mallesons / www.kwm.com 3 Source: BBC Website Voting
- 4. King & Wood Mallesons / www.kwm.com The immediate aftermath ... 4 “We stand ready to launch negotiations swiftly with the United Kingdom regarding the terms and conditions of its withdrawal from the European Union. Until this process of negotiations is over, the United Kingdom remains a member of the European Union, with all the rights and obligations that derive from this. According to the Treaties which the United Kingdom has ratified, EU law continues to apply to the full to and in the United Kingdom until it is no longer a Member.” President Tusk, President Schulz and Prime Minister Rutte, 24/6/16 “A negotiation with the European Union will need to begin under a new prime minister and I think it is right that this new prime minister take the decision about when to trigger article 50 and start the formal and legal process of leaving the EU,” David Cameron "There cannot be any informal negotiations until we get that message from the UK.” Angela Merkel, 27 June 2016
- 5. King & Wood Mallesons / www.kwm.com Key EU Institutions 5 European Council
- 6. King & Wood Mallesons / www.kwm.com Key EU Institutions 6 • The European Council • Brings together EU leaders to set the EU's political agenda. It represents the highest level of political cooperation between EU countries • Not to be confused with the Council of Ministers • The European Council takes the form of (usually quarterly) summit meetings between EU leaders, chaired by a permanent president • Receives the Art 50 notice • The EU Commission • Promotes the general interest of the EU by proposing and enforcing legislation as well as by implementing policies and the EU budget • Likely to lead the Brexit negotiations • European Parliament • Is directly elected every 5 years • Has legislative and budgetary powers
- 7. King & Wood Mallesons / www.kwm.com Article 50 Lisbon Treaty (TEU) 7 Art 50(1) – Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements. Art 50(2) – A Member State which decides to withdraw shall notify the European Council of its intention ... the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. Art 50(3) – The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.
- 8. King & Wood Mallesons / www.kwm.com Article 50 Lisbon Treaty (TEU) 8 The key milestones: • UK to give notice to the European Council • The European Council will provide negotiation mandate to Commission Any Brexit terms need to: • Obtain the consent of EU Parliament • Be approved by the European Council (with a qualified majority) • All European Council decisions must be adopted by adopted by a “qualified majority” vote • At least 55% of the members of the Council representing the participating Member States, comprising at least 65% of the population of these states
- 9. King & Wood Mallesons / www.kwm.com How is Notice given? 9 How to give “notice”? • No form requirement • Must conform with Member State’s own constitutional requirements • “The notification of Article 50 is a formal act and has to be done by the British government to the European Council. It has to be done in an unequivocal manner with the explicit intent to trigger Article 50”, EU spokesperson • No risk of “whoops, we notified the Council ...” What are the UK’s “constitutional requirements”? • Referendum is purely “advisory” • UK’s “constitutional conventions” do not address the role of Parliament in relation to referenda and the issue of Art 50 notice • No majority for Brexit in the Commons at present
- 10. King & Wood Mallesons / www.kwm.com How is Notice given? 10
- 11. King & Wood Mallesons / www.kwm.com Is there a “reverse gear”? 11 Second referendum There were no ‘hurdle rates’ for the first referendum Desire to introduce these now for future second referendum (75% / 60%) Need for material change in circumstance? ▪ Parliamentary ratification of Brexit negotiation mandate? ▪ Parliamentary ratification of Brexit terms? ▪ Next general elections The next general election in May 2020 Fixed-term Parliaments Act 2011 May be held at an earlier date if vote of no confidence or other exceptional circumstances
- 12. King & Wood Mallesons / www.kwm.com Scotland 12 • Voting outcome in Scotland • Could Scotland block Brexit? • Brexit requires changes to the Scotland Act • A second independence referendum?
- 13. King & Wood Mallesons / www.kwm.com Continued application of EU law 13 UK representation • UK MEPs • UK European Council (except Brexit) • Council of Ministers • UK Commissioner, after Lord Hill resignation? UK staff in EU institutions • New glass ceiling • Voluntary exits likely Legal compliance obligations • Respect for the fundamental freedoms • Regulations and Directives • Budget contributions According to the Treaties which the United Kingdom has ratified, EU law continues to apply to the full to and in the United Kingdom until it is no longer a Member. Joint EU Statement
- 14. King & Wood Mallesons / www.kwm.com Article 7 Lisbon Treaty 14 Voting suspension An EU infringement procedure to be used against member countries that have committed fundamental rights violations. • Allows the EU to suspend the voting rights of a Member States • All other obligations continue to apply (e.g. budget contributions) Hurdles • Unanimous support by all Council Members for a determination of a “serious and persistent” breach of one or more of the fundamental rights of the EU, e.g. democracy, rule of law and human rights • Qualified majority of the Council Members is sufficient for subsequent suspension decision Never invoked to date but ... • Poland (2015) – government control over state media • Hungary (2015) – treatment of migrants
- 15. King & Wood Mallesons / www.kwm.com Exit options 15
- 16. King & Wood Mallesons / www.kwm.com Exit implications 16 Source: FTWeekend 25/26 June 2016
- 17. Financial Services - Passporting
- 18. King & Wood Mallesons / www.kwm.com Passporting: EEA (Norwegian option) 18 UK would continue to implement existing and new financial services directives and regulations Outward and inward passports for firms regulated under EU financial services directives on a services and branch basis still available Likely loss of influence in Europe over scale and nature of future regulation Technical issues with incorporating provisions into EEA Agreement can affect position, particularly for new firms / directives / regulations Little regulatory reason for a UK firm to move to another European jurisdiction Little regulatory reason why a non-European institution would not choose the UK as a place to establish its European HQ
- 19. King & Wood Mallesons / www.kwm.com Passporting: Third country (all other options) 19 No automatic passporting (services or branch) based on UK authorisation UK firms might establish a subsidiary elsewhere in the EU and passport from it Non-UK firms might move staff and business to an existing subsidiary elsewhere in the EU or establish a new subsidiary to act as EU HQ Or work with EU authorised firms by delegation / agency Some financial services directives have third country recognition / passporting • AIFMD model – equivalence and full authorisation and compliance in an EU state • MiFID model – equivalence + ESMA registration • Services/sales only to professional investors, not retail public • Equivalent, not lighter touch, regulation
- 20. King & Wood Mallesons / www.kwm.com Data protection: 20 EU’s General Data Protection Regulation (“GDPR”) ▪ GDPR is scheduled to come into force on 25 May 2018 ▪ Automatically will apply in all EU Member States from that date ▪ Q: So what happens when the UK leaves the EU? ▪ A: Almost certainly nothing will change
- 21. King & Wood Mallesons / www.kwm.com 21 ▪ Non-EU established organisations will be subject to the GDPR where they process personal data about EU data subjects ▪ This means that UK companies offering goods or services in the EU will be caught ▪ Plus as part of any EEA/Swiss/Norway style negotiation the UK will in practice need to implement equivalent legislation ▪ ICO: “If the UK wants to trade with the single market on equal terms we would have to prove ‘adequacy’ – in other words UK data protection standards would have to be equivalent to the EU’s General Data Protection Regulation framework” Data protection:
- 22. King & Wood Mallesons / www.kwm.com Philipp Girardet EU, Competition and Regulatory, Partner London T +44 207111 2055 philipp.girardet@eu.kwm.com 22 Questions? Tamasin Little Financial Regulation, Partner London T +44 207111 2302 tamasin.littlet@eu.kwm.com Tom Usher EU, Competition and Regulatory, Partner London T +44 207111 2988 tom.usher@eu.kwm.com Jeremy Schrire Commerce & Technology, Partner London T +44 207111 2439 jeremy.schrire@eu.kwm.com
Editor's Notes
- Our aim today is to discuss the factual implications of Brexit for the business community – beyond the often heated rhetoric we have seen from the politicians and the press. King & Wood Mallesons has been studying the implications of Brexit over an extended period, working with clients, industry leaders, academics, heads of both the ‘in’ and ‘out’ campaigns, media influencers and others to offer a 360° view of the implications of Brexit for clients. We are engaging with many of our clients on specific issues that relate to them, and where the risks and opportunities from Brexit may lie. Today, we aim to set out some of the headline considerations for the business community, across a range of sectors, and we will share answers to some of key queries we are seeing from our clients. There will be an opportunity to submit questions on an entirely anonymous basis at the end of this presentation – though you can of course tell us which sector you are operating in where this is relevant.
- Note that the referendum is advisory, not legally binding – however, the UK government will be under intense political pressure to act on the vote.
- The Norwegian Option: Member of EEA Norway, Iceland, Lichtenstein No automatic right – each EU and EEA state has a right to veto (e.g. Norway/Slovakia) Obliged to make substantial financial contributions, e.g. Norway is the 10th largest contributor per capita at £106 p.a. vs UK per capita contribution of £126 (after rebate) Required to adopt wide ranging EU legislation – without having a say Required to accept freedom of movement Would have access to the single market for trade in goods but not full access for financial services 2. The Swiss Option: Member of EFTA EU relationship would be based on a series of bilateral agreements UK would have to accept free movement of persons and make EU budget contributions Switzerland’s contributions as an EFTA member are estimated at approximately €75 per capita Access to the single market requires that EU standards and regulations must still be met No mutual recognition of legislation but constant legislative amendments required to maintain access to EU market There would also be no dispute resolution procedure to give common interpretation to the agreement 3. The Turkish Option: Joining EU’s Customs Union No contribution to EU No need to accept freedom of movement but UK citizens also lose right to move freely within the EU Partial access to the single market but does not cover services and finance Goods must meet EU standards Can have the benefit of all EU trade agreements but cannot participate in any negotiations 4. The “Albanian” Option: UK-EU FTA option Enter into a Free Trade Agreement (FTA) with the EU EU FTA with Canada (CETA) took 7 years to become effective Difference in bargaining power significant: EU represents c. 40-50% of UK exports, the UK represents only c. 6% of total exports by other EU countries The trade agreements the UK is party to via its EU membership cover c. 59% of the UK’s global trade; this could rise to 88% if the EU is successful in its current trade negotiations – over 28 agreements may need to be renegotiated 5. The WTO Option: Relying on the World Trade Organisation Rules The UK controls its trade policy but would submit to the ‘no discrimination’ principle which applies to all WTO members UK loses the benefit of existing FTAs between the EU & other countries as well as losing access to trade with the EU on terms more advantageous that those available to other third countries UK would trade with EU on part with all other WTO members which do not have a FTA with the EU Goods and services exported into the EU would still need to meet EU standards
- The Norwegian Option: Member of EEA Norway, Iceland, Lichtenstein No automatic right – each EU and EEA state has a right to veto (e.g. Norway/Slovakia) Obliged to make substantial financial contributions, e.g. Norway is the 10th largest contributor per capita at £106 p.a. vs UK per capita contribution of £126 (after rebate) Required to adopt wide ranging EU legislation – without having a say Required to accept freedom of movement Would have access to the single market for trade in goods but not full access for financial services 2. The Swiss Option: Member of EFTA EU relationship would be based on a series of bilateral agreements UK would have to accept free movement of persons and make EU budget contributions Switzerland’s contributions as an EFTA member are estimated at approximately €75 per capita Access to the single market requires that EU standards and regulations must still be met No mutual recognition of legislation but constant legislative amendments required to maintain access to EU market There would also be no dispute resolution procedure to give common interpretation to the agreement 3. The Turkish Option: Joining EU’s Customs Union No contribution to EU No need to accept freedom of movement but UK citizens also lose right to move freely within the EU Partial access to the single market but does not cover services and finance Goods must meet EU standards Can have the benefit of all EU trade agreements but cannot participate in any negotiations 4. The “Albanian” Option: UK-EU FTA option Enter into a Free Trade Agreement (FTA) with the EU EU FTA with Canada (CETA) took 7 years to become effective Difference in bargaining power significant: EU represents c. 40-50% of UK exports, the UK represents only c. 6% of total exports by other EU countries The trade agreements the UK is party to via its EU membership cover c. 59% of the UK’s global trade; this could rise to 88% if the EU is successful in its current trade negotiations – over 28 agreements may need to be renegotiated 5. The WTO Option: Relying on the World Trade Organisation Rules The UK controls its trade policy but would submit to the ‘no discrimination’ principle which applies to all WTO members UK loses the benefit of existing FTAs between the EU & other countries as well as losing access to trade with the EU on terms more advantageous that those available to other third countries UK would trade with EU on part with all other WTO members which do not have a FTA with the EU Goods and services exported into the EU would still need to meet EU standards