Planning for a no deal Brexit

• United Kingdom

• Brexit
• Commercial agreements
• Competition, EU and Trade
• Employment law
• Financial services and markets regulation
• Intellectual property
• Privacy, data protection and cybersecurity

11-10-2019

We cannot discount the possibility that the United Kingdom will leave the European Union without any agreement on any transitional period and with nothing finalised on what the UK’s future trading relationship with the European Union will look like.

We hope that most businesses have been planning for Brexit for some time, but perhaps the shape of this contingency planning has been influenced by an assumption that the UK and the European Union would manage to find some agreement on withdrawal arrangements.

The proposed withdrawal agreement that was agreed at negotiators’ level last year provided for a standstill transitional period lasting until 31 December 2020 (with the possibility of a one off time limited extension). During that period, EU law would have applied in full to the UK and there were arrangements that clarified, for example, when products were placed on the market and on citizens’ rights. And of course the withdrawal agreement contained the Protocol on Northern Ireland, known as the backstop, which has been the source of so much political unhappiness.

A no deal scenario means that none of the terms of the withdrawal agreement will apply. From an EU perspective, the UK will be a third country from exit day, there will be no clear agreement on the other matters in this agreement, such as on products and civil proceedings and there will be no possibility of the backstop applying in the future. The transition period would have given everyone more time to prepare, with the aim of a softer landing. All of us will need to respond immediately to changes involved in the UK no longer being a member state of the EU.

Both the UK and the EU have been putting in place a variety of interim measures that would apply on a no deal and these measures can only be of help. In addition, individual EU member states are taking unilateral action but again on a time limited and narrow sectoral basis. Most of these measures are not open ended commitments and are not across the board. It would be unwise to plan long term around them and they should be seen as temporary measures that will help us all prepare for the new post Brexit world.

Set out below are some areas of particular concern.

The legal position

The coming into force of the European Union (Withdrawal) Act 2018 last year put in place the structure to ensure that there would be no gap in the UK statute book on the date of exit. So, on exit day, EU law that currently applies in the UK will be transposed into UK domestic law. However, that is not the end of the story. Some of this EU law will be repealed (because it can only operate on a reciprocal level) and much of it needs to be amended to make it work at a domestic level. The process of this amendment has been going on for some time with the issue of hundreds of statutory instruments aimed at making consequential amendments and repeals to this body of retained EU law and the latest insight from the Hansard Society suggests that this process is nearly complete. It is not an easy task to work out when these changes will affect any particular business and even where the amendments are described as only correcting deficiencies, they often involve new procedures, new interactions with new regulators (where a new UK only regulator is required) or they involve new assessments or standards (such as the proposed new replacement mark for the CE marking). No assumptions are easily made with regard to existing assessments or certifications. In the future we can expect more regulatory divergence between the UK and the EU as a result of future policy changes, many of which are yet to be announced.

There is the distinct possibility that other legislation that is required to make sure the UK has the necessary new regulators and policy frameworks will not be ready in time for exit day, notably in the fields of immigration and trade policy. The Government has said it has a range of contingency plans to deal with some of this legislation not coming into force in time, but details are sketchy.

Trade

With no agreement with the EU in place, trade between the UK and the EU will be governed by WTO rules. This means that exports from the UK into the EU will be subject to the EU’s commitments under the WTO General Agreement on Tariffs and Trade (GATT) and the WTO General Agreement on Trade in Services (GATS). In particular, UK exports of goods into the EU will be subject to EU import duties (at the rates set out in the EU’s GATT tariff schedules) and import VAT, while provision of services into the EU will be subject to the EU’s market access restrictions under the GATS. The same principles will apply for exports from the EU into the UK. However, in this respect the UK has issued its own proposals for its own tariff rate to apply for a limited 12 month period prior to full consultation on what UK tariffs should be. Those proposals zero rate most products but businesses supplying goods into the UK from the EU should check the UK Government’s latest proposals as to whether those goods are zero rated or not.

Effect on contracts

Customs checks (including checking rates of applicable tariffs) and clearance procedures will become the new norm, although this may be an impetus for simplified procedures to be introduced (for example French Customs has already designed what they refer to as a “smart border” using technology to automate border crossings by HGV). Preferential trading terms with countries which have free trade agreements with the EU will only apply if the UK and those countries have already successfully agreed to roll over those terms. The Government keeps a list of those agreements where the counterparty has agreed to roll over terms but it is also clear that some will not be rolled over on the same terms, including those with Japan, Turkey and Canada.

In terms of services supplied into the EU, UK businesses will no longer be treated as if they were local businesses in each EU Member State and they, as well as UK nationals providing services, will be regarded as originating from a third country. This may mean additional legal, regulatory or administrative barriers, depending on the local law of the EU Member State in which the service is to be supplied. This could be visa or work/residence permits for individuals, local rules for recognition of qualifications or local rules that regulate particular services, all of which will need to be checked on a national basis. Although the WTO rules mentioned above provide some harmonisation, they provide even less protection than they do for goods, as the key to effective removal of trade barriers in services tends to require regulatory harmonisation. Where this is not in place, the model for free trade in service tends to be based on mutual recognition of standards and regulatory oversight – without a trade agreement between the EU and the UK, these principles will not apply.

The UK Government has made some preparations to help UK importers and exporters deal with Brexit, with some interim measures put in place to ease the process. We recommend those selling into or buying from the EU read Government guidance if they have not already done so. In addition, the issue of product standards will arise. The EU has chosen to adopt a different approach to goods regulation on a no deal where, in general terms, it will cease to recognise regulatory compliance activity carried out in the UK as valid for goods placed on the EU market. In addition, there remains the issue of whether existing contracts will reflect the new reality and what new provisions future contracts should contain to ensure the risks of importing and exporting as a third country rather than as an EU Member State are adequately addressed.

Immigration

Free movement ends on exit day. This means that for the most part EEA citizens who come to the UK to take up residency or to work after that date will require immigration permission to enter the UK. The previous Prime Minister had acknowledged that a new system would take some time to set up and had proposed a new regime called “European Temporary Leave to Remain in the UK” in the event of no deal. However, the Home Office announced in August that this transitional measure would no longer be pursued and has suggested a new immigration system will be in force immediately after Brexit day. The new Prime Minister has expressed a preference for an Australian style points based system. This may well bring advantages for skilled workers but unskilled and semi-skilled, low paid and those seeking work may struggle to satisfy the proposed points system.

On a more positive note EEA citizens in the UK before Brexit day are eligible to apply for settled UK status via the EU Settlement Scheme provided they do so before 31 December 2020.

Intellectual property

Following Brexit, the unitary European Union trade mark (EUTM) and Registered Community Design (RCD) will no longer cover the UK or provide protection in the UK. However, the Government is intending to put in place a new scheme of “cloned rights” covering EUTMs and RCDs so that, provided they exist and are registered as at the date of exit, they will continue to be protected and enforceable in the UK by the scheme providing an equivalent trade mark or registration in the UK. For any EUTMs or RCDs which are pending at the point of exit, the brand owner will need to confirm that protection is required in the UK and some additional fees will be payable (which are likely to be the UK official fees). Once confirmed, a ‘cloned’ UK trade mark/design application (with the filing date of the EU application) will be created.

Civil legal proceedings

A no deal Brexit means no automatic recognition and enforcement of UK court judgments across the EU as the UK will lose the benefit of current EU wide regimes on jurisdiction. Nor will the remaining EU member states be required to automatically defer to the jurisdiction of the UK courts in certain circumstances. The UK is acceding to the 2005 Hague Convention on Choice of Law Agreements (accession is currently suspended until date of exit) which will protect exclusive jurisdiction clauses (but only these clauses) in certain commercial contracts in respect of signatories to this Convention (which include all EU member states) but will provide no protection for non-exclusive jurisdiction agreements and no protection for a variety of disputes that fall outside the scope of this Convention, such as claims based on tort. The upshot is that many litigation strategies which have evolved over the last 20 years based on the provisions of an EU harmonised and reciprocal regime may become obsolete as regards the UK. That is not to say that the local law of various EU member states will not recognise English exclusive jurisdiction clauses, only that it will be a matter of checking rather than being able to assume recognition. For a more in-depth look at the implications of a no deal Brexit on dispute management strategies, including service, evidence, mediation and arbitration please see our booklet on What does no-deal Brexit mean for Commercial Litigation across the EU.

Data flows

The current EU General Data Protection Regulation (GDPR) will remain part of UK domestic law as retained EU law. However, the EU GDPR and the current UK Data Protection Act 2018 will be adjusted to operate effectively for the UK’s purposes post Brexit and a new “UK GDPR” will be formed – a single UK regime for general processing activities.

In respect of transfers of personal data, the UK will become a third country after exit day and will be treated as such. The European Commission has yet to grant an adequacy decision in respect of the UK, and is unlikely to before exit day. Therefore, an appropriate safeguard will be required for transfers of personal data from the EU into the UK: businesses that rely on these transfers will need to work with their EU counterparts to make sure a safeguard (such as the EU standard contractual clauses) is in place. This is potentially made more difficult shortly after exit as the validity of standard contractual clauses is being challenged before the CJEU with a decision expected in December 2019. An adverse decision could have particularly poor timing in relation to transfers from the EU to the UK in the absence of an adequacy decision. In respect of transfers from non EU countries to the UK, a limited number have confirmed that they will maintain unrestricted personal data flows to the UK (including Canada, Guernsey, Japan, Israel, Jersey, New Zealand). The ICO is maintaining a list that is updated on its website.

As far as data transfers from the UK are concerned, the UK will recognise all EEA states, Gibraltar and EU institutions and bodies as providing an adequate level of protection for personal data. Existing EU adequacy decisions will also be recognised by the UK on a transitional basis. The use of EU standard contractual clauses will continue to be an effective basis for data transfers to territories outside the UK. The ICO will gain powers to issue new standard contractual clauses for transfers from the UK after exit. In addition, existing authorisations of binding corporate rules made under the EU process will continue to be recognised in UK law. These arrangements will be kept under review by the Government and Information Commissioner post Brexit.

Organisations will also need to contemplate other data protection compliance issues arising from the UK’s third country status. For example, new representatives in the EU and/or UK may need to be appointed by organisations caught by the extra-territorial reach of the EU GDPR and/or UK GDPR. Organisations will also need to consider whether their lead supervisory authority in the EU will change as a result of Brexit. In addition, documentation may need to be updated, including records of processing activities, fair processing notices, data protection impact assessments and contracts.

You can read our briefing for further information on actions to take.

UK Competition Law

Once the UK leaves the EU, the UK competition authorities (rather than the Commission) will have sole jurisdiction to investigate anti-competitive practices which took place both pre- and post- Brexit which affect UK markets. Furthermore, the UK competition authorities and courts will no longer be required to ensure consistency with EU competition law, including the EU competition decisions and case law, unless it pre-dates exit date. This means that the UK competition authorities and courts will no longer have to have regard to EU case law and decisions adopted after that date. This opens the door to divergent outcomes between the European Commission’s and the UK competition authorities’ decisions, as well as between court decisions.

Financial Services

HM Treasury and the UK financial regulators have onshored the EU financial services regulatory framework without any policy changes. Passporting of financial services firms and funds will end on exit day, however the UK regulators have put in place temporary permissions and recognition regimes (the TPR) which will permit those banks, broker-dealers, fund managers, insurers and other financial services providers who have given notice that they want to participate in those temporary regimes time to transition to full UK authorisation. For those that choose not to participate in the temporary regimes there will be the financial services contracts regime that will permit financial services providers to service existing contracts for five years after exit day (fifteen years for insurers).

The UK Financial Conduct Authority has entered into memoranda of understanding with the European Securities and Markets Authority and each EU National Competent Authority (the equivalents of the UK Financial Conduct Authority and the UK Prudential Regulation Authority) in the remaining 27 EU member states that will permit continued information sharing between regulators and the ability of financial services firms to delegate functions across the UK-EU border.

It is expected that the UK will make findings of “equivalence” for the EU27 under those regimes where it is available and those countries and territories in respect of which the EU has currently found equivalence immediately on exit day, although such findings will not be automatic. The equivalence regimes are limited, being focussed mainly on access to market infrastructure, such as securities trading venues, and wholesale investment and fund services.

For further information, follow this link.