Brexit update – the shape of the United Kingdom’s exit

• United Kingdom

• Brexit

29-01-2020

We are now days away from the UK’s exit from the European Union, with the UK legislation that is needed to give effect to the agreed withdrawal arrangements in UK law having received Royal Assent last week.

This article covers:

• What are the implications of the withdrawal arrangements?
• A future UK-EU trading relationship
• UK legislation to implement the withdrawal arrangements
• Immigration
• Data protection
• Financial services
• Where does this leave business planning?

Eversheds Sutherland are committed to giving clear, straightforward and objective advice on what an exit may mean for your business. The issues are not the same for every business and our legal advice will be tailored to your needs. We are one of a handful of firms recognised for our Brexit legal advice by Legal 500, a go-to firm for Brexit contingency planning and legal advice, monitoring of developments, and client and industry specific briefings.

View our dedicated Brexit hub where you can find our publications on Brexit, a full list of our Brexit team, and details of our client events programme.

Introduction

The European Parliament is voting today to ratify the withdrawal agreement and the UK will officially leave the EU at 11.00pm (GMT) on Friday 31 January 2020. We will then enter into a transition period until 31 December 2020. The agreed withdrawal arrangements contain the possibility of this period being extended once for up to 2 years, if this is agreed by both the UK and the EU by 1 July 2020 but the current UK Government is ruling out such an extension and the UK legislation implementing the withdrawal arrangements has written into it a prohibition on a UK minister making such a request.

The UK’s formal exit may be the end of one legal relationship but it also represents the start of the next phase of Brexit: the negotiations for the future trading relationship with the EU.  The European Commission plans to hold briefings with EU Member States in the next month, with a view to negotiations with the UK on the future trading relationship formally starting at the beginning of March 2020.

What are the implications of the withdrawal arrangements?

The key element of the withdrawal arrangements remains a standstill transition period during which EU law will continue to apply to the UK until 31 December 2020. The withdrawal agreement and the EU refer to this as a transition period but UK legislation refers to this as an implementation period. Neither of these terms accurately describe its effect.

During this period, EU regulations as they currently apply will remain the same. In addition, new directly applicable EU law adopted by the EU during transition will continue to apply automatically within the UK and other new EU measures adopted during this period will need to be implemented domestically.

The withdrawal agreement with the EU contains the arrangements for the attempts to square the circle between honouring the Good Friday Agreement and reflecting Northern Ireland’s new status as no longer being a constituent part of an EU member state.  Whereas the previous intention was that these arrangements operated as an insurance backstop (that is, only coming into effect if other measures failed to keep the Irish border open), the intention is now that they come into force automatically at the end of the transition period.  They are permanent, provided consent of the Northern Ireland Assembly is given at set periods of time.  In practice this means that there will be a customs and regulatory border between Great Britain and Northern Ireland in the Irish Sea affecting goods intended for export to the EU, and Northern Ireland will apply many EU customs rules where goods are ultimately destined for the EU27, whether direct or after processing. However, the actual impact of this Protocol will depend on whether a free trade agreement with the EU is in place on 31 December 2020 as such an agreement has the potential to reduce these border issues to little effect.

The withdrawal agreement also sets out what happens at the end of the transition period for certain matters where they straddle pre and post expiry of that period, including in the areas of EU citizenship rights and immigration, recognition of professional qualifications, when goods are placed on the EU market and intellectual property.

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A future UK-EU trading relationship

Sitting alongside the withdrawal arrangements is a non-binding political declaration setting out the framework for the negotiations of the future trading relationship between the UK and the EU.  This document aims only for a free trade agreement and not a free trade area, with the result that trade will not be frictionless (as, for example, goods will be subject to checks for rules of origin) and as it is non-binding, its contents are not reflected in any current UK Brexit legislation.

There is no commitment by the UK in this declaration to “align” with pre-existing EU rules in certain regulated areas (and by “align” we mean ensuring common standards would not be reduced below the level applicable at the end of the transition period). For example, in the field of employment and social policy, there is a loose statement relating to commitment to uphold high standards.  Similarly, previous binding wording on free and undistorted  competition has been  replaced by  potentially weaker  language in the new declaration. That is not to say that alignment may not occur, only that the UK is not agreeing now to any binding commitments in this respect.

For services, the political declaration states only an aim that the parties should “aim to deliver a level of liberalisation in trade in services well beyond the parties World Trade Organisation commitments”.

Crucially, the UK and the EU now have 11 months to negotiate this new trading relationship if they are to avoid a cliff edge Brexit at the end of 2020. If the UK were requesting a comprehensive trading agreement with the EU or an arrangement that involved regulatory alignment commitments,  there would have been some significant doubt as to whether this type of trade agreement could be negotiated within this timescale.   The European Commission is said to be working on a basic free trade agreement for goods linked to conditions of level playing field, governance, external and internal security and fisheries. Negotiations will be led by EU Chief negotiator, Michel Barnier. However, there is also the UK Government’s approach to take into account here: the UK has not accepted this linkage, with UK Government statements suggest UK alignment with EU rules is not on the table (although alignment when it is a matter of implementing global standards might be achieved as part of any sectoral deals that are negotiated post transition).  If the UK aim is to limit a future free trade agreement to a pared down goods only arrangement, this in itself may create greater certainty on the timetabling.

However, these conflicting positions suggest that the conclusion of even a basic agreement on trade within 11 months may remain challenging. As the UK will be in a position post transition to “de-regulate”, we expect the EU to continue to focus on its requirement for level playing field provisions. This seems to directly challenge the current Government’s attitude to other trading relationships. 

This means that the risk of some kind of cliff edge Brexit has been shifted to 31 December 2020.  However, there are other possibilities to no or no useful trade deal by that date, including:

• as referred to above, a limited pared down trade deal in goods but not in services by 31 December 2020;
• an approach whereby the UK and EU agree to negotiate individual agreements on non-contentious subjects first, leaving areas where negotiations are likely to be more complex to be added at a later date or subject to further commitments to co-operate in these areas; or
• an approach where each side unilaterally allows access to the other to certain markets, possibly linked to reciprocal access being granted by the other (using the same approach as adopted by the EU in putting in place its own unilateral contingency measures for a no deal Brexit).

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UK legislation to implement the withdrawal arrangements

The European Union (Withdrawal Agreement) Act 2020 which passed into law last week, implements the withdrawal arrangements with the EU in UK law and crucially delays what was meant to be the conversion of existing EU law into UK domestic law until the end of the transition period.

 UK legislation to implement the withdrawal arrangements of the UK’s exit from the EU.

The European Union (Withdrawal Agreement) Act 2020 (the 2020 Act) implements the withdrawal arrangements. Since the withdrawal agreement is an international treaty, it requires domestic legislation for it to take effect in the UK.

The 2020 Act is designed to work in conjunction with the European Union (Withdrawal) Act 2018 (the 2018 Act). It qualifies the provisions of the 2018 Act for the duration of the transition period as follows:

• since the UK needs to preserve EU law for the agreed transition period, although the European Communities Act 1972 is to be repealed on “exit day” (with “exit day” being set in stone as 31 January 2020), the 2018 Act then goes on to save the effect of the 1972 Act after exit day so that EU law can continue to apply to the UK during transition;
  • some amendments are then needed to be made to the 1972 Act for this purpose and this appears to create a new category of law described by the 2020 Act as “relevant separation agreement law” that will apply during transition only;
  • the domestication of EU law onto the UK statute book as envisaged by the 2018 Act will now take place at the end of the transition period rather than on 31 January 2020 (which is the date the UK ceases to be an EU member state). The key date for this domestication is no longer “exit day” but what is defined as “IP completion day” which becomes a key definition in UK Brexit legislation; and
  • direct jurisdiction of the CJEU in the UK will end on expiry of the transition period. Before then, existing EU mechanisms for supervision and enforcement will continue to apply in the UK so as to ensure that EU rules are interpreted and applied consistently in both the UK and the EU for the duration of transition.

The 2020 Act also includes the following provisions:

• a power to allow Ministers (following consultation with the judiciary) to change how the 2018 Act provides for courts to interpret saved historic CJEU case law after the end of transition, including what test should apply when deciding whether to depart from any retained EU case law. This provision has been subject to some level of criticism on the basis that, if all UK courts and not just the UK Supreme Court, have the ability to revisit case law of the CJEU, then what are now established interpretations of law will be more vulnerable to challenge at all levels of courts;
• a power to disapply any inconsistent or incompatible domestic law where it conflicts with the withdrawal agreement;
• a prohibition on a UK Minister agreeing to extend the transition period;
• implementation of the withdrawal agreement on citizens’ rights (such as the setting up of a new body to be called the “Independent Monitoring Authority for Citizens’ Rights Agreements”), on the financial settlement and implementation of the Northern Ireland Protocol;
• implementation of the agreement the UK has reached with the EEA and EFTA states on separation issues and an agreement with Switzerland on citizens’ rights: these are given an equivalent legal effect in domestic law to that of the withdrawal agreement with the EU so that nationals of EEA/EFTA and Switzerland may rely on their rights in the same way as EU citizens;
• delegation of authority to ministers and appropriate authorities to make secondary legislation to ensure the correct functioning of the separation provisions of the withdrawal agreement;
• parliamentary scrutiny over any EU legislation made, or which may be made, during transition that, in the opinion of the European Scrutiny Committee, affects the UK’s vital national interests. However, the 2020 Act gives Parliament no role in shaping the UK’s proposals for the future relationship with the EU; and
• an express statement that the UK Parliament is sovereign.

Finally, the UK is not committed by the 2020 Act to maintain any particular regulatory level going forward, whereas when this legislation was originally introduced as a bill in October 2019, it contained certain commitments aimed at ensuring political support. Given the result of the general election, these are no longer a political necessity and have been removed, although this does not prejudge the UK Government’s future approach to regulatory standards.

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Immigration

The UK’s exit preparations continue to significantly affect workforce planning.

The UK Government intends to introduce its Immigration and Social Security Co-ordination (EU Withdrawal) Bill to implement a points based immigration system from 2021 and to bring an end to free movement in UK law.

This will mean that EU citizens arriving from 2021 will be subject to the same UK immigration controls as non-EU citizens, whilst at the same time protecting “the long-standing immigration status of Irish citizens when free movement ends”.   In addition, the Government has said it will create visa schemes for new migrants who will fill shortages in UK public services, including a fast track NHS scheme and increased quotas for seasonal agricultural workers.

The European Union (Withdrawal Agreement) Act 2020 includes measures so that existing resident EU citizens have the right to remain via the already established EU Settlement Scheme. Those who have arrived before 2021, other than Irish citizens, need to apply for permission to stay within this simplified immigration application process which requires citizens of EEA countries to establish their identity, residence in the UK and an absence of serious criminal convictions.  The Government advises that around 2.6 million of the estimated 3.4 million resident EEA citizens in the UK have applied so far, with only a very small number of refusals to date.  It is not yet clear what will happen to EEA citizens who fail to register by the scheduled end date of 30^th June 2021, although employers will not be obliged to make future immigration checks on such employees.

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Data protection

Ensuring data flows remains a critical part of many businesses planning for Brexit.

EU regulations (including the General Data Protection Regulation (EU) 2016/679 (the GDPR)) will continue to apply in the UK during the transition period. During this time, however, the Information Commissioner’s Office will not necessarily be able to participate in the activities of the European Data Protection Board (e.g. meetings, decision-making etc.). Upon expiry of the transition period the GDPR will be transposed into UK domestic law and adjusted to address any deficiencies arising as a result of Brexit, by way of the Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019, to create a single UK data protection regime.

We know that, during the transition period, the UK will seek to obtain an EU adequacy decision in respect of transfers of personal data to the UK from the EEA. The political declaration notes that “the European Commission will start the assessments with respect to the United Kingdom as soon as possible after the United Kingdom's withdrawal, endeavouring to adopt decisions by the end of 2020, if the applicable conditions are met”. Further, in a more recent document, the European Commission also indicated its intention to “endeavour to finalise” an adequacy assessment by the end of 2020. However, it is by no means certain that UK adequacy will be obtained – the assessment process could be long (if previous adequacy assessments are anything to go by) and the UK will have certain hurdles to clear such as concerns regarding its legislative approach to national security.

Article 71 of the withdrawal agreement provides that in respect of the processing of personal data of non-UK data subjects, EU data protection laws including the GDPR (except Chapter VII – cooperation and consistency) will apply in the UK, provided that the personal data:

• was processed under EU law in the UK before the end of the transition period; or
• is processed in the UK after the end of the transition period on the basis of the agreement.

This provision will not apply if the processing is covered by an adequacy decision.

Essentially, this all means that if the UK fails to secure an adequacy decision before the end of the transition period, then the personal data of non-UK data subjects processed by UK businesses will need to be processed in accordance with EU data protection laws as they stand at the end of the transition period. In this scenario, organisations would need to deploy specific data mapping and tagging activities to identify and ring-fence any non-UK personal data and address any divergence between the UK and EU regimes post-transition. However, the level of practical additional disruption this requirement would have on organisations is unclear, given that many would presumably be caught by the extra-territoriality application of the GDPR in any event and therefore have to consider how to continue to address GDPR, as well as UK GDPR if divergences start to appear in laws and interpretation.

It is also worth noting that, since new directly applicable EU law adopted by the EU during transition will continue to apply automatically within the UK, the adoption (and application) of any new EU ePrivacy Regulation by the EU during transition would apply in the UK. However, at the time of writing, it remains to be seen whether the ePrivacy Regulation will indeed reach such fruition within the next eleven months.

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Financial services

As for the position for cross-border financial services, the risks that a no deal Brexit posed to cross-border financial services from the outset of the Brexit process and the failure of the UK and the EU to make any meaningful progress towards a withdrawal agreement for so long ensured that all well advised financial services market participants took steps so that they were fully prepared for no deal, either by opening subsidiaries in the UK or EU27 as required or by separating their UK and EU27 businesses into separate entities, back in 2018 and early 2019.

This is fortuitous because the revised political declaration holds out nothing for financial services save for a non-binding aspiration for the UK and EU to seek to make findings of equivalence to the extent that UK and EU financial services regulation permits by July 2020. The most likely outcome for financial services is that there will be an effective no deal Brexit on 31 December 2020. While a deal on financial services may be agreed by the UK and EU subsequently to that date, and, if the parties were to behave as rational economic actors, such an agreement would indeed be quickly forthcoming, there is no realistic chance of such a deal being agreed and ratified by IP Completion Day in light of the political and diplomatic factors in play.

The no deal Brexit plans of financial services firms will be put to the test and should be maintained and revised to ensure they remain fit for purpose in good time for IP Completion Day.

Equivalence

The equivalence provisions in EU financial services regulation are partial, limited and do not provide a stable framework on which to base cross-border financial services business. There are around forty individual equivalence regimes, the most important of which are shown in Table 1. The same limitations will apply to the (initially) identical UK equivalence regime, which will derive from onshored EU financial services regulation.

Table 1 – EU equivalence regimes[1]

EU law	Scope of equivalence or third country entities	Member State opt out?
MiFID II	Wholesale investment products for sophisticated investors	Yes, may either not adopt new rules or require a local branch to be opened
MiFID II	Wholesale investment products for selected professional or retail clients	Yes, may either not adopt new rules or require a local branch to be opened
AIFMD	Manage  EEA AIFs, with passport rights	No
AIFMD	Market EEA and non-EEA AIFs, with passport rights	No

Third country regimes are not available for deposit-taking, lending, mortgage lending, insurance mediation and activities relating to UCITS.  It is difficult to conceive of a cross-border financial services firm with such a narrow ambit of activity that it would be encompassed by equivalence, even if the fullest extent of equivalence were found.

To date, the EU has been sparing in making findings of equivalence and even where it has made such findings, it has shown itself willing to withdraw those findings for unrelated political and diplomatic reasons.

Financial services provisions in FTAs

In general, free trade agreements do not include provisions in relation to trade in financial services and where they do, they have not yet been activated.

Currently, the best example of an agreement for trade in financial services which is live is the bilateral agreement between Switzerland and the EU for trade in non-life insurance.  That is a narrow agreement and currently at risk of coming to an end as a result of the ongoing trade dispute between Switzerland and the EU.

While a free trade agreement that includes financial services is possible in theory, if the UK/EU free trade agreement were to contain a fully-fledged financial services chapter and that chapter were activated, that would be a global first.

Financial Services Bill 2020

In the Queen’s Speech a Financial Services Bill was announced.  While the text of the Bill has not yet been published we know that the intention of the Bill is to “Ensure that the UK maintains its world-leading regulatory standards and remains open to international markets after we leave the EU” and that the Bill will “Simplify … the process which allows overseas investment funds to be sold in the UK to maintain our position as a centre of asset management and provide more choice to UK consumers, in line with commitments made during our preparations for leaving the EU.”

From what little we know, it appears that it is the intention of the UK Government to open the UK retail fund market to retail funds with similar regulatory and consumer protection standards as (UK) UCITS, with funds from the USA, Canada, Australia, New Zealand and Japan the most likely early beneficiaries of this policy.

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Where does this leave business planning?

The changes on the Northern Ireland arrangements have significant implications for businesses supplying goods into Northern Ireland as they should be aware that there will be separate rules in the areas of customs, VAT and regulatory alignment for goods that will apply until the point in time when a UK-EU trade agreement provides otherwise. In law, an English supplier to a Northern Irish customer may not strictly be an exporter but the differences in regimes will have a similar practical effect.

Contingency planning should not assume that a trade agreement with the EU will be in place by 31 December 2020 or should assume only a minimum bare bones agreement covering goods. Without any trade agreement being in place, UK-EU trade (and trade with other countries where free trade agreements are not rolled over or agreed with the UK by 31 December 2020) will be governed by WTO terms.  In other words, no deal preparations may come into play again in the run up to the end of 2020.

Regulatory alignment is not the policy of the current UK Government. Businesses should not assume equivalence between UK and EU law will remain after the end of the transition period (although areas such as financial services and environment are subject to separate proposed legislation surrounding future policy in this area which may or may not be close to equivalence). Changes to UK legislation will not come to an end with the completion of the transposition process of EU law into UK domestic law.

Contingency planning based on the day when the UK ceases to be an EU member state will not reflect the practical reality of the transition period: the UK will have exited from the EU on 31 January 2020 but will remain subject to EU law during the remainder of this year. This includes new EU law introduced during this period, without the UK having the ability to influence or repeal this law during transition, although given the UK Government’s desire to not extend the transition period, this should not be a major issue.

The approach of the UK Brexit legislation passed this month is technically complex and creates new categories of UK law. It may be that the use of certain contractual terms to apply EU law requires review and that terms that assume UK membership of the EU may no longer have the desired effect.

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[1]           Source: European Parliamentary Research Service Briefing “Understanding equivalence and the single passport in financial services - Third-country access to the single market”.