© 2016 The Texas Lawbook.
By Norton Rose Fulbright’s Chris Warren-Smith, Efren Acosta, and Andrew Sheftel
(Aug. 25) – On June 23, the United Kingdom electorate voted to leave the European Union (the EU) by a margin of 52% to 48%. The vote in itself has no legal effect, but politically, it is likely to start a process eventually leading to the UK’s withdrawal from the EU.
How Brexit will impact businesses having a presence in or trading with the UK and the EU is still largely unknown and will remain so for some time. However, there are various challenges and opportunities that such businesses will need to consider. These include issues like investment and location of business operations as well as trade consequences such as possible changes to tariffs and customs duties. Could, for example, the UK’s departure from the EU lead to the signing of a free trade agreement between the UK and the US?
In this article, we set out the likely stages leading to the withdrawal of the UK from the EU, how these will affect the regulatory landscape and the steps that Texas businesses may consider to deal with regulatory change.
Timeline for the UK’s withdrawal
For the moment, the position is exactly as before the referendum. English law has not changed, nor is it likely to change for at least two years. The Financial Conduct Authority, the UK financial regulator, made an announcement on June 24 to make it clear that “Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.”
The triggering of Article 50 requires the departing state and the EU to negotiate that state’s withdrawal from the EU. If no agreement is reached (and no extension is agreed upon) at the end of a period of two years following delivery of the notice, all treaty obligations will cease to apply to the UK. In addition, the UK will also need to negotiate new arrangements with EU countries as well as other countries with which the EU currently has trade deals.
The legal route to regulatory change
There are thousands of pieces of legislation in the UK that derive from the UK’s membership in the EU. The future of those laws following Brexit – and how that future is achieved – will be one of the key challenges for the UK Parliament in the coming years.
EU-derived law comes from four sources:
- Regulations that rely on the principle of direct applicability and are directly implemented into domestic law without the need for legislation from the UK Parliament;
- Directives that require implementation into domestic law to have effect. This may be done by primary legislation or, much more commonly, secondary legislation known as statutory instruments passed pursuant to the European Communities Act 1972 (ECA) that allows the Government to pass secondary legislation to implement EU law;
- Decisions of the Court of Justice of the European Union; and
- The EU Treaties themselves. In addition to the treaties constituting the EU, the EU has signed numerous international agreements on behalf of the Member States. Following Brexit, the UK will no longer be covered by these. It will need to accede to them on its own behalf.
If the UK Parliament decides to repeal the ECA, the statutory instruments passed under it would cease to have effect in the UK, unless Parliament takes steps to preserve them (although freestanding Acts of Parliament will stay in force).
At the time of the passage of any Act repealing the ECA, one option might be to include a continuity provision affirming the status of UK legislation passed pursuant to EU Directives unless repealed or amended by a subsequent Act of Parliament. This would, in turn, provide for time to address individual laws and would not give rise to instant dramatic changes.
While a continuity provision could also operate to incorporate all EU Regulations directly into domestic law, the treatment of laws (including Regulations) that regulate the relationship between EU Member States themselves is more complicated. There is nothing to stop the UK declaring that it will unilaterally continue to preserve the existing position in relation to these EU rules (for example, in relation to the enforcement of judgments of the courts of EU member states). However, the UK would presumably want the EU to give reciprocal confirmation. It will be necessary for the UK to identify those areas of law that fall into this category and ensure they form part of the exit deal with the remainder of the EU to the extent possible.
It is then necessary to apply these considerations to examples of specific regulatory measures. For instance, the UK Bribery Act 2010 is not based on European law and will be wholly unaffected by the decision to leave the EU. Conversely, the Money Laundering Regulations 2007 implement EU law and so a ‘grandfathering’ provision as described above would ensure their retention as part of domestic law. Similarly, in the financial services sphere, a significant amount of UK financial services legislation is derived from EU law and, therefore, at least some of the provisions could fall away in the absence of grandfathering legislation.
Possibility of regulatory change
The US does not currently have a formal trade agreement with the EU. However, businesses wishing to trade within the EU need to comply with EU regulatory requirements. The UK’s anticipated departure from the EU raises the question whether there will be any divergence in UK and EU regulatory standards that could impact on US businesses supplying to the UK and the EU. Any relaxation in regulatory standards could facilitate trade between the UK and Texas and therefore benefit business situated in both jurisdictions. However, any trade barriers between the UK and the EU may adversely affect trade flows between the UK and Texas.
The extent to which this happens will likely depend on political considerations and the nature of the deal that is ultimately agreed between the UK and the EU. The UK will continue to be a member of a number of international standard setting bodies, such as the G20, the Basel Committee on Banking Supervision and the Financial Stability Board (FSB). In these areas, at least, there is unlikely to be significant change.
An important concern for financial services businesses with operations in the UK is whether “passporting” rights will be retained. Subject to its fulfilment of conditions under the relevant single market directive, an entity authorized in a European Economic Area (EEA) state is entitled to carry on permitted activities in any other EEA state either by exercising the right of establishment (of a branch and/or agents) or providing cross-border services. The exercise of this right is referred to in the Financial Services and Markets Act 2000 (as amended) as “passporting.” Businesses, including Texas businesses, will be interested in whether the outcome of the UK’s negotiations with the EU will result in their continuing to be able to exercise this right to provide their services across the EU from their UK subsidiaries. If passporting is not preserved, US businesses will have to consider how best to structure their European operations so as to allow them to continue to provide cross-border services. This may involve establishing new subsidiaries in EU Member States or transferring operations or personnel between existing subsidiaries. It may also affect how European operations are capitalized.
Another possible change is to the rules governing transfer of employees between Texas and the UK. There is currently free movement of people between all EU Member States. Following Brexit, this may change. This may, in turn, result in new rules governing movement of people, including transfer of employees between the UK and non-EU countries. Texas businesses should be prepared to take advantage of any new rules facilitating employee transfer.
What comes next
The impact of the result of the EU referendum will not be fully known for some time to come. Despite this uncertainty, it is important for Texas businesses with subsidiaries established in the UK and Europe to start planning for the potential consequences of Brexit.
From a regulatory perspective, nothing has yet changed. However, given that the political will in the UK now seems resolved to leave the EU, businesses will no doubt monitor the forthcoming negotiations between the UK and the EU with interest.
You can read more about Brexit’s latest developments from Norton Rose Fulbright at www.insidebrexitlaw.com/blog/ and www.nortonrosefulbright.com/brexit-what-next.
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