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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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
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Source: BBC Website
Voting
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The immediate aftermath ...
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“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
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Key EU Institutions
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European
Council
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Key EU Institutions
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• 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
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Article 50 Lisbon Treaty (TEU)
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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.
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Article 50 Lisbon Treaty (TEU)
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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
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How is Notice given?
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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
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How is Notice given?
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Is there a “reverse gear”?
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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
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Scotland
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• Voting outcome in Scotland
• Could Scotland block Brexit?
• Brexit requires changes to the Scotland Act
• A second independence referendum?
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Continued application of EU law
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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
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Article 7 Lisbon Treaty
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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
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Exit options
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Exit implications
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Source: FTWeekend 25/26 June 2016
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Passporting: EEA (Norwegian option)
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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
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Passporting: Third country (all other options)
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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
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Data protection:
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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
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▪ 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:
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Philipp Girardet
EU, Competition and Regulatory,
Partner
London
T +44 207111 2055
philipp.girardet@eu.kwm.com
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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
Notes de l'éditeur
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