BREXIT: BREXIT: CHARTING A NEW COURSE

Transcription

1 BREXIT: BREXIT: CHARTING A NEW COURSE FEBRUARY 2017

2 FOREWORD When we began analysing in depth the possibility of Britain exiting the EU (Brexit), 18 months prior to the June 2016 referendum, the business consensus was very much that Brexit was a remote prospect that either would never happen or not matter. Fast forward just over two years and the reality could not be more different. In this fourth edition of our Brexit Legal Guide, we take stock of the present situation, summarising the key developments since last year's vote and what's to be expected in the months ahead. From the outset, our approach to Brexit has been defined by objective analysis and a global perspective. The vast majority of our clients and our 3,000 lawyers are not based in the UK. We shall continue in 2017 to leverage this worldwide network to bring maximum clarity to our and our clients' understanding of the details of the debates and negotiations and to develop thoughtful solutions to the complex challenges ahead. As well as looking at Brexit from different regional perspectives, we have acknowledged the breadth of the issues it raises and adopted a collaborative approach, working not only with our clients own Brexit teams but with other leading experts to analyse and assess the implications and to develop new ideas of how they might be addressed. I am delighted that our strengths as a firm, including our distinguished International Trade practice, position us as one of the most capable in the market to support your analysis and preparations for Brexit. I do hope that you find this updated Brexit Legal Guide helpful and that you will contact any one of us should you wish to discuss a particular issue in more detail. James Palmer Chair and Senior Herbert Smith Freehills LLP

3 CONTENTS page Introduction... 2 Charting a new course: the timeline to Brexit... 4 What happens next?... 6 Trade: The new relationships How the legal structure will change post-brexit...20 Impact for business Financial services Corporate law Financing and security Restructuring and insolvency Disputes Contract and other obligations Telecoms and media Data protection Intellectual property Real estate Energy regulation Environment Tax Competition and antitrust Aviation Migration Employment Pensions...45 Preparing for Brexit: how we can help...47 Contacts...48 NOTE: This legal guide features numerous links and references to external sources which can be easily accessed via the online PDF found on our website. If you are reading the hard copy and wish to access any of these further sources, please visit

4 02 INTRODUCTION HERBERT SMITH FREEHILLS INTRODUCTION If 2016 ended with more questions than answers as to how Brexit would take shape, 2017 began with at least a little more clarity. Speeches delivered by the UK Prime Minister Theresa May, the decision of the UK Supreme Court on the constitutional question of how the Government must serve notice to leave the EU under Article 50 of the Treaty on European Union (TEU), the tabling of a Bill to obtain Parliamentary authority to serve the notice, the publication of a set of formal Government proposals (a White Paper) and the unveiling of a UK national Industrial Strategy, all against the background of the first weeks of the new US presidential administration, shed considerable light on the UK s direction of travel. With the benefit of this improving visibility, we consider the implications of Brexit from a legal perspective. THE UK GOVERNMENT S AIMS The UK Prime Minister's 17 January 2017 speech 1 confirmed that as part of Brexit the UK proposes to: resign its membership of the Single Market (the term commonly used to describe the EU internal market created by the EU Treaties and extended to Norway, Iceland and Liechtenstein by the Agreement on the European Economic Area (EEA Agreement)); remove itself from the jurisdiction of the Court of Justice of the European Union (CJEU); cease to apply the EU's common commercial policy and common external tariff and in doing so leave the EU's customs union, restoring the UK s freedom to strike independent trade agreements with non-eu countries; and replace the principle of free movement of people between the EU and the UK with a UK-controlled immigration policy. This is what the term hard Brexit is generally taken to mean, although the UK Government now refers to it as "clean Brexit". What prevents this proposal from being the hardest Brexit is that the UK also seeks: 1. while not being a member of the Single Market, the "greatest possible access to it through a new, comprehensive, bold and ambitious free trade agreement" which may contain "elements of current single market arrangements in certain areas" (eg the freedom to provide financial services "across national borders"); 2. while not participating in the customs union, a new customs agreement with the EU to ensure tariff-free trade between the EU and the UK; 3. a time-limited and phased process of implementation for Brexit to avoid the cliff edge risk of an overnight switch to a new EU-UK trading regime at the end of the Article 50 notice period. This period is intended to discourage business from moving parts of their activities out of the UK precipitately and to give time to plan for and adapt to the new arrangements (with some sectors needing longer than others). Customs systems, and the regulatory framework for financial services were two areas specifically mentioned by the Prime Minister as needing such staged implementation ; and 4. an immigration system which will continue to attract the brightest and the best to work or study in Britain" but which is also "managed properly so that [it] serves the national interest and allow the Government to "get control of the number of people coming to Britain from the EU". The Prime Minster acknowledges that agreement on each of the above four key elements of the deal she seeks are crucially dependent on reaching agreement with the other (27) EU Member States. Her initial objective is to reach agreement on a framework for a long-term EU-UK trade deal covering goods and services as well as the "phased process of implementation" plan by the end of the two-year Article 50 notice period. It is implicit in the proposal of a phased implementation that the details of the long-term deal would be bottomed out over several years. The Government's negotiating approach includes the following key elements: 1. the freest possible trade in goods and services between the EU and UK, and the least disruption during Brexit implementation, would be a "win/win"; 2. the UK being willing to walk away from negotiations as "no deal for Britain is better than a bad deal for Britain". It was suggested that offering a bad deal would be "an act of self-harm for the countries of Europe" and that while the EU would have limited options to react to such a situation, the UK would be free to "change the basis of Britain s economic model" and "set the competitive tax rates and embrace the policies that would attract the world s best companies and biggest investors"; and 1

5 HERBERT SMITH FREEHILLS INTRODUCTION the UK's continued co-operation with its EU partners in important areas such as crime, terrorism and foreign affairs would be an important part of the negotiations. The Prime Minister clearly intended her speech to focus the minds of EU leaders, but it will also serve as a useful steer for businesses analysing and assessing the potential effects of Brexit on their activities and deciding how best to address those implications. The White Paper The United Kingdom s exit from and new partnership with the European Union (the White Paper) confirms and puts a little more flesh on the bones of the Prime Minister's speech and its provisions are referred to throughout this legal guide. SCOTLAND, WALES, IRELAND AND BREXIT The UK has devolved extensive legislative powers in home affairs to Parliaments or Assemblies in three distinct areas of the United Kingdom, Scotland, Northern Ireland and Wales, while the home affairs of England, where most of the UK population lives, are managed by the UK Parliament and the Government of the UK as a whole. The residents of Scotland, Northern Ireland and Wales all elect members of the UK Parliament as well as of their own Parliament or Assembly. The UK Government manages foreign affairs and all other matters that have not been devolved, for the UK as a whole. The Scottish Government (the people of Scotland having voted in the June 2016 referendum by a substantial majority to remain in the EU) has said that it will do everything possible to keep Scotland in the EU (or, at least, in the Single Market). This increases the risk of a second referendum on Scottish independence from the UK. A vote in favour of independence is something that would greatly complicate the process of the UK establishing its position as a trading nation outside of the EU and would also cause difficulties for Scotland establishing a different course from the rest of the UK without any certainty of EU membership. It remains to be seen whether there is any serious likelihood of a further referendum, even leaving aside its prospects of success. The majority of voters in Wales, like the English, voted to leave the EU and the position of Wales in relation to Brexit is relatively uncomplicated. However, the Welsh Government has also stated that it wishes Wales and the UK as a whole to remain within the Single Market. It is evident that the UK Government s decision to leave the Single Market will be a source of friction between the UK Government and the Governments of Scotland, Northern Ireland and Wales. THE CONSTITUTIONAL PROCESS TO LEAVE THE EU On the constitutional question of whether the UK Government requires Parliament's approval in order to give the Article 50 notice, the UK Supreme Court on 24 January 2017 (by a majority of eight judges to three) decided that Parliamentary approval was required but unanimously rejected the argument that any of the UK s devolved administrations (Northern Ireland, Scotland or Wales) must authorise or could block the giving of the Article 50 notice. The UK Government immediately placed a very short Bill before Parliament, the European Union (Notification of Withdrawal) Bill (the Withdrawal Bill), which would authorise the giving of the Article 50 notice. 2 It believes that the Withdrawal Bill will become law without material impediment or amendment in time for the notice to be given to the European Council during March 2017, as previously foreshadowed by the Prime Minister. This is an area of risk for the UK Government. See our updated timeline to Brexit below. So far the UK Government has conceded that the UK Parliament will have the right to approve the terms of any agreement reached with the EU before it is considered by the European Parliament. They appear to envisage that the choice will be between approving the deal and taking World Trade Organisation (WTO) terms, but the proposed timing, some months before the actual Brexit date, may allow for other approaches. In respect of Northern Ireland (which also voted in the majority to remain) there are difficult legal and practical issues arising from the UK s long-standing relationship with the Republic of Ireland, which will need to be resolved in the leave negotiations in any event. 2 services.parliament.uk/bills/ /withdrawalfromtheeuropeanunionarticle50.html

6 04 CHARTING A NEW COURSE: THE TIMELINE TO BREXIT HERBERT SMITH FREEHILLS CHARTING A NEW COURSE: THE TIMELINE TO BREXIT 24 June 2016 UK Referendum result 13 July 2016 Theresa May becomes UK Prime Minister. UK creates new EU exit and external trade ministries 8 November 2016 Trump wins US Presidency. Republican House of Representatives and Senate 4 December 2016 Italian Government loses constitutional reform referendum 24 January 2017 UK Supreme Court requires Government to seek Parliamentary authority to serve Art 50 notice 15 March 2017 Dutch general election End of March 2017? Article 50 Bill to be passed by Parliament Article 50 Notice served Art.50 Art.50 JUN June 2016 End of Q Formulation of negotiating stance

7 HERBERT SMITH FREEHILLS CHARTING A NEW COURSE: THE TIMELINE TO BREXIT April and 7 May 2017 French presidential election 11 and 18 June 2017 French Parliamentary election Summer 2017 Great Repeal Bill passage through Parliament 24 September 2017 German federal election End of Q Exit from EU. Exit agreement. Outline of final EU/UK deal and phased process of implementation agreed (or not) June 2019 EU Parliament elections May 2020 UK general election 3-7 years later Final EU/UK deal agreed and any phased implementation completed YEARS LATER End of Q End of Q Initial negotiations 4-5 months Initial ratifications End of Q years later Phased process of implementation, final negotiations further ratifications

8 06 SECTION TITLE WHAT HAPPENS NEXT? On 23 June 2016, UK voters were asked "Should the United Kingdom remain a member of the European Union or leave the European Union?". The vote was 51.9% in favour of leaving, with 48.1% voting to remain. This section considers what may happen next. HERBERT SMITH FREEHILLS

9 HERBERT SMITH FREEHILLS WHAT HAPPENS NEXT? 07 ARTICLE 50 How it works The vote for the UK to leave the EU did not in itself have legal effect and the European Union Referendum Act 2015 did not specify what was to be done in the event of a leave vote. Under the terms of Article 50 of the TEU (Article 50), which governs the process, it is envisaged that the UK will trigger the process by informing the European Council of its intention to leave the EU, having taken the decision to do so in accordance with its own constitutional requirements. This notice will trigger the two-year period specified by the TEU for the negotiation of the terms of a Member State s withdrawal. The constitutional litigation It is the UK Government s stated intention to serve the Article 50 notice by the end of March However, a major piece of constitutional litigation was brought shortly after the vote aimed at resolving the question of what in accordance with its own constitutional requirements means in the case of the United Kingdom. The issue at stake in this important case was whether service of the Article 50 notice: is part of the normal conduct of foreign affairs, including the negotiation and conclusion of treaties, in which case it is a matter of Royal Prerogative, meaning that the decision rests with the UK Government, most likely with the Prime Minister, acting with absolute discretion; or amounts to the overturning of an Act of Parliament, the European Communities Act 1972, affecting the rights of citizens and the sources of law in the UK which could only be done with Parliamentary authority, probably requiring a further Act of Parliament passed by both Houses. In a landmark constitutional law ruling R (on the application of Miller and another) v Secretary of State for Exiting the European Union [2017] UKSC 5, the UK Supreme Court, sitting en banc (with all 11 judges), on 24 January 2017 upheld the decision of the English High Court on 4 November 2016 (by a majority of eight to three) that the Government cannot trigger Article 50 without the approval of Parliament, specifically by an Act of Parliament. 3 The Supreme Court also heard an appeal from Northern Ireland on the effect of the Good Friday Agreement and certain other laws applicable in Northern Ireland on the ability of the UK Government to give notice without consulting the Northern Ireland Assembly and heard interventions from the Scottish and Welsh Governments, but rejected the contention that any of these devolved administrations had to authorise the giving of the Article 50 notice before it could be given. The consequences of the Supreme Court decision The UK Government has placed a very short Withdrawal Bill before the UK Parliament to authorise the Article 50 notice, with a view to it being passed in time for service of the notice during March The lower House of the UK Parliament (the House of Commons) had already endorsed this timing in a resolution passed on 7 December It seems likely that both Houses of Parliament will approve the Withdrawal Bill without material impediment even though the upper chamber (the House of Lords) has a large majority of members who are opposed to the UK leaving the EU. The Withdrawal Bill may nonetheless suffer delays at the hands of lawmakers opposed to Brexit. In the extreme, it could take over a year to override opposition in the House of Lords, although this is thought unlikely given the arguably precarious existence of the upper chamber owing to its unelected nature. Article 50 of the Treaty on European Union 1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements. 2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, 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. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament. 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. 4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union. 5. If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article

10 08 WHAT HAPPENS NEXT? HERBERT SMITH FREEHILLS WHAT HAPPENS NEXT? Full text of House of Commons Resolution of 7 December 2016, passed by 448 votes to 75 That this House recognises that leaving the EU is the defining issue facing the UK; notes the resolution on parliamentary scrutiny of the UK leaving the EU agreed by the House on 12 October 2016; recognises that it is Parliament s responsibility to properly scrutinise the Government while respecting the decision of the British people to leave the European Union; confirms that there should be no disclosure of material that could be reasonably judged to damage the UK in any negotiations to depart from the European Union after Article 50 has been triggered; and calls on the Prime Minister to commit to publishing the Government s plan for leaving the EU before Article 50 is invoked, consistently with the principles agreed without division by this House on 12 October; recognises that this House should respect the wishes of the United Kingdom as expressed in the referendum on 23 June; and further calls on the Government to invoke Article 50 by 31 March The expectation is that the Withdrawal Bill will be passed in time for service of the Article 50 notice in March 2017, although there is a possibility that the Parliamentary process could take longer. Many of the Governments of the remaining 27 EU Member States have indicated that they wish to see the Article 50 process started as soon as possible, but have accepted that it is a matter for the UK to start the process. THE TWO-YEAR PERIOD Even once the Article 50 procedure has been triggered, the UK will still remain a Member State of the EU during the notice period, which is set at two years, unless it were to be agreed with all 27 other Member States that its membership should cease sooner or continue for a longer period. At the end of the notice period, the UK will automatically leave the EU, even if the terms of leaving or any future arrangements have not been agreed. Until the UK actually leaves the EU, UK Members of the European Parliament (MEPs) will continue to vote in the European Parliament. The EU law-making process will continue as normal: current EU law should be expected to continue to apply in the UK, and EU laws which are due to be passed or transposed into national law during that period will continue to become part of UK law. During this period, however, the influence of the UK over new law making will be radically diminished. autonomous dependency of Denmark, took approximately two years when it left the European Economic Community in The leaving arrangements took the form of a very short Treaty and a Protocol on special arrangements on the import of fish from Greenland into the EU, which indicated further agreement was yet to be concluded on fishing rights in Greenland fisheries. The UK economy and relationship with the EU are vastly more sophisticated and withdrawal can therefore be expected to be correspondingly more complex. During the two-year Article 50 notice period, it is expected that negotiations will focus on the terms of the withdrawal of the UK from the EU including matters such as the disentanglement of the UK from agreements made by the EU on behalf of the UK and from the EU institutions. The White Paper In early February 2017, just as the Withdrawal Bill started on its progress through the UK Parliament, the UK Government responded to the 7 December 2016 House of Commons Resolution and published its White Paper, The United Kingdom s exit from and new partnership with the European Union (the White Paper). 4 Despite recognising the importance of certainty and clarity for businesses and individuals, it outlines an uncertain future, particularly in the areas of negotiation with the EU, while providing some snippets of genuinely useful clarity, particularly in areas within the sole control of the UK. On the other hand, it is recognised that negotiating the terms of withdrawal may take at least two years: negotiating leaving terms for Greenland, which is an 4

11 HERBERT SMITH FREEHILLS WHAT HAPPENS NEXT? 09 The White Paper sets out Government Policy in 12 key areas under the headings: 1. Providing certainty and clarity 2. Taking control of our own laws (removing the jurisdiction of the Court of Justice of the European Union (CJEU) and adopting EU law into UK law) 3. Strengthening the Union (England, Wales, Scotland and Northern Ireland) 4. Protecting our strong and historic ties with Ireland and maintaining the Common Travel Area 5. Controlling immigration 6. Securing rights for EU nationals in the UK, and UK nationals in the EU 7. Protecting workers rights 8. Ensuring free trade with European markets 9. Securing new trade agreements with other countries 10. Ensuring the UK remains the best place for science and innovation 11. Cooperating in the fight against crime and terrorism 12. Delivering a smooth orderly exit from the EU. We pick up the points arising from the White Paper in the following sections of this legal guide. On the all important issue of future relations with the EU, the White Paper adds flesh to the Prime Minister's speech on 17 January 2017 and confirms the UK Government s direction of travel, which, despite the urging of the devolved administrations, involves: leaving the Single Market; not participating in the customs union, but seeking a new customs agreement with the EU to ensure tariff-free trade between the EU and the UK; seeking a bespoke deal to ensure free trade with European markets that does not follow exactly any of the existing precedents for relations between the EU and other countries; and having an implementation phase to avoid a cliff-edge which would be damaging to both EU and UK citizens and businesses. While this course provides some clarity, by narrowing options, it increases the risk of a hardest Brexit and/or disorderly Brexit in which an abrupt or (if there is a transitional arrangement) gradual move to WTO terms occurs and many years pass before there is a new trade deal between the UK and the EU. A framework for the future EU-UK relationship by the end of the two-year period In the Prime Minister's speech on 17 January 2017 she stated that the UK Government wishes to reach an agreement with the EU by the end of the two-year period. Our understanding is that this does not mean the final EU-UK bespoke trade agreement in relation to the future relationship between the EU and the UK in all its detail, but rather a framework for the final agreement coupled with an implementation period to deal with the transition. On this assumption, the detailed terms of the EU-UK deal would not be settled until after the UK has left the EU (at the end of the notice period), and could take several years to negotiate. If there is a fixed term implementation phase the risk remains that this will expire without a new arrangement coming into effect, albeit that risk is at a much lower level. The EU Trade Commissioner has stated that talks on the future trade relationship will not begin until the UK leaves the EU, but it remains to be seen if this will be the case, given the potential for this to cause avoidable disruption for all 28 countries, not just the UK. Furthermore, the UK's proposal appears to be in line with Article 50(2) which anticipates that the EU and the UK " shall negotiate and conclude an agreement setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the [EU]". A phased process of implementation from the end of the two-year period An important part of the scheme set out in the White Paper is the UK Government's proposal for a "phased process of implementation". If adopted, at the same time as the framework for the future relationship is agreed, the EU and UK would also agree a phased process of implementation in their mutual interest: the White Paper states that this will give businesses enough time to plan and prepare for those new arrangements. The implementation process might be about our immigration controls, customs systems or the way in which we cooperate on criminal and justice matters. Or it might be about the future legal and regulatory framework for business. For each issue, the time we need to phase in the new arrangements may differ; some might be introduced very quickly, some might take longer. And the interim arrangements we rely upon are likely to be a matter of negotiation.

12 10 WHAT HAPPENS NEXT? HERBERT SMITH FREEHILLS WHAT HAPPENS NEXT? The UK Government is clear, however, that it will not be seeking some form of unlimited transitional status. Given the timescale of decisions required for a regulated business or a highly invested business to make preparations which guard against the risks of business disruption, much greater clarity on implementation will be needed and it will be difficult for the UK and the EU to deliver this in time to prevent business taking decisions based on a hard/disorderly Brexit base case. What if there is not a meeting of minds in the negotiations? While the White Paper expresses confidence that a positive deal for a new partnership in the interests of all parties can be reached, it confirms that the UK Government is clear that no deal for the UK is better than a bad deal for the UK. This acknowledges the risk that there could be the hardest of hard Brexits in which the UK has to fall back overnight on its WTO position which, in itself, may be the subject of considerable negotiation with fellow members of the WTO. Other Brexit litigation Although the Supreme Court decision on 24 January 2017 has clarified the route to beginning the formal process of leaving the EU, this case is not the end of the line for Brexit-related litigation: A fresh legal challenge has been brought in relation to the UK s position under the European Economic Area Agreement (EEA Agreement), which is the Treaty under which Norway, Iceland and Liechtenstein three of the four participants in the European Free Trade Area (EFTA) participate in the Single Market. The UK is a signatory of the EEA Agreement, as are the other Member States of the EU. The claimants in this case contend that the effect of the UK signing the EEA Agreement is that it is a member of the EEA Single Market in its own right, and not just as a member of the EU. They contend that to leave the Single Market the Government must give one year s notice under Article 127 of the EEA Agreement and, further, that this can only be done with Parliamentary approval. The Government takes the view that the UK is only a member of the Single Market as a result of its membership of the EU and need not do anything to leave when Brexit takes effect. The High Court has refused to hear the case on the grounds that it is premature, the UK Government not having yet considered how it will go about leaving the EEA. It has not ruled on the substantive arguments. The case could, therefore, be brought again if circumstances warrant it, in which event the courts will also consider the nature of the EEA Agreement, the way in which it was ratified in the UK and whether it has a similar status to the EU Treaties under UK constitutional law. The EEA Agreement is not designed to have a party which is neither a Member State of the EU contracting alongside the EU itself (for most purposes forming a single contracting party with the other Member States and the EU) nor an individual EFTA State contracting on the terms which each of the current EFTA State parties contract, terms which include the obligation on the EFTA parties to transpose a substantial body of EU law into their own systems. If the claimants are correct, the UK would be in that anomalous position post-brexit unless it leaves the EEA, even though it has left the EU. It seems likely in any event that the other parties to the EEA Agreement will be prepared to agree that the UK retires from the EEA Agreement once the UK leaves the EU, whether this occurs as a result of an Article 127 notice or simply by mutual agreement. Another legal challenge is being brought before the courts of the Republic of Ireland, raising a number of issues, including seeking a reference to the CJEU on the issue of whether a notice under Article 50 can be revoked. This case is at a very early stage and at the moment has a range of other issues, including the question of continuing membership of the EEA raised in the Article 127 litigation, and whether an oral notice to leave the EU was served at a European Council meeting in October 2016 and has legal effect. If this latter argument is pursued, it could potentially affect the timing of the UK actually leaving the EU, but not the processes being followed in the UK on the assumption no notice has yet been given. The case may also be a leading case on the acceptability of crowd-funding of litigation in the Republic of Ireland. Finally, members of the Alliance Party in Northern Ireland have indicated that they may consider bringing further litigation seeking to prevent the Government from triggering Article 50 without the consent of the legislature of Northern Ireland on different grounds to those already litigated. Any such litigation seems unlikely to hold up service of the Article 50 notice, even if it could cast some doubt on its validity.

13 HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS SECTION TITLE 11

14 12 THE NEW TRADE RELATIONSHIPS HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS THE NEW UK/EU TRADE RELATIONSHIP As an EU Member State, the UK is currently part of the Single Market, which is one of the most advanced trade areas in the world and has been developed and extended since 1951, when the European Coal and Steel Community was created and broadened by the 1957 Treaty of Rome. Originally referred to as the common market, the EU includes, among other things, a customs union eliminating tariffs on goods traded between Member States and a common external tariff for goods entering the EU from outside. In addition to the basic trade rules, the EU includes a network of more-advanced trade-related rights and obligations which are enforceable by EU courts. Central to the Single Market are the four freedoms (free movement of goods, persons, services and capital) which are enshrined in the EU Treaties. The Treaty provisions establish these free movement principles which are further refined by a raft of Single Market legislation designed to complete the creation of the Single Market by abolishing any remaining trade barriers and creating regulatory harmonisation. The internal market and the Single Market According to the European Commission, the term Single Market refers to the EU as one territory without any borders or other regulatory obstacles to the free movement of goods and services. This includes measures such as standardisation, the CE mark, public procurement and State aid rules, and the removal of disguised restrictions on trade, as well as the development of a digital Single Market. The term used in this sense is interchangeable with the term internal market as used in the EU Treaties, and the European Commission and politicians in the EU often assert that all four freedoms are essential to the operation of the Single Market. The term Single Market is sometimes also used loosely to include Norway, Iceland and Liechtenstein, which, with the EU States, form part of the European Economic Area (EEA). While the EEA Agreement incorporates the four freedoms, the non-eu countries in the EEA are not party to the EU customs union even though goods originating in these countries have tariff-free access to the EU Single Market and most Single Market measures relating to trade in goods and services extend to the EEA. In addition, the EEA Agreement does not cover trade in certain areas (eg fisheries and energy are excluded) and it does not extend to civil or criminal justice measures or to a common foreign policy. Access to the Single Market is therefore about much more than removing tariffs on goods. So what does it mean, and is it possible for the UK to achieve the policy objectives of Brexit while retaining full access to the Single Market? The speech by the UK Prime Minister on 17 January 2017 indicates that the UK Government does not believe it possible and, in place of membership of the Single Market and customs union, the UK s objective is the greatest possible access to the Single Market (through an ambitious free trade agreement covering not only goods but services too) and a new customs agreement between the EU and the UK to ensure tariff-free trade. The February 2017 White Paper confirms the UK Government s approach. We consider below the forms of arrangements that the EU and the UK will no doubt draw on in their negotiations. Likely options From the Prime Minister s speech and the White Paper, it seems clear that only two options are on the table from the UK perspective: The first option, of falling back on WTO rules is what would happen if the EU and the UK fail to reach an agreement (but even this presupposes that the UK is entitled to adopt the current EU tariff card, on which experts differ). The UK has signalled its willingness to walk away from negotiations and accept this option if necessary on the basis that no deal for the UK is better than a bad deal for the UK. The preferred option, a bespoke bilateral deal with an implementation phase, is what the UK intends to pursue. To achieve the high degree of access to the Single Market that the UK seeks, particularly with respect to trade in heavily-regulated services, requires a sophisticated set of rules on cooperation, coordination, mutual recognition and dispute resolution. For financial services this would be an enormous technical challenge in all likelihood taking several years and goes well beyond any existing free trade agreement. Having said that, no other trade agreement has been negotiated from the position of such close initial alignment as the UK and the EU. After considering those two options, we look at the other models broadly in order of increasingly-closer relationships. Note that, depending on the exact terms of any bespoke EU/UK deal, this preferred option could involve a closer relationship in some respects between the UK and the EU than many of the models listed further down. For example, the UK is aiming to have a significantly more comprehensive trade deal with the EU than the EU s CETA (Comprehensive Economic and Trade Agreement) deal with Canada.

15 HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS 13 Key question A bilateral agreement between the EU and the UK seems likely in due course covering trade in goods and, possibly, trade in services, though it is doubtful a final form could be in place at the time the UK is due to leave the EU at the end of the two-year Article 50 notice period; certainly not an agreement of the substantially more-ambitious kind that the UK seeks. This leaves what is possibly the most important question in relation to the outcome of the negotiations: Will it be possible, as the UK seeks, to get agreement between the EU and UK including a phased implementation process while the full deal is negotiated and finalised an orderly Brexit; or Will there be a hiatus between the UK leaving the EU and a new deal taking effect a disorderly (and potentially chaotic and economically damaging) Brexit? It is clearly in the economic interests of the UK and the remaining 27 members of the EU to avoid a disorderly Brexit, but it will take immense political will to reach an agreement to avoid it (see the analysis section below). If there is a disorderly Brexit, the WTO rules would most likely apply between the UK and the EU with immediate effect on Brexit. Non-trade measures It is worth noting that none of these alternative trade arrangements between the UK and the EU include the elements of greater political integration that have arisen in the EU s development, such as the adoption of the euro as a single currency by many Member States, the emergence of a common foreign policy, moves towards a common defence policy orchestrated outside of the NATO framework and measures in the field of criminal law. The UK either does not participate in most of these measures or has had opt-out or blocking rights in relation to them while a Member State of the EU, so that measures in these areas which will cease to apply on Brexit are ones that the UK has chosen as in its national interest, often replacing separate treaties between the EU States (eg the civil private international law rules in the Rome I Regulation and the Brussels Regulation). These measures that the UK has participated in are not trade measures as such and most could again be replicated by international treaty, if the parties are willing, separately from the establishment of any new trade relationship between the UK and the EU. We do not mention these further in this section. The main trade relationship options are: WTO (World Trade Organisation) if negotiations fail Bespoke comprehensive bilateral agreement(s) the UK proposal EU-UK CETA (Comprehensive Economic and Trade Agreement eg EU/Canada) EU-UK Swiss-style bilateral agreement(s) EU-UK customs union (eg EU/Turkey) EEA (European Economic Area currently EU plus Norway, Iceland and Liechtenstein) EFTA (European Free Trade Association currently Norway, Iceland, Liechtenstein and Switzerland) A brief overview of the different models is provided below. 1. WTO (World Trade Organisation) if negotiations fail If the EU and the UK fail to reach agreement on a bespoke free trade agreement then there would be no special relations between the EU and the UK at all. In that event, the UK s right to trade with the EU in both goods and services would be governed solely by the WTO rules, as both the EU and the UK are members. This would place the UK in a similar position to that of the USA currently, but in a significantly less sophisticated relationship to the EU than that achieved by Canada. The same applies as regards Australia and New Zealand, which are also negotiating a trade agreement with the EU. The UK would need to work hard to negotiate a number of additional bilateral and multilateral arrangements to improve access to markets within and outside the EU, starting with disentangling its WTO position from that of the EU, as the EU negotiated the current arrangement for the EU as a whole, including the UK. Even the negotiations for the UK to be an independent member of the WTO as regards goods traded under the General Agreement on Tariffs and Trade (GATT), which will be needed for all forms of Brexit, except continuation as a member of the EU customs union, could be complex and time-consuming. In its White Paper, the UK states that Our aim is to establish our [WTO] schedules in a way that replicates as far as possible our current position as an EU Member State, thus creating a mutually beneficial, simple and inclusive outcome, so that the interests of the UK and other WTO members are protected.

16 14 THE NEW TRADE RELATIONSHIPS HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS Another question that may arise is whether the EU would also need to change its GATT commitments as a result of the UK leaving its customs union. In that context it should be noted that the UK represents approximately 12.5% of the EU economy, so the effects are potentially significant for third countries, particular where there are EU quotas on tariff-free or low tariff imports, for which the UK will post-brexit be competing as a third country. It is important to note that the WTO option does not stop tariff and customs barriers being raised between the UK and the EU as there would be no free trade zone. It could be expected that the starting point would be both sides applying the current EU tariffs to trade in goods between them and being able to apply a range of non-tariff barriers to trade in goods: these would take effect gradually for manufactured goods as most would start with an EU approval, but might be more easily applied to perishable goods, such as agricultural produce. It would seem to involve the reintroduction of full border checks, a subject discussed further below in relation to the proposed bilateral agreement. The WTO service rules in the General Agreement on Trade in Services (GATS) are a far cry from the highly-integrated EU Single Market in services and services businesses would be most seriously affected by the move from the Single Market to GATS rules. The UK has one of the most liberal services regimes under the GATS and it is the EU which would be raising significant barriers to UK businesses trading in the EU, especially for highly-regulated businesses, such as financial services which rely on regulation in an EU State to provide services within the EU, and for businesses where recognition of qualifications is important. On the other hand, EU services businesses seem likely to be able to remain trading within the UK, unless prevented by EU regulatory policies and/or such changes as the UK can make within its limited GATS commitments. The White Paper states that the UK is committed to advancing the lengthy negotiations under the WTO aegis for an enhanced multinational agreement, the Trade in Services Agreement (TISA) involving more than 20 countries. Relatively limited progress has been made to date in these negotiations and it seems unlikely that this will change significantly in the near future. Finally, the WTO rules deal only to a very limited extent with free movement of people and then only in relation to services businesses. The arrangements both the UK and individual EU countries introduce in relation to each other s citizens and the terms on which they can live and work in each other s countries will be of great importance, as well as the extent to which those already living and working in each other s countries will be protected. The UK would be free of the EU rules on free movement of people and capital, the former being one of the main aims of the UK in leaving the EU. While the UK economy is sufficiently dependent on workers from the EU, as well as from other parts of the world, for the UK to adopt a policy allowing significant access by EU workers to the UK, it is not clear what the position will be within the EU. The exact extent of the rights of those exercising their rights to live and work in the UK or an EU country before Brexit will probably be the subject of an agreement under Article 50 and may be protected in various ways by the acquired rights doctrine. Although the absence of free movement of capital requirements could, in theory, lead to the re-introduction of exchange control or other restrictions on moving money between the UK and the EU, this is not thought likely. Examples of other measures that will be affected, unless preserved by agreement, are access for individuals to the health services of EU countries or the UK on the same terms as nationals, the recognition of qualifications needed to work, the costs of study, academic exchanges and research collaborations, the scope of some intellectual property rights, the regulation of the costs of mobile voice telephony and data roaming and the application of competition law (which will in some cases be doubled up for the same transaction). Some of these issues (eg health services and research collaborations) are acknowledged in the White Paper, but solutions depend on agreement between the UK and the EU and its Member States. 2. Bespoke bilateral agreement (with implementation phase) the UK proposal The UK Government s intention is to negotiate the general outlines of a bespoke bilateral arrangement with the EU and an implementation phase within two years of the service of the Article 50 notice to avoid a cliff-edge change of business environment for businesses both in the UK and the EU. Assuming that a bespoke EU/UK bilateral arrangement will include free trade in services as well as goods, achieving an implementation phase after Brexit would be of great importance to these businesses as they make new arrangements to trade in the EU. The exact content of this agreement (or indeed what would be in the agreement covering an implementation phase while the agreement is finalised and brought into force) is not clear, but in broad outline the aim appears to be to preserve tariff-free trade and free trade in services

17 HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS 15 between the UK and the EU, as in a number of the precedent models, but without any limitation on the right of the UK to negotiate independent trade agreements with third countries. So far as goods are concerned, this would mean a need to ascertain the origin of goods entering either the EU or the UK from the territory of the other, in case they are of third country origin and attract duty at the UK/EU frontier. The mechanism of introducing customs controls, while maintaining speed for goods in transit and avoiding physical border checks, has not been worked out. It poses particular problems at the land border between Northern Ireland and the Republic of Ireland which has had a Common Travel Area ever since the Republic became independent of the UK and where an open border is an essential part of the political settlement in the island of Ireland. The White Paper speaks of the negotiation of different transitional arrangements for different aspects of UK/EU relationships (e.g. for customs systems and for the legal and regulatory framework for business), an approach that may add to the complexity of any agreement. As service industries are extremely important in the UK, it can be expected that efforts will be made to negotiate a wide-ranging agreement on services, including regulated services, such as financial services, and mutual recognition of rules, standards and qualifications, aiming to preserve as closely as possible the current position under the EU Treaty. The UK Government suggests that aspects of this may be drawn from existing treaties (such as the EU and EEA Treaties) but this may not fit with the EU approach (see the section on the EEA below). The extent to which the UK s membership of the G7, the Financial Standards Board and other supra-national bodies may provide platforms for recognition of each other s regulatory regimes without specifying the EU model (itself based largely on the UK regulatory model) remains to be seen. It is notable that, in the White Paper, the UK Government indicates a willingness to make an appropriate financial contribution in relation to those European programmes in which it participates. This would, it suggests, be a significantly lesser contribution than its current contributions to the EU budget, but might possibly be similar to the contributions made by Norway or Switzerland. In terms of dispute resolution for the new bilateral arrangements, only State to State mechanisms appear to be contemplated except, possibly, for private enforcement of any investor rights against Governments/the EU. One of the key risks for any form of new trade treaty between the UK and the EU is the issue of ratification by the EU. Recent agreements (eg those with the Ukraine and Canada) highlight the difficulty of obtaining ratification of such deals when the consent of all EU Member States is required (whether legally or politically). Some Member States may need a referendum before they can agree and others the consent of regional assemblies (eg the Belgian region of Wallonia) which may find that they have a useful bargaining counter in withholding their consent. It is possible that the implementation phase arrangements could be covered by the Article 50 agreement, which has a qualified majority approval process. 3. EU-UK CETA (Comprehensive Economic and Trade Agreement) Often referred to as the Canadian model, this option is based on the Canadian CETA with the EU which has taken more than seven years to negotiate and has yet to formally take effect. In February 2017 the CETA received the approval of the European Parliament, which will enable partial provisional implementation to be put in place, pending completion of the full ratification process by EU Member States. The CETA removes many tariff barriers on goods in painstaking detail (the Canadian CETA has over 1,600 pages) but contains very few provisions dealing with services. Similarly to the position vis-à-vis the Turkish model (see below), as the UK is a net exporter of services, this is unlikely to be satisfactory for the UK, but the bespoke agreement s goods provisions could conceivably take a similar form or be modelled on the EEA approach (see below). 4. EU-UK Swiss-style bilateral agreement Mention is often made of the Swiss-EU bilateral arrangements. These agreements cover certain services and rights of establishment as well as, effectively, a single market for goods. They also allow for free movement of persons and Switzerland is a signatory to the separate Schengen Agreement which removes border controls in much of the EEA. The Swiss bilateral agreements are traditional international law instruments. They permit significant free trade without establishing supranational institutions. Some provisions on free movement of employees are likely to be considered.

18 16 THE NEW TRADE RELATIONSHIPS HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS On the surface, the Swiss arrangements provide a positive precedent for a potential bilateral trade relationship between the EU and the UK. They allow for relatively extensive free trade which goes beyond traditional trade in goods. Further, the rules are not subject to supranational decision making. However, neither in form (some 120 separate agreements) nor substance (omission of financial services other than life insurance and inclusion of free movement of workers) do they provide a good precedent for the UK s policy objectives. Also, Switzerland is a party to the Schengen Agreement on open borders with most EEA countries (the UK and the Republic of Ireland being the principal exceptions). Recent EU-Swiss relations simply point to the difficulties the UK may have in negotiating a close trade agreement with the EU which does not include free movement of workers. The Swiss recently decided in a referendum to oppose unlimited migration of people from Europe. The EU has warned that the Swiss will lose their treaty rights of access to the Single Market if they follow through. Indications are that the EU may accept a Swiss scheme of preference for local residents (including EU citizens already resident) in filling job vacancies, but without any overall cap on EU immigration. This matter is likely to be resolved during 2017 and this will form a background to EU/UK negotiations. 5. Customs union This model, of which the EU-Turkey arrangement is the leading example, removes tariff barriers on goods and may contain provisions dealing with services. It was devised as a model for countries working their way towards joining the EU and therefore is not well suited to a country leaving the EU but wishing to maintain the maximum access to the Single Market. While effective for manufacturers to obtain access to the EU, the Turkish experience has shown little liberalisation in relation to services and would need to be supplemented by a free trade agreement in services. The disadvantages of being in a customs union with the EU are: the existence of the agreement creating a customs union is incompatible with the UK making agreements on tariffs with third countries which are more favourable than those agreed by the EU with those countries; the UK would have to honour EU deals on tariffs with third countries; and third countries would have no incentive to extend the terms of their deal with the EU to the UK, and, if they decided to do so, would not offer better terms, while the UK would have to afford the third country EU terms in any event. These disadvantages are exemplified by the recent EU-South Korea Free Trade Agreement (FTA). Turkey was required to provide market access to Korea but it did not automatically obtain greater access to the Korean market. Instead, Turkey had to negotiate a separate FTA essentially on the same terms. In its White Paper, the UK Government states that the UK will not be bound by the EU s Common External Tariff or participate in the Common Commercial Policy. This appears to rule out continued participation in the EU customs union, but for some time the UK Government has seemed to think that there might be some half-way house, talking in the White Paper of the option for the UK to remain signatory to some of the elements of the existing arrangements. It has said that it wishes to maintain tariff-free trade with the EU and is open to discussion of any possible form that is in accord with its objective of the UK being free to enter into its own trade treaties with third countries. The alternative of a completely new agreement seems much more likely, except possibly on an interim basis. 6. EEA (European Economic Area) The EEA was set up in 1994 and conceived for the purpose of creating a Single Market between the EU and EFTA. Today the EEA comprises the EU and its Member States on the one hand and three of the four EFTA States on the other (Iceland, Liechtenstein and Norway but not Switzerland which rejected EEA membership following a national referendum). The key feature of the EEA is economic integration and more particularly free movement of persons, services, goods and capital. This is the closest economic integration that can be obtained without political integration, save that energy, fisheries and external trade matters are excluded. As in the EU, the EEA provides for supranational institutions. Thus, while the EU has the EU Commission and the CJEU, the EFTA Member States have the EFTA Surveillance Authority and EFTA Court which carry out similar supervisory and interpretive functions. If the UK rejoined the EFTA, it would potentially be possible for the UK to become a full member of the EEA as a non-eu party and this would be a relatively easy transition for the UK. It would also allow the UK to opt out of a wider range of EU law and policies, but a number of considerations militate against the UK taking this route, particularly the requirements in the EEA Agreement on free movement of people, a possible requirement to join

19 HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS 17 CONTRIBUTE TO EU BUDGET FREE MOVEMENT OF PEOPLE SCHENGEN OPEN BORDERS PARTICIPATE IN EU LAW MAKING EU MARKET ACCESS GOODS EU MARKET ACCESS SERVICES FINANCIAL SERVICES PASSPORTS TRADE TREATIES WITH THIRD COUNTRIES WTO (if negotiations fail) Bespoke bilateral deal (UK proposal) No No No No Possibly No No No CETA (Canada) No No No No FTA (Switzerland) Customs Union (Turkey ) Most favoured nation tariffs Aim is tariff free Largely tariff free Yes Yes Yes No Yes Not beyond WTO commitments Possibly Little more than WTO Limited extent No No No No Yes As WTO No EEA (Norway) Yes Yes Yes No Yes Yes Yes EU (current UK terms) No No? No No Not immediately Not immediately Not immediately Not immediately Only on same terms as EU Not immediately Yes Yes No Yes Yes Yes Yes Yes, via EU the Schengen open borders area and the acceptance of much EU law without any say in its formulation. In any event, the UK Government appears to have ruled out this way forward for the UK. In its White Paper, however, the UK has suggested that elements of the Single Market arrangements may be taken into the bespoke EU-UK trade relationship to achieve the freest and most frictionless trade possible in goods and services between the UK and the EU. These elements are most likely to be drawn from the EEA Agreement which effectively extends much of the EU s internal or Single Market to the three EFTA parties. The EU has stated on a number of occasions that it will not accept a cherry-picking deal and that it regards the four freedoms as indivisible (while having done deals related to only some of them with third countries). It will be a fine balancing act to achieve the aims of both the UK and the EU in this area. 7. EFTA (European Free Trade Association) EFTA is a free trade organisation between four European countries that operates in parallel with the EU and was established in Its current members are Iceland, Liechtenstein, Norway, and Switzerland. The UK was a member until it joined the EU in 1973 and could seek to rejoin EFTA. This would require the consent of the other EFTA countries, which, for Switzerland, would have to be preceded by a referendum vote in its favour. EFTA would be a gateway to seeking membership of the EEA (see above) but joining the EEA is not essential. Switzerland is in EFTA and is party to the Schengen Agreement but not in the EEA. Although it provides a gateway to the EEA, in itself membership of EFTA only provides a free trade relationship with other EFTA members. However, EFTA members have trade agreements with a significant number of countries, many of which were jointly negotiated (approximately 27, including Korea, the Southern African Customs Union (SACU) and Canada). It seems more likely, on the basis that the UK does not wish to join the EEA, that the UK would prefer to negotiate bilateral or multilateral trading arrangements with the EFTA members, tailored to current conditions. Analysis With any of these options, there would be significant challenges for business: Each arrangement for free trade requires bilateral or multilateral agreement. Agreements resulting from negotiations with the EU may require unanimous approval of the continuing EU Member States, not just the agreement of the EU itself to bind the Member States: Any agreement under Article 50(2) TEU requires a qualified majority in the Council of Ministers and the consent of the European Parliament, but may include provisions dealing with the transition to the future trading relationship between the UK and the EU; There is a broad legal basis for trade agreements in Article 207 of the Treaty on the Functioning of the European Union (TFEU) that would allow conclusion of such an agreement by the EU alone. However, other matters are often included in such agreements that allow, or even require, the Member States to also be parties, making the agreement mixed ; The EU has competence to conclude international agreements on many subjects but this is often not exclusive and in these cases Member States are normally reluctant to allow the EU to exercise this competence without the Member States; and Where agreements need to be mixed, or are made mixed for political reasons, each Member State will need individually to ratify the agreement.

20 18 THE NEW TRADE RELATIONSHIPS HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS There is currently a debate as to whether the EU CETA-type agreements involve Member State powers and therefore must be ratified by the Member States. The European Commission maintained that CETA could be concluded as an EU-only agreement but was forced to concede mixity (politically) by the Member States. This greatly complicated the conclusion of CETA. It is expected that the CJEU will soon clarify the issue when it issues a judgment regarding Member State competences in respect of the recently concluded EU-Singapore FTA. The Advocate-General s report to the CJEU, which is often an indication of the final decision, concludes that the EU-Singapore agreement contains only one provision which is of Member State competence (requiring the agreement to be mixed), but a number of others that allow the Member States to insist on mixity. The Advocate General examines each area of competence in some detail. The attention of the EU and its Member States will focus on their own interests. The risk is that trade arrangements with the UK may be a low priority for some of these countries and political and national interests will surface in each attempt to reach agreement, potentially leading to delays and significant hurdles. However the EU is a net exporter of goods to the UK and major exporting countries, such as Germany, would not wish to face barriers in accessing the UK market, which is one of the largest national markets with which it trades. As the EU frames new rules without UK input, the rules will address only the concerns of EU Member States, but not UK concerns. Indeed they could be framed to create barriers to trade for the UK, for example in financial services, or in defining quality standards and processes for goods and services. Soft trade barriers based on standards, testing requirements and the need for equivalence in the regulation of services businesses would be likely to arise and automatic recognition of qualifications may be lost. To the extent that UK based businesses wish to export to, or operate businesses within, the EU, they would still need to meet EU standards as these evolve. In conclusion, there will be continued uncertainty until the negotiations are complete as to where businesses operating in the UK will stand on access to EU markets and vice versa. It will be important to limit uncertainty as quickly as possible by agreement of the main elements of an alternative framework for relations with the EU, but it is doubtful that this will be achieved before the UK leaves the EU, although there is some possibility that an implementing phase while a new trading relationship is put in place will cushion the change for all parties. THE UK S NEW TRADE RELATIONSHIPS WITH THE REST OF THE WORLD Negotiating new trade agreements On leaving the EU, the UK will most likely cease to benefit from existing EU trade agreements with third countries and will be excluded from those under negotiation. The EU has around 50 international trade agreements with third countries from which the UK benefits, and many more are under negotiation. The UK will have to make a major effort to improve its position vis-à-vis third countries, including establishing its independent terms as a member of the WTO and building up its capacity to negotiate trade agreements, which has largely been outsourced to the EU. Under Article 3 of the TFEU the EU has exclusive jurisdiction over trade policy, which is referred to as the EU s Common Commercial Policy. Trade agreements with non-eu countries can only be concluded by the EU and Member States are not able to negotiate their own trade deals with third countries, although they can still conclude international agreements in other areas. For example the UK recently signed the Cape Town Convention dealing with security interests over aircraft, as rights in property are an area of exclusive Member State competence. The UK and four other Member States have adopted the UNCITRAL Model Law on Cross-Border Insolvency. Insolvency is an area of shared competency and relations between EU Member States are regulated by the EU Insolvency Regulation, now recast in Regulation (EU) 2015/848 which comes into effect in June 2017 (see the Restructuring and Insolvency section below). As long as the UK is a Member State it will be subject to the EU s Common Commercial Policy. Triggering Article 50 will start the withdrawal process but the UK will remain subject to the EU Treaties until the withdrawal agreement takes effect or until two years after the notification under Article 50, whichever is earlier (unless all Member States agree to extend the two-year period). Whether or not the UK can start negotiating its own FTAs with third countries before the withdrawal process is finalised and sign them once it is no longer a Member State (and whether those third countries will be willing to enter into FTAs with the UK before its post-brexit relationship with the EU is certain) is not clear, but this is again the type of issue that should be agreed as soon as possible under the withdrawal process. Following Brexit, the UK s ability to negotiate its own trade deals with third countries will depend on the model replacing its EU membership. If (although politically this is no longer on the table) the UK were to join the EEA

21 HERBERT SMITH FREEHILLS THE NEW TRADE RELATIONSHIPS 19 Agreement it would be free to enter into its own trade agreements, as the EEA is not a customs union. By contrast, if the UK were to join a customs union such as the Turkish model, it would be bound by the EU s Common Commercial Policy for trade in goods (but not services) and would be limited as to the terms it can agree with third countries which the UK has stated it will not pursue. It is clear that the UK places considerable emphasis on its ability to enter into independent trade treaties and it has had preliminary discussions with a number of countries including the USA, which is the UK s single largest trade partner if the countries within the EU customs union are considered separately, but a poor second if the EU customs union is considered as a single trading partner. The balance of EU and non-eu trade for the UK has moved gradually away from total reliance on EU markets, which were the destination of 44% of UK exports in 2015, as compared with 54% in The White Paper presents a large number of trade statistics to support the view that the UK can continue to grow its trading partnerships with the rest of the world and it will need to do so all the more if customs and other barriers are raised by the EU. The UK s position under existing EU trade agreements The UK s post-brexit position in respect of existing EU trade agreements is not clear. There are currently around 50 preferential trade agreements in place between the EU and third countries. The UK is party to these agreements by virtue of its EU membership. Some of these agreements, which only cover provisions which fall within the EU s exclusive competence, are concluded between the EU and the third countries only. Following Brexit these agreements may cease to apply to the UK and the UK may need to make an assessment as to which of these agreements remain relevant and should be replaced with a new relationship with the relevant third country(ies). agreements, and for the EU it would help avoid a situation where the third country could claim that without the UK s membership the original agreement was no longer what was agreed. For some third countries the EU may become less attractive without the UK as a Member State. The issue as to whether the EU would have to negotiate compensation with its partners for the rights and benefits these third countries would lose as a result of the shrinking EU was considered in the context of Greenland (a tiny economy compared with the UK) leaving the EU. For both types of agreements (ie mixed agreements as well as agreements concluded by the EU without the Member States) the third country concerned may object to the UK s withdrawal. Withdrawal from the EU under Article 50 would remove the legal obligations between the UK and the EU Member States, but a third country may not necessarily accept that the UK can walk away from its obligations under a procedure in which the third country is not involved. The UK, the EU and the third country may therefore need to take positive steps to terminate the UK s participation and to ensure that it is no longer bound to offer market access under the terms of that agreement. However, many of the EU preferential trade agreements are mixed agreements which means they contain provisions which relate to areas which are within the EU s exclusive powers as well as provisions which relate to areas reserved for the Member States or shared with the EU. Mixed agreements are concluded between third countries and the EU as well as the EU Member States, and it has been argued that it may therefore be possible for the UK more easily to agree with the third countries on a rolling-over of these agreements. This could in practice be an attractive transitional solution for the UK, the EU and the third country. It would buy the UK time to negotiate its own preferential trade

22 20 HERBERT SMITH FREEHILLS HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT 1. HOW THE UK LEGAL STRUCTURE WILL CHANGE POST-BREXIT Introduction Since the UK joined the EU in 1972, much UK law has derived from European law: a UK exit from the EU now brings the prospect of revisiting 44 years of interconnection of UK law with EU law and institutions. Affected law ranges from the regulation of financial services firms to vast swathes of EU health and safety, environmental, product liability, consumer protection and employment law applicable in the UK. The UK could not manage without law in these fields; the Government has confirmed that transitional arrangements will preserve existing laws on the UK s exit from the EU. Following the exit, UK lawmakers will need to review the elements of UK law which are derived from EU law and take decisions as to whether to retain, reform or repeal them.

23 HERBERT SMITH FREEHILLS HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT 21 UK and EU: the key constitutional changes The UK s constitutional relationship with the EU seems set to be fundamentally altered. As and when the UK ceases to be a member of the EU, the EU Treaties will cease to have effect and new arrangements will be put in place. The key constitutional changes on leaving the EU (in the absence of agreement to the contrary) will be: there will be no obligation to apply or adopt new EU legislation; there may be no, or a limited, obligation to follow EU decisions; there will be no voting representation at the EU (Parliament, Council or Commission) and no standing for the UK to be heard before the CJEU, although UK businesses will continue to be subject to EU laws when operating in the EU and to have standing before the European Commission and CJEU in processes and disputes arising; there will be no say in EU legislation; and there may be limited financial contributions between the EU and the UK. It is clear that the UK will seek to agree substitute arrangements with the EU as regards trade and financial services in particular, but this may be a prolonged process extending beyond the two-year leaving negotiations. Rights enjoyed by UK businesses and citizens in the EU will be lost, including free movement, recognition of qualifications and protection from soft trade barriers, save in so far as they are saved by the leaving arrangements or new trade agreements with the EU or accepted by the CJEU as protected by the doctrine of acquired rights. It is possible that there will be different solutions for those already exercising these rights and for UK citizens who wish to work or live in an EU Member State, as well as for EU citizens wishing to live or work in the UK, after the UK has left the EU. Replacing EU law: the Great Repeal Bill Much of the UK s law is directly effective EU law (from the Treaties themselves or Council or Commission Regulations). In addition a great deal of UK law arises from the implementation of EU Directives addressed to Member States. The CJEU in Luxembourg is the final arbiter on the interpretation of all this law. In October 2016 the Prime Minister announced that the Government would enact a Great Repeal Bill which would: repeal the European Communities Act 1972 (and with it the application of EU law in the UK and the primacy of the CJEU) with effect on the day the UK leaves the EU; and convert all EU legislation into domestic legislation. This announcement provided some clarity as to the transitional arrangements: on the day that the UK leaves the EU, it will have all relevant EU laws in place, and decisions will then be taken going forward as to whether they are to be retained, reformed or repealed. The Prime Minister indicated that those decisions would be made in the usual way, ie via the Parliamentary process. This legislative review process will be a huge exercise in itself. Some areas (eg environmental law) are within the competency of devolved administrations in Scotland, Wales and Northern Ireland for their respective regions, leaving the prospect of up to four different replacements for a single European law. It is not clear whether devolved administrations will continue to make laws in parallel with the Westminster Parliament in these areas or will be content simply to have the competency to amend laws enacted in Westminster to suit their local requirements. In addition to the Great Repeal Bill, the Government contemplates some stand-alone legislation for the new legal order. A Bill relating to immigration and another relating to customs are mentioned in the White Paper. The transition of EU law into UK law There is clear political desire for a quick and clean Brexit. However, from a legal perspective, the transitional measures outlined by the UK Government will not be straightforward: The Government has said that the Great Repeal Bill will convert all EU legislation into domestic legislation. Creating new laws in the same terms as EU Directives and Regulations will not, however, in itself be enough. These EU laws typically assign ongoing roles to the European Commission or another European body and it would be necessary to identify an appropriate Minister or body to exercise that role in each case (or at least establish a methodology to do this). For example, in financial regulation, a substitute for the European Banking Authority (EBA) would need to be appointed or the law changed to abolish the role altogether.

24 22 HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT HERBERT SMITH FREEHILLS HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT In other cases provisions for co-operation with or assistance to the European Commission, or other EU bodies, might need to be removed. Currently EU laws are governed by the EU approach to interpretation, which is purposive and has regard to recitals, headings and preparatory work. The UK approach is more literal and largely ignores extraneous material (even statutory headings). Certainty on the approach to interpretation of incorporated EU law is therefore important and the UK Government has provided useful clarification in its White Paper by stating that it believes that the preserved law should continue to be interpreted in the same way as it is at the moment. As the White Paper says this should ensure a coherent approach which provides continuity. Adopting the UK approach would have increased uncertainty and speeded up divergence from EU interpretation. Linked to the question of interpretation, is the question whether courts in the UK should remain bound to follow relevant decisions of the CJEU, should be bound to have regard to such decisions or should be free to depart from them. Continuity of approach suggests that they will be expected to follow the CJEU on issues of interpretation. The UK courts will not (unless provided in a Treaty with the EU) be able to seek decisions on interpretation from the CJEU where there is no clear answer: therefore divergence of interpretation will be likely to increase in any event. The status of decisions addressed to individual private and non-central Government bodies by the European Commission and other EU entities (eg the EU Intellectual Property Office, the EBA) will need to be determined with regard to the date of the decision or the conduct to which it relates. Post-Brexit, will UK authorities be able to vary or release ongoing obligations in relation to conduct in the UK? The status, if any, of laws and decisions addressed to Member States will need to be considered. Some, eg State aid decisions and EU Treaty infringement decisions, may fall away, but the ability to have regard to Directives as an aid to interpretation of UK implementing laws (which will remain in force) will be important. The transposition of some laws would not have the same effect in national law as the EU law has: for example the Regulation creating an EU right would not address the gap that arises in the UK when the right, which applies to the territory of the EU, no longer covers the UK. The law will need to be adapted to create equivalent rights under UK domestic law. In other cases transposition may result in the UK recognising EU law rights but have no effect in the continuing EU. For example, the EIDAS Regulation provides for the automatic recognition of electronic signatures meeting certain standards throughout the EU. Once the UK leaves the EU, EU Member States will not be bound to recognise any electronic signature created under an equivalent UK regime, even if its requirements are identical to those applicable under the Regulation in continuing EU countries. Finally there are some classes of EU law that are intended to operate separately but in parallel with the law in Member States, eg the competition law regime in Article 101 et seq of the TFEU and related Regulations. These will not be needed going forward, but may need to continue to apply to historic rulings and to some or all cases in progress when the UK leaves the EU. The transitional arrangements in this area will require detailed negotiation and that will need to be reflected in UK law. Areas of law that will be less affected by Brexit The following areas of law are likely to be less affected by Brexit than others; we discuss areas of law for which Brexit is likely to make a greater impact in the Impact for business section below. Contract law and tort-related civil litigation The basic contract and tort laws of England (and equivalents in other UK jurisdictions) have not been significantly altered by EU law (except in the field of consumer protection). This means that the use of English law in international contracts and disputes is not affected and a leave vote does not affect English law as the governing law of the contract. In relation to new contracts, English law has always been a very popular choice for parties doing business worldwide. English law has its own well-developed and respected rules which have largely been unaffected by EU intervention and the benefits of using English law are in no way connected to the UK s membership of the EU. Similarly, the existing validity and effectiveness of contractual choice of law is very unlikely to be affected by Brexit. Choice of law will continue to be effective, following from the continued operation within the EU of the Rome I Regulation, and the very similar UK domestic rules. It seems likely the UK will adopt the Rome I and Rome II Regulations into domestic law, so keeping UK rules on applicable law in line with EU rules.

25 HERBERT SMITH FREEHILLS HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT 23 Choice of the exclusive jurisdiction of the English courts will also be recognised by the English courts and should remain recognised throughout the EU (and certainly will be, for example, if the UK individually joins the Hague Convention on Choice of Court Agreements, to which the EU has already acceded) and English judgments are likely to remain enforceable. A choice of arbitration seated in London (or in any EU Member State) will not be affected, since recognition and enforcement of arbitral awards is governed by the 1958 New York Convention rather than EU law. Although a UK exit from the EU will mean that key EU legislation regarding jurisdiction and reciprocal enforcement of judgments (the Brussels Regulation, which has a wider impact than the Hague Convention) will no longer apply to the UK, the UK will undoubtedly seek to reach an agreement with the EU on enforcement (for example as exists between the EU and Denmark, which has a general opt-out from EU law in this area), or seek to join existing conventions on enforcement of judgments. If this cannot be done, English law has its own domestic rules on jurisdiction and enforcement of judgments which would be extremely likely to apply in international cases in the English courts involving EU parties. The UK Government s comments in its White Paper on the Great Repeal Bill suggest that the UK will legislate to bring its law on recognition of judgments as close as possible to the Brussels I Regulation, bearing in mind that agreement with the EU is needed to achieve reciprocal treatment (see the Disputes section below). Property laws Land law is in itself unaffected by EU law. EU proposals for laws on the sale of goods have not so far been adopted and in any event exclude the transfer of title. EU law in related areas such as environmental law, product liability or consumer protection are likely to be initially unchanged and dealt with under the Great Repeal Bill. Intellectual property has been the subject of greater harmonising measures, and there may be a need for special measures to preserve the rights of holders of, for example, EU trade marks (see the Intellectual Property section below). Competition law The UK has its own parallel system of competition law, important parts of which are currently closely modelled on EU law. Therefore the EU Treaty provisions and Regulations could cease to have effect in the UK without leaving a gap. This does not mean, however, that international businesses with a UK presence escape the EU regime: it is more likely that they would face two regulators operating in parallel, whereas previously they were exposed to action only by EU or national authorities (see the Competition and Antitrust section below). There will also be tricky issues regarding cases in progress at the date of Brexit, which may be suitable for an agreement with the EU under Article 50. Tax Apart from VAT and customs duties, national taxation systems are areas of national competency. The effects of the UK exit from the EU may extend, however, into fields of national competence, where taxing decisions have been affected by EU law (see the Tax section below). 2. HOW THE LEGAL ORDER WILL CHANGE IN THE EU POST-BREXIT Introduction The EU will also need to adopt a large number of measures to take account of Brexit, including probably Treaty change. This could provoke a large number of other proposals for changes to EU law. The effects for the continuing EU will also be political and will depend to a considerable extent on the outcome of elections in major Member States, including France and Germany, during the period when the Article 50 notice is running, as well as on the pressures faced by the euro as a currency and on external factors such as the policies pursued by major world powers, notably the USA, Russia and China. One question that has been raised is whether the EU Member States will maintain their support for the centralising direction of EU law and policy or will review whether this best meets the aspirations of their peoples. Such a review would give rise to complex political and legal questions about the drafting of a new treaty on the functioning of the EU, which would require ratification by all EU Member States. Another is whether EU trade policies will become more protectionist in response to the difficulties new trade treaties, such as that with Canada, are facing in obtaining full ratification by all the EU Member States. It can be seen that movements/political parties in other EU Member States that favour their countries leaving the EU have taken heart from the result of the UK referendum, but it is not at all clear this will lead to any of these parties

26 24 HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT HERBERT SMITH FREEHILLS HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT moving into Government in their respective countries. Only if that were to happen in another major EU Member State and that State were to decide to leave the EU would the British vote come to be seen as having significant consequences for the continuation of the EU in its current form. Some obvious legal points are as follows. EU structure and organisation The voting ratios in the European Council will change and this may give the Eurozone countries and the leading countries in that group more ability to dictate policy for the EU as a whole. The UK together with other countries outside the Eurozone are currently a much more significant counterweight to this grouping. If giving effect to this or any other measures requires a Treaty change there may be issues on ratification, leading to bargaining on areas not directly affected by Brexit. The UK is the second largest net contributor to the EU budget and the continuing Member States will miss this contribution and may need to readjust their arrangements. The leaving negotiations, however, will seek to obtain ongoing UK contributions to expenses already incurred, including the cost of pensions for retired officials, which may soften this blow. The prospect of the UK paying for continued participation in some EU programmes may also incentivise the EU to agree to UK participation. The UK has never been committed to the euro and supporting structures, so the legal structure of the Eurozone and the related Treaty provisions are wholly unaffected. Nonetheless, the UK contributed to the bailouts of Ireland and Portugal and is indirectly affected by a temporary EU bailout agency, the European Financial Stabilisation Mechanism (EFSM), which was created by the European Council in 2010 and remains in place for specific tasks, ie lengthening of maturities for loans to Ireland and Portugal. It would be a matter for an Article 50 agreement whether the UK can decouple its commitments in relation to Ireland and Portugal or will continue to manage them in tandem with the EFSM. (The European Stability Mechanism was set up in 2012 as a new permanent international organisation and as a successor to the EFSM; the UK does not participate in it.) Similarly the UK has never been party to the Schengen Agreement on open borders and this should be unaffected also. There is, however, a question about the status of Ireland, which will be the only EU country not a party to or committed to join Schengen once the UK leaves. The political importance of Ireland s open border with the UK in the island of Ireland may protect Ireland from pressure to join. Position in relation to third countries Existing trade arrangements may require further work to ensure that the counterpart third country states are content that they apply to a smaller EU. This is particularly so for those that contain EU-wide import quotas, where the amount attributable to the UK will come under debate. The commitment of EU countries to separate treaties and international arrangements where the UK will continue to be involved, as varied as the G20 Basel accords on financial stability, NATO and the European Convention on Human Rights is legally unaffected, although political pressures may result in changes of approach, eg the creation of an EU sponsored European Defence Force. The EU has developed a significant system of economic and commercial sanctions against third states, individuals and entities. Brexit may lessen the impact of this sanctions regime. EU law regulating relations with third countries, such as the Rome I and Rome II Regulations on applicable law will remain in force, but the UK will now be a third country for the purpose of those Regulations. Brexit will see the UK entering various markets as a competitor to EU Member States. For instance, Spain (among other Member States) has high stakes in fisheries in the Exclusive Economic Zone of third states. Post-Brexit, the UK will enter the fisheries market as an independent state and will be able to negotiate a new agreement relating to its Exclusive Economic Zone with the EU, affected Member States and third countries under international law. According to the White Paper, the UK sees fisheries as an area for agreement with the EU, particularly as to fishing rights in each other s territorial waters; EU states currently take from UK water approximately six times the weight of fish that the UK fleet takes from the territorial waters of other Member States (over four times in value terms). Effects within the EU At the level of EU law, the UK will cease to be part of the EU from the date of Brexit and laws that require recognition of national rules of other Member States ranging from financial regulation to recognition of qualifications will cease to apply unless preserved by agreement or recognised as part of the doctrine of

27 HERBERT SMITH FREEHILLS HOW THE LEGAL STRUCTURE WILL CHANGE POST-BREXIT 25 acquired rights. This might apply, for example, where individuals depend on recognition of their qualifications to continue to work within the EU. This is an area of uncertainty which, in the absence of agreement, will be settled by the CJEU. Businesses may address this uncertainty by moving parts of their operations to entities regulated within the EU so as to retain recognition, while others may benefit from the rights given by the EU GATS commitments, EU law on the recognition of third country regulation or a new EU-UK agreement. Import of many goods from the UK will be subject to tariffs on import to the EU and/or proof of compliance with EU technical standards.

28 26 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS This section looks in more detail at the possible impact of Brexit in a number of important business areas. The impact of Brexit on trade is discussed in the section entitled Trade: the new relationships above. Given the evolutionary nature of the Brexit process, any response requires an element of ongoing monitoring in order to sequence and trigger planned actions but also to regularly re-validate adopted strategies

29 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS FINANCIAL SERVICES a) Banking and investment firms The UK exit from the EU is likely to have a significant impact on the financial services sector in the UK. The nature and extent of that impact will depend on the model of EU-UK co-operation adopted as an alternative to EU membership and the nature of the UK s access to EU markets after the UK s exit. Since the UK Prime Minister ruled out remaining in the Single Market in her speech on 17 January 2017, the likelihood of this sector facing substantial change has become high. Businesses will need to prepare before the UK actually leaves the EU. The Financial Conduct Authority (FCA) made a statement on 24 June 2016 reminding firms and consumers that currently applicable financial regulation continues to apply until any changes are made by Government or Parliament. The statement said 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 and reassured consumers that their rights and protections are unaffected by the result of the referendum. There is no suggestion that the UK will not continue to implement EU law and the Government has announced that existing EU law will be implemented into UK law in the Great Repeal Bill. So the UK should leave the EU with its domestic financial services law very closely aligned with that of the continuing EU. The Government has also confirmed in its White Paper that the UK will continue to support and implement international standards, and that it will seek to establish strong cooperative oversight arrangements with the EU. Access to European markets Currently, a UK authorised firm has the right to carry on business in another EEA State, with or without a branch, provided the requirements of the Single Market Directive under which the activities will be carried out are met. This important passporting right allows UK authorised firms, including banks, investment firms, asset managers, (re) insurers, insurance intermediaries, payment services providers and E-money firms, free access to EU markets. Depending on the nature of the exit, leaving the EU could mean either restricted EU market access for the UK, with third country status following an exit, or continued access to EU markets but without the ability to vote on financial services legislation eg as an EEA/EFTA member. It is now clear that the UK may well have no more than third country status after Brexit, unless either a new long term trade agreement covering services provides for a closer relation or the Government is able to negotiate a phased process of implementation that preserves the status quo until such an agreement comes into effect. Given the risk that the UK does not retain continuous market access for its institutions, businesses will need to consider how to use their existing EU operations with good planning this transition could be effected relatively smoothly or whether new subsidiaries are needed. Without a transition period the timeline will be challenging, most particularly for those firms wishing to continue serving customers across the EU, but have hitherto passported out of London; it is also unclear whether regulators in continuing EU Member States will be able to process a potentially very significant increase in new authorisation applications. What third country status means in practice will need to be considered on a legislation-by-legislation basis. As an example, looking forward, the Markets in Financial Instruments Directive II (MiFID II) allows EU Member States the option to require third country firms to establish a branch in that State before being permitted to provide services to retail clients and certain professional clients. This means that UK firms wishing to provide services to these clients across the EU may be required to set up branches in different Member States before being able to do so. Access to EU eligible counterparties and certain professional clients may be possible under MiFID II without establishing a branch, but this may be subject to uncertainty as it will depend on a European Commission decision on equivalence of the relevant UK legislation. The outcome of an equivalence assessment would depend on the extent to which the UK chooses to replicate MiFID II provisions; the closer the UK stays to those requirements, the more likely it is to be assessed as equivalent: the approach that the UK Government has outlined for the Great Repeal Bill indicates a close correspondence of UK and EU financial services regulation will be maintained. Equivalence assessments are rarely at the top of the EU bodies priority list, and risk being deprioritised when resource is constrained. The assessment process can be slow, and there are numerous assessments to be performed for many jurisdictions a table produced by the European Commission scopes out 30 distinct types of equivalence decisions which have or could be considered in respect of 33 countries (not including the UK) as at the end of It may conceivably be possible to negotiate some form of interim registration process. The EU granted the USA s Commodity Futures Trading Commission equivalence in relation to the regulation of central clearing counterparties (CCPs) under EMIR (the European Market Infrastructure Regulation on over-the-counter (OTC) derivative transactions, central counterparties and trade repositories) in March 2016, some two years after the Regulation came into application. If the UK were to be a third country under EMIR, in the absence of some other negotiated arrangement, UK CCPs would need recognition from ESMA (the European Securities and Markets Authority) in order to continue offering services to EU financial institutions. The EU also is considering legislative measures to move London s euro-clearing business to the Eurozone after Brexit. To maintain full access to EU markets, and specifically to carry on deposit taking, lending and payments in the EU, some firms would need to set up subsidiaries in the EU subsidiaries will be able to apply for the EU passport but being a subsidiary comes with capital implications which are particularly burdensome for some activities, eg banking. For other firms, it could be necessary to move parts of the firms operations out of the UK into the EU.

30 28 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS Some firms will be able to use existing subsidiaries, but again there may be capital implications. EEA firms EEA firms currently passported into the UK or which would like to gain access to the UK market after the UK s exit from the EU will face similar uncertainties as those described above. In terms of recovery and resolution planning, and depending on the extent of the UK commitments under the WTO GATS, EEA firms might find the UK regulators are more likely to insist on subsidiarisation and additional bail-in capital. The UK has traditionally accepted branches of banks from third countries and cannot discriminate against banks from EEA countries when their countries become third countries, so blanket subsidiarisation requirements would involve a significant change in the UK s approach to third country banks in general; although the current view of the Prudential Regulation Authority (PRA) is that new non-eea branches will focus on wholesale banking, and at a level that is not critical to the UK economy. In addition, if the UK left the EU, then Article 55 of the BRRD (Bank Recovery and Resolution Directive (2014/59/EU)) may require EEA banks to insert clauses recognising bail-in powers into their UK contracts, unless otherwise agreed. The precise scope of this requirement is under review at EU level and may become less wide-ranging. Amendments to rules and legislation Almost the entirety of UK financial services legislation over the past 10 years has EU legislation as its source. The move towards the European Single Rulebook has also meant that many EU rules are now directly applicable in the UK. Much of this law, however, is closely modelled on earlier UK law. Existing rules and legislation The starting point of the Great Repeal Bill is the transposition of existing EU law, which will then be considered for adaption or amendment. While it is not difficult to imagine the swift repeal of particular UK bugbears, such as the bonus cap imposed by the Capital Requirements Directive IV (CRD IV), and various other tweaks to rules and legislation, it seems unlikely, although not impossible, that the UK exit will trigger a mass overhaul or repeal of EU-based financial services legislation, especially in cases where implementation is recent or imminent (eg Solvency II January 2016; MiFID II January 2018) and would involve costly systems and operational changes. Thus UK law is likely to continue to incorporate most current EU law in this field. The PRA and FCA handbooks will need to be amended to take into account the UK s exit. Almost the entirety of UK financial services legislation over the past 10 years has EU legislation as its source KAREN ANDERSON Directly applicable EU Financial Services Regulations When the UK leaves the EU, unless otherwise agreed with the EU, alternative provisions will need to be made to retain a financial services regulatory regime in the UK. As described above, the Great Repeal Bill will incorporate directly effective EU law into domestic law and preserve the validity of implementing UK statutory instruments for other EU law. For example, UK implementation of the Market Abuse Regulation (in operation from July 2016) required changes to the current legislation, which will need to be maintained or reversed on a UK exit (see the section entitled Replacing EU law: the Great Repeal Bill above). Factors to consider, in relation to possible changes after incorporation, will include whether or not the measures are necessary for the financial stability of firms and the UK financial system, or are necessary to ensure the UK s competitiveness or to meet an international commitment (eg CRD IV partly implements Basel III; EMIR is Europe s response to the G20 commitment to have standardised OTC derivatives cleared through a central counterparty). The UK is independently committed to these measures and will remain so after it leaves the EU. If UK regulatory policy begins to diverge significantly from the EU approach, this will create additional burdens for firms with cross-border interests who would need to comply with yet another set of regulatory requirements. It might also lead the EU to review equivalence in those areas of divergence. b) Asset management Investment funds We consider that the UK leaving the EU may have a substantial impact on the management and marketing of investment funds in the UK. The regulatory environment within which funds and fund managers based in the UK operate is derived to a significant extent from EU rules and regulations. Central to fund management and marketing are Directives and Regulations such as the UCITS (Undertakings for the Collective Investment in Transferable Securities) Directives, MiFID (Markets in Financial Instruments Directive) and the AIFMD (Alternative Investment Fund Managers Directive). A significant proportion of funds managed out of the UK take the form of UCITS, which benefit from a European cross-border passport. To the extent a UK UCITS is marketed widely across the EEA, there is potential for substantial disruption once the passport no longer applies to such UK UCITS. Where a UK UCITS is marketed primarily within the UK, the scope for disruption is less. In both cases however, UCITS would likely lose their designation, because UCITS are a creation of EU law (indeed they would likely be characterised as alternative investment funds, similar to their domestic counterpart, the non-ucits retail scheme). Alternative investment funds (AIFs) established in the UK with UK managers also benefit from a marketing passport under the AIFMD (facilitating access to professional investors across the EEA). To the extent any AIF relies on EEA wide marketing then, as for UCITS, there would be scope for material disruption. For AIFs that are marketed

31 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 29 mainly in the UK or into countries relatively open to the marketing of AIFs established or managed outside the EEA, then the impact of Brexit would be less damaging. In addition to the obvious marketing issues noted above, a loss of the management passport could also cause significant issues for UK based managers. A loss of the ability of UK managers to manage EU-domiciled funds, whether directly or through delegation arrangements will likely be of serious concern to managers who currently make use of that passport (to the extent that the local regimes in such countries do not anyway allow for management by non-eu managers). This issue may be most acute if and when the AIFMD begins to make overseas management of EU AIFs more highly regulated, pursuant to its controversial third country provisions. In the medium to long term, therefore, asset managers could re-evaluate the benefits of operating from the UK and establishing funds in the UK, where there is a need to raise capital widely across the EEA. Others may already have split their business between UK and EU regulated entities and be well placed to deal with the change with relatively little disruption. Over the long term Brexit may result in a more industry-friendly regulatory framework without some of the more burdensome EU provisions, thereby making the UK more attractive for management operations NIGEL FARR On the other hand, however, increasingly prescriptive EU rules and regulations have been cited as putting London at a competitive disadvantage in comparison to jurisdictions like the US (for example with respect to remuneration restrictions). Once the uncertainties in the short term are addressed, over the long term Brexit may result in a more industry-friendly regulatory framework without some of the more burdensome EU provisions, thereby making the UK more attractive for management operations. There can, however, be no guarantee that more industry-friendly regulation will be promulgated. Non-pooled clients (segregated accounts) Many asset managers, in addition to managing and marketing pooled vehicles (be they UCITS or AIFs), will manage accounts for individual clients (typically on a discretionary basis). Some of these will be clients based outside the UK. The issues that asset managers will face in relation to this line of business are similar to those that will be faced by banks in relation to their MiFID business. For further details, see the Financial Services section above and, in particular, the paragraph entitled Access to European markets. In short, there are access options that may be made available to asset managers for their MiFID business that would allow them to continue to provide services to clients based in the EU. These options, however, are not necessarily complete solutions and there is some material uncertainty in relation to when and how these will become available. c) Capital Markets The current UK listing and prospectus regime is largely derived from the EU requirements set out in the Prospectus Directive, Transparency Directive and Market Abuse Regulation. Changes to the framework will depend on the extent to which HM Treasury and the FCA look to retain an equivalent regime through UK law and regulation which replicates the European framework. As the London Stock Exchange is a leading international listing venue and trading platform, the UK regulators are likely to continue to require adherence to standards equivalent to the requirements imposed by the Prospectus Directive, Transparency Directive and Market Abuse Regulation, in order to maintain the strength of its global brand. Substantial divergence away from these standards seems unlikely taking into account: (i) the extent of the UK s historic and current involvement in the development of the Single Market for EU financial services and in developing standards supported by international listing venues; (ii) that there is unlikely to be significant political pressure to make changes in this area; and (iii) that Switzerland, as an EFTA but non EEA member, has recently overhauled its regulatory framework for capital markets to bring it closer into line with international standards, and in particular the EU Prospectus Directive. On the other hand, it is possible that the UK authorities could decide to relax the regulatory regime at a later stage, at least in relation to certain details, on the basis that choice of listing venue is determined by a number of factors, including access to potential investors, the valuation of similar companies listed on the exchange and liquidity; not solely by the level of continuing regulation and disclosure required and that, to a degree at least, removal of certain administrative burdens could make the UK more attractive as a listing venue. There is no reason why the UK should not remain an attractive place for IPOs. It has market liquidity and a strong international reputation. The UK is by far the largest market in Europe for investment in IPOs. The current passporting provisions for prospectuses prepared in the UK for use elsewhere in the EU, and vice versa, would not continue post-brexit unless a bespoke agreement is put in place between the UK and the EU which includes arrangements for mutual recognition of prospectuses. An EU Member State has the option to approve a prospectus drawn up by a non-eu issuer if it has been drawn up in accordance with international standards that are equivalent to the requirements under the Prospectus Directive. The European Commission has the power to decide whether a third country s law or practice is sufficient to satisfy the EU equivalence test for this purpose. It could therefore make this determination in respect of prospectuses prepared under UK law and approved by the FCA. Similarly, HM Treasury and the FCA could decide to continue to accept prospectuses approved in an EU Member State for the purposes of making a securities offering in the UK. Passporting,

32 30 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS however, is rarely relevant in the context of IPOs, given that very few IPOs are marketed to retail investors in more than one Member State. Passporting is more relevant to rights issues where there are lower numbers of retail investors in more than one Member State. For these, individual approvals would be required in each such Member State. There is no reason why the UK should not remain an attractive place for IPOs CHARLES HOWARTH The effect of Brexit on the future plans for the creation of a new EU capital markets union (CMU), which aims to promote the concept of a Single Market for capital are unclear. The CMU is a European Commission initiative to strengthen capital markets in Europe. It comprises a range of reforms targeted at specific sectors and the overall EU supervisory structure. Its primary objectives are to help businesses (including small and medium-sized enterprises (SMEs)) reduce their reliance on bank-funding and access alternative sources of capital; to make markets more efficient generally and to offer investors a wider choice of financial instruments to meet their needs. d) Insurance Many of the issues raised by Brexit for the insurance industry are the same as for financial services firms more generally. Important questions include how UK insurers and reinsurers can best access EEA markets once the UK has withdrawn from the EU. In common with other financial services firms, UK insurers (including UK subsidiaries of groups headquartered outside the EEA) currently benefit from passporting rights set out in the Solvency II Directive (Solvency II). Withdrawal from the EU does not of itself mean that they will no longer be able to do business in EEA States. What it does mean is that they will not be able to carry on insurance activities on an EEA-wide basis as a matter of right (albeit subject to the necessary formalities), flowing from the UK s membership of the EU. If, post-brexit, the Government fails to negotiate terms close to free access, UK firms might be forced to move some of their business to Europe. International insurers, whose European operations are headquartered in the UK, may rethink the location of their European hubs. For UK insurers with policyholders in EEA States, there is a risk is that they will no longer be licensed to deliver services in those countries unless they go through the onerous process of establishing an authorised branch in each country. Not doing this may leave insurers unable to pay out on claims, and EEA policyholders without valid insurance, unless there are grandfathering provisions in place for existing contracts. The loss of passporting rights will be equally relevant to the cross-border activities of insurers and reinsurers coming from the EEA into the UK. It is more difficult to advise EEA firms in this regard because it will depend on the regime that the UK decides to adopt in relation to the recognition of insurers meeting Solvency II rules and what they may do in the UK without submitting themselves or a UK subsidiary to UK regulation. Given the complex nature of much of the insurance business written in the UK, our market attracts some of the world s top insurance professionals. An additional concern for the industry post-brexit is likely to be reconciling the need for high-quality staff with the Government s policy on immigration controls. UK regulation of insurers and reinsurers post-brexit seems likely to follow Solvency II closely. The UK may, however, seek to introduce changes once it is no longer constrained by Solvency II. The argument runs that reducing the burdens imposed on UK-headquartered groups would enable them to become more competitive outside the EU. The Treasury Select Committee inquiry into EU insurance regulation is actively considering the impact of Solvency II on the competitiveness of the UK insurance industry and how the current regime might be improved, including for the benefit of consumers. In practice, however, there are other considerations: The UK was behind much of the content of Solvency II and is unlikely to reform the current regime radically. UK insurance companies also underwent massive upheaval to comply with the Directive and, in most cases at least, are unlikely to welcome a significant rewriting of the rules. The UK authorities are renowned internationally as regulators and supervisors of the highest standard. Putting that reputation at risk to further the competitiveness of UK groups in overseas markets is unlikely to be in the UK s long-term interests. For the UK to be assessed as equivalent, it will undoubtedly need to follow Solvency II closely. The benefits of an equivalence determination under Solvency II are, however, limited. Some UK insurers, at least, would favour a less onerous regulatory regime over equivalence. Insurance intermediaries who stand to lose passporting rights that they currently hold under the Insurance Mediation Directive will also need to consider how they can continue with their cross-border activities after the UK s exit. UK regulation of insurers and reinsurers post-brexit seems likely to follow Solvency II closely GEOFFREY MADDOCK Despite all of the uncertainty surrounding Brexit, insurance businesses are having to prepare for life outside the EU, while keeping a close eye on the shifting political landscape. Following recent announcements by the Government, firms have little choice but to plan on the assumption that passporting rights will be lost and that any bespoke deal agreed by the Government will fall short of providing free access to the Single Market. As it can take a year or more

33 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 31 to restructure an insurance business, few are prepared to wait and see what the Government s negotiations might deliver. 2. CORPORATE LAW Whilst the Companies Act 2006 and the raft of secondary legislation made under it have been heavily influenced by various European Directives (notably the Company Law Directives and Accounting Directives and the Shareholder Rights Directive), Brexit will have little immediate impact on company law. There may be some attempt post-brexit to remove any unnecessary burdens on business which were previously derived from European Directives. However, given the history of the Companies Acts in the UK, and the extensive consultation process which gave rise to the Companies Act 2006 itself, the key features of company law, including the types of companies which can be incorporated, the role of Companies House as Registrar, directors duties and shareholder remedies, and the rules on accounts and audit are expected to remain generally the same. Brexit will have little immediate impact on company law GAVIN WILLIAMS UK companies with subsidiaries incorporated in the rest of the EU or companies in the EU with subsidiaries in the UK may experience new challenges running their groups cross-border over time, should the EU and UK company law frameworks diverge. Groups may therefore wish to review their current corporate structure and consider the importance of and reliance on companies incorporated in the UK and the rest of the EU and also the use of branches and representative offices. UK incorporated companies which have their centre of operations in another EU Member State may wish to take legal advice in that Member State as to whether Brexit may impact on which law applies when determining their legal status and the protections that flow from it. The registration of a UK establishment by European companies should not be affected because the rules relating to UK establishments currently apply equally to companies in and outside the EU. UK companies with subsidiaries, establishments or branches in other EU Member States should also not expect any immediate change in company law terms. The key to the impact of Brexit for both UK companies with establishments in the EU and EU companies with establishments in the UK is not company law but the regulatory and trade framework for the type of business that they conduct ie whether or not the ability of that entity to provide goods or services within the EU or the UK is affected by Brexit (see for example the Financial Services section above). The methods of re-domiciling from the UK to another EU jurisdiction and vice versa may be more limited following Brexit because, in particular, the EU Cross-Border Merger Regulation only applies to mergers between EU incorporated entities. In addition, it is not clear what the status of a Societas Europaea (SE) which has a registered office in the UK will be following Brexit; for example whether there will be a provision to automatically convert those into UK PLCs. Those SEs with registered offices elsewhere in the EU will no longer be able to move their registered office to the UK and those operating partly in the UK may be required to register a branch or establishment in the UK (they are currently exempt from registration). Companies will need to consider the impact of Brexit (good or bad) on their business, including any specific potential impact on their business model and strategy and also its more general impact via changes in exchange rates and to the economy. For companies that have publicly traded securities, one consideration will be whether that impact creates an inside information announcement obligation. In most cases, Brexit related matters will not be inside information because the information about Brexit itself will be in the public domain. However, particularly as regards a change in financial performance or prospects which is not in line with market expectation, companies will need to assess in the usual way whether they have inside information and their announcement requirements, in consultation with their legal advisers and brokers. In relation to periodic financial reporting, on 12 July 2016 the Financial Reporting Council (FRC) issued guidance on disclosures in the light of the Brexit vote and in December 2016 the FRC confirmed that it will be monitoring Brexit disclosures when it reviews annual reports published in Brexit risk factors will also need to be included in prospectuses and information memoranda for new issues and for borrowings. 3. FINANCING AND SECURITY The precise impact of Brexit on financing transactions still remains unclear at this stage. The principal issues in focus arise in connection with (i) market volatility; (ii) the effects on English contract law and dispute resolution more generally (which are relatively few); and (iii) the impact of relevant EU law and its expected UK replacement under the Great Repeal Bill (whether that EU law is directly effective or implemented via UK legislation). The impact of any market volatility appears to remain one of the main concerns for borrowers and lenders, in particular in relation to foreign exchange volatility where borrowers have non-sterling exposure. This is particularly relevant where financial covenants are calculated partly based on a spot rate of exchange at a particular date and partly on an averaged rate over an accounting period. Where non-sterling debt obligations are hedged, counterparties may be required by their derivatives contracts to post further collateral, and if a position is closed out, there may be significant payment obligations if the contracts are out of the money. The ability of lenders or other financial counterparties to invoke a contractual material adverse change clause would, as ever, depend on the precise wording of the relevant clause and the formulation of MAC clauses is likely to be kept under review for new financing arrangements. However the high evidential burden required to prove that a material adverse change has been triggered should be borne in mind.

34 32 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS In the longer term, the impact on loan documentation governed by English law is likely to be relatively minor (see the section on Contract and other obligations below). While arbitration with a seat in London should not be affected by the exit from the EU, there is some focus on dispute resolution mechanisms, specifically on the question of enforcement of judgments, following an exit from the EU. This is discussed in more detail in the Disputes section below but, in brief, it is likely that the UK would seek to reach an agreement with the EU on reciprocal jurisdiction and enforcement of judgments to replace the existing EU legislation on these matters and may join the Hague Convention on Choice of Court as an independent signatory. This would protect the recognition of exclusive jurisdiction clauses and related judgments as the EU Member States are all parties to this Convention already. It is worth noting that in the absence of any agreement with the EU, parties to transactions involving a submission to the English courts would be in the same position as regards recognition in the EU as they would be if they were party to New York law documents containing a submission to the New York courts. In terms of the detail of financing agreements, any contractual reference to the EU would need to be considered, and possibly amended to clarify the position following a UK exit. The wider effects of the UK potentially being a third country as far as the Bank Recovery and Resolution Directive is concerned should also be considered, primarily in the context of whether contractual bail-in language should be included in English law contracts to which an EU financial institution is a party. The impact of any market volatility appears to remain one of the main concerns for borrowers and lenders DINA ALBAGLI There should be no effect on English law security over assets located in the UK or English law guarantees. However, the position may be more complicated where assets or rights to be secured arise as a result of, or are very closely entwined with, EU law. For example certain intellectual property rights arise under EU law (for further details see the Intellectual Property section below), and security over those rights is perfected by registration at an EU level. The Financial Collateral Regulations (which stem from the EU Financial Collateral Directive) are now fairly well entrenched in domestic law in the UK, and we expect that the UK will wish to retain a similar regime following an exit from the EU, given their importance in finance transactions generally. There may be a myriad of regulatory issues to consider since the regulatory position following a UK exit is still unclear. These are discussed in more detail in the Financial Services section above. The principal issue will be in relation to potential loss of passporting for lending or the provision of other financial services in jurisdictions where licences to provide such services are required: financial counterparties will want to consider any illegality or other provision which may be triggered and may wish to amend the documentation to allow for affiliate entities which meet the relevant regulatory requirements to actually provide the service, or in the absence of any contractual ability to do so, may approach counterparties to seek transfers or novations. 4. RESTRUCTURING AND INSOLVENCY Issues will arise upon a UK exit in relation to restructuring tools such as schemes of arrangement and in relation to insolvency processes; there are also special EU insolvency rules for financial institutions which will be affected. Finally there are elements of EU financial services laws which impinge on insolvencies and remove uncertainties, such as settlement finality and financial collateral. Schemes of arrangement have been used in the UK in recent years to restructure the financial indebtedness of a significant number of overseas companies, including those incorporated in other Member States. In order for the English court to accept jurisdiction to sanction a scheme of arrangement proposed by a foreign company, it must be satisfied that there is a sufficient connection with England; and that the scheme will be recognised in the relevant foreign jurisdiction. It has not yet been necessary for the English court to determine whether the Recast Judgments Regulation has the effect of limiting its jurisdiction to sanction a scheme proposed by a foreign company; therefore, in the event that the Recast Judgments Regulation no longer applies to the UK, the debate as to whether it curtails the jurisdiction of the English court falls away. However, the English court will still need to be satisfied that any order it makes will have effect in the relevant jurisdiction (enforcement of judgments is discussed in more detail in the Disputes section below). If the Recast Judgments Regulation is no longer an available avenue, recognition would have to be established based on national rules of private international law. Ultimately, non-uk companies with English law liabilities seeking to establish scheme jurisdiction in the UK based on a centre of main interests shift may become more open to challenge in their EU state of incorporation, increasing the risk of a competing process in the EU. In relation to insolvency proceedings, the Insolvency Regulation aims to establish procedural rules on jurisdiction and applicable law and to aid the mutual recognition of cross-border insolvency proceedings commenced in a Member State, where the debtor has its centre of main interests. It does not further seek to harmonise substantive insolvency law. It has direct effect in all Member States other than Denmark. Upon a UK exit, there would no longer be automatic recognition of UK insolvency proceedings in EU Member States pursuant to the Insolvency Regulation. The UK has already adopted the UNCITRAL Model Law on Cross-Border Insolvency, which has been adopted in jurisdictions such as Australia, the US, and in some EU Member States (Greece, Poland, Romania and Slovenia), but elsewhere in the EU the UK insolvency office holder would be left to rely on older cross-border insolvency rules in the jurisdiction where recognition is sought. It may be that, following a UK exit,

35 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 33 other EU Member States will adopt this law. Absent that, or other steps being taken in the EU, there is, at worst, a risk of competing insolvency proceedings taking place, at best, scope for delays and uncertainty. Through its adoption of the Model Law, the UK does provide for recognition of foreign insolvency proceedings (regardless of whether the foreign company is in a jurisdiction which has itself adopted the Model Law), albeit on a more limited basis than under the Insolvency Regulation. Upon a UK exit, there would no longer be automatic recognition of UK insolvency proceedings in EU Member States pursuant to the Insolvency Regulation LAURENCE ELLIOTT Financial institutions (insurance undertakings, credit institutions and certain investment undertakings) are excluded from the Insolvency Regulation. These institutions are covered by two separate EU Directives which, in England, have been implemented as the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 and the Insurers (Reorganisation and Winding Up) Regulations Both provide for recognition in the UK of insolvency and reorganisation measures commenced in the country of the financial institution or insurer without any further requirements. Upon a UK exit, even assuming this UK legislation remained in place, reciprocity would be lost, as EU Member States would not be required to recognise insolvency or reorganisation measures commenced in the UK, unless there is an agreement between the UK and the EU providing for this. The regime for cross-border resolution of banks (the EU Bank Recovery and Resolution Directive (BRRD)) is also relevant. The UK s implementation through the Banking Act 2009 would likely remain in place, giving discretion to the UK to recognise EU Member States resolution proceedings. It is expected however that the UK would seek reciprocity as part of the exit arrangements, requiring EU Member States to give recognition to UK resolution proceedings as third country resolution proceedings under BRRD. Until any such recognition is obtained, EU financial institutions may have to include contractual recognition of bail-in clauses in English law contracts under which they incur liabilities. Finally, financial services law with aspects relevant to insolvency will be impacted. UK payment and securities settlement systems will lose the protections from the impact of insolvency proceedings on the finality of settlement and on the enforcement of collateral afforded to such systems in EU Member States under the Settlement Finality Directive. The Financial Collateral Regulations are likely to be preserved in the UK however, for the ease they afford to realisation of collateral in a variety of finance transactions in the event of insolvency. 5. DISPUTES Private disputes As parties assess changes in the legal, economic and regulatory landscape caused by the UK exit, and the costs and other implications on their contractual relationships, they are more likely to consider the scope for avoiding contractual obligations, such as seeking to rely on a force majeure clause or a material adverse change clause, or arguing that a contract is frustrated. Businesses will wish to consider carefully the contractual mechanisms on which they (or their counter-parties) may seek to rely to avoid contractual obligations in the context of any negotiation about contractual performance. The fact that there may be uncertainty as to the content of English law after a withdrawal could in itself lead to disputes, as parties seek to test the position. In its White Paper the UK Government has stated that, by way of the Great Repeal Bill, it will preserve existing EU law pending any decision by Parliament to amend or repeal it. However, it also recognises that changes will have to be made to the extent that existing laws would not function sensibly once we have left the EU, and no doubt more significant changes are likely to follow as Parliament makes decisions on the way forward for the UK outside the EU. The Government has also said that, in general, it believes that the preserved EU law should continue to be interpreted in the same way as it is at the moment. This seems to express a policy intention that UK courts will apply EU rules of interpretation to these laws and, at least, have regard to CJEU judgments. With regard to dispute resolution procedures, exit from the EU will mean that key EU legislation regarding jurisdiction and reciprocal enforcement of judgments (namely the recast Brussels Regulation) would no longer apply to the UK. It is likely that the UK would seek to reach an agreement with the EU on such matters, or seek to join existing conventions such as the 2007 Lugano Convention or 2005 Hague Convention on Choice of Court Agreements. The EU (including the UK) has acceded to the Hague Convention and the UK could easily accede as an independent state. If that happens, judgments will be enforced under the Convention where judgment was given pursuant to an exclusive jurisdiction clause in favour of a UK court or the courts of another contracting state. In its White Paper the UK Government recognises, in the chapter on free trade with European markets, that an effective system of civil judicial cooperation will provide certainty and and protection for citizens and businesses of a stronger global UK which may indicate that it will seek to achieve a closer agreement with the EU on civil justice than the Hague Convention will provide. Even in default of any agreement or convention on these matters, it is likely that EU Member State courts will continue to respect exclusive English jurisdiction clauses, and the English courts will do likewise where there is an exclusive choice of an EU Member State court.

36 34 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS At the enforcement stage, the enforcement of English judgments in the EU, or of EU judgments in England, may be more cumbersome, although it is likely that enforcement of money judgments will continue in most cases. It will obviously be important for parties with contracts containing English court dispute resolution clauses to monitor the arrangements negotiated between the UK and EU. Overall, it seems unlikely that Brexit would substantially damage the UK's position as a premier dispute resolution centre ADAM JOHNSON Overall, although there may be some instability and uncertainty, it seems unlikely that Brexit would substantially damage the UK s position as a premier dispute resolution centre. Arbitration with a seat in London should not be affected by the exit from the EU because it is not regulated by EU law, and because the UK will remain a party to the New York Convention 1958, along with all the remaining EU Member States. Public and administrative law disputes Rights of UK businesses trading in the EU to bring disputes with regulators and public bodies in the EU (as well as horizontal disputes with private bodies about the application of administrative or public law rules) will continue to be governed by the laws of the relevant EU Member State including EU law. In the continuing EU Member States, questions on the application and interpretation of EU law will still be able to be taken to the CJEU as the final court. EU and UK businesses operating in the UK will still have recourse to UK courts, but the UK Supreme Court will be the final decision taker, including on EU laws incorporated into UK law. The Government s policy is that the preserved law should continue to be interpreted in the same way as it is now. This suggests that the UK courts should apply EU rules of interpretation to these laws (for example considering aids to interpretation such as underlying Directives) and may, at least, have regard to CJEU judgments. The White Paper indicates that the resolution of most or all disputes in relation to any new agreements between the UK and the EU will be at State to State level (with the possible exception of any investment provisions creating private rights directly enforceable against the State). This will leave business with only indirect enforcement rights where the relevant provisions are only contained in a Treaty and are not translated into directly effective provisions of EU or EU Member State or UK law. This may be a distinct loss for business. For example, where a business faces trade barriers not permitted by the Treaty arrangements, persuading the Government or the EU to take up the cause may be difficult, with considerations of cost and practical factors potentially acting as an impediment. There may also be limited circumstances where such a Treaty may be referred to in English courts, for example in order to aid interpretation of UK law. Where agreements between the UK and the EU are given effect in domestic legislation, there may be more scope for recourse to the UK courts, for example by way of judicial review. 6. CONTRACT AND OTHER OBLIGATIONS Given that the exit from the EU will not entail any change in the currency of the UK, there are fewer issues about existing contracts than would be the case if a member of the Eurozone left the EU. However there are still a number of issues for contracting parties to address. A key question is whether a particular contract can be terminated as a result of a UK exit from Europe, particularly as the changed commercial landscape may prompt contracting parties to reassess their current contract arrangements and look for ways to exit those contracts which are no longer required or profitable. Any right of termination of course depends on the terms of the relevant contract, including any material adverse change and force majeure provisions and any right (express or implied) to terminate on notice as well as the doctrine of frustration. Most general provisions are unlikely to be triggered by any of the stages of the Brexit process. We may see some companies seeking to include a specific provision in new contracts dealing with the effects of the UK s exit from the EU. A related issue is interpretation of pre-existing contracts. For example, how will an obligation to comply with a specific piece of EU legislation be interpreted after the exit? How will the use of European Union as a defined term in contracts be interpreted will it be found to include the UK, or not? Similarly, how will a contract be interpreted if, at the time of contracting, EU law formed part of English law but the time of performance is after the UK s exit? These are essentially questions of contractual interpretation. In most cases it is likely that a choice of English law will be interpreted to mean English law as it stands from time to time, subject to any variations, including such variations as may arise from Brexit. However, where some key provision of EU law is essential to the operation of a particular contract, in particular where performance of the contract is in the continuing EU, the court may give effect to the relevant EU law so as to give commercial effect to the contract. English courts are likely to take a sensible view and to favour commercial interpretations. The UK's exit should not generally have any effect on the willingness of contracting parties to choose English law as the governing law of the contract ANNA PERTOLDI In relation to new contracts, English law has always been a very popular choice for parties doing business worldwide and the UK s exit from the EU should not generally have any effect on the willingness of contracting parties to choose English law as the governing law of the contract. Appropriate drafting in new contracts can avoid the issues described above in relation to existing

37 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 35 contracts. English domestic commercial law has its own well-developed and respected rules which have largely been unaffected by EU intervention and the benefits of using English law are in no way connected to the UK s membership of the EU. Finally in the contract area, the validity and effectiveness of any contractual choice of law is very unlikely to be affected by Brexit. In other words, a choice of English law (or Scots law, or any other law) in a contract will continue to be effective, whether in England, Scotland or in the remaining EU Member States. This would follow from the continued operation within the EU of the Rome I Regulation, governing choice of law in contracts, which in effect enforces any choice of law made by contracting parties, whatever law they have chosen. The Regulation will probably be adopted for the UK by the Great Repeal Bill, but if it were not, the pre-regulation rules in England are to very similar effect and would give rise to the same result ie any expressly chosen governing law will generally be enforced. Outside the contract area, commercial disputes sometimes involve allegations of liability arising in tort or delict, or claims for unjust enrichment and the like. Such disputes can give rise to considerable uncertainty and risk in international cases, because it may be difficult to predict which law to apply. EU legislation (the Rome II Regulation) presently allows commercial parties to select in advance, by contract, the law to govern not only their contractual but also their non-contractual rights and liabilities. That was not the position under the English common law, however. It is likely that Rome ll will be adopted into UK law under the Great Repeal Bill. 7. TELECOMS AND MEDIA The regulatory framework for telecoms networks and services in the UK is primarily established under the Communications Act This piece of primary legislation gives effect to a number of EU Directives originally adopted to establish a framework for the regulation of communications-related activities across Europe. In the media sector, regulation of television services also derives, in part, from applicable European law, in particular from the Audiovisual Media Services Directive which was implemented into law in the UK by the Broadcasting Acts 1990 and 1996 and the Communications Act Post-Brexit, these primary pieces of legislation will be likely to remain in force at least for the short-term, thus retaining the regulatory status quo. In such highly regulated and complex sectors, this would certainly be preferable to any repeal of the legislation. However, the UK Government would have the scope to repeal or amend these laws over time without being limited by the requirements of the European Directives, subject to any other international commitments. The telecoms sector is, however, also subject to directly applicable EU Regulations in a couple of key areas, being roaming and net neutrality. The 2015 Roaming and Open Internet Regulation codified the principle of net neutrality (subject to reasonable traffic management) and will abolish roaming charges from June The 2015 Regulation applies to countries in the EEA and the effect of Brexit on the Regulation will depend in part on the future relationship between the UK and the EU. If the UK were no longer part of the EEA as envisaged in the Government s current plan for Brexit, post-brexit the 2015 Regulation will fall away, although the Great Repeal Bill could result in its being adopted as UK legislation. Such adoption alone would not oblige EU mobile operators to comply with the anticipated reciprocal caps on wholesale roaming charges in respect of UK mobile operators. If the 2015 Regulation falls away and is not adopted as UK law, in relation to roaming, Brexit could leave UK consumers travelling to Europe subject to higher roaming charges (and vice versa) as the regime will be dependent upon individual roaming agreements negotiated between mobile operators, rather than regulation any unregulated, commercially agreed wholesale rate increase by UK operators is likely to be reciprocated by their counterparts elsewhere in the EU, which in turn is likely to affect retail pricing in those jurisdictions. Such a scenario, however, would not seem to align with the Government s intention in its White Paper to focus on ensuring that UK telecoms companies can continue to trade as freely and competitively as possible with the EU and let European companies do the same in the UK. At a time when regulation is moving towards greater harmonisation at the European level change at a UK level will lead to uncertainty for operators as to how they will be regulated across Europe NICK PANTLIN At a time when regulation is moving towards greater harmonisation at the European level, with proposals such as the Digital Single Market seeking to remove any obstacles to a single European digital market, any such change at a UK level will lead to uncertainty for operators as to how they will be regulated across Europe. This in turn could have a big impact on consumers at the retail level, something which it is likely the UK Government and the EU will be keen to avoid. In the media sector, the Audiovisual Media Services Directive enshrined the so-called country of origin principle whereby, as long as broadcasters are licensed and regulated in one Member State, they may freely transmit into other Member States without the need for additional licences or compliance with additional regulation. When the UK leaves the EU, broadcasters could lose the benefit of this principle, although the Government will still be bound by its other international commitments, such as the Convention on Transfrontier Television. This could mean that UK-licensed broadcasters will no longer be guaranteed freedom of retransmission in other Member States and may be required to comply with additional regulation in at least one of the Member States in which they are active. The Government has, however, acknowledged in its White Paper that the UK is currently the EU s biggest broadcasting hub and that in the course of Brexit

38 36 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS negotiations the Government will focus on ensuring the ability to trade as freely as possible with the EU as well as supporting the continued growth of the UK s broadcasting sector. 8. DATA PROTECTION Data protection is currently regulated in the UK via the Data Protection Act 1998, being the UK implementation of the EU Data Protection Directive However, the data protection regulatory regime in Europe is in the process of being overhauled. A new European General Data Protection Regulation (GDPR) was approved and entered into force on 25 May There is a two-year implementation period for the GDPR, meaning that it will not apply until 25 May The timing of the UK exit from the EU will therefore have significant consequences from a data protection legislative perspective. Despite initial uncertainty regarding the application of the GDPR in the UK as a result of the referendum, the UK Digital Minister Matt Hancock confirmed in a written statement in November 2016 that the GDPR will come into force in the UK in May 2018 despite the UK s move towards Brexit. The confirmation followed a comment made by the Culture Secretary Karen Bradley in Parliament, where she stated we will be members of the EU in 2018 and therefore it would be expected and quite normal for us to opt into the GDPR and then look later at how best we might be able to help British business with data protection while maintaining high levels of protection for members of the public. It is in practice unlikely that the UK will want or be able to stray far from the principles of data protection set out in the GDPR DUC TRAN The GDPR is a directly applicable Regulation not needing national implementing legislation. As a result, the current Data Protection Act is likely to be repealed in anticipation of the GDPR, meaning that a UK exit from Europe post-may 2018 may leave the UK having to take steps to adopt new data protection legislation when the GDPR falls away on exit. Many commentators anticipate that this will be dealt with initially by the Great Repeal Bill which would effectively adopt the GDPR as UK legislation. However, as with most things, the devil will be in the detail of this approach. The GDPR contains many references to, for example, the coordination of European data protection regulators. It is not clear how such provisions will apply to the UK and the UK s data protection regulator post-brexit. As an alternative to the approach of the Great Repeal Bill, the UK s exit from the EU has been viewed by some as an opportunity for data protection reform at a UK national level. A lot of the detail of the GDPR has been criticised in the past by both the UK Government and the Information Commissioner (the UK data protection regulator), as well as UK public listed companies. The UK exit from the EU could therefore leave the UK Government free to adopt a more business-friendly approach to data protection regulation going forward, without being constrained by EU law. However, there are two key issues which mean that it is in practice unlikely that the UK will want or be able to stray far from the principles of data protection set out in the GDPR. First of all, depending upon the form of the new relationship with the EU, the UK may be required to adopt certain EU laws in any event, including data protection laws. Secondly, the UK Government will want to ensure that the transfer of data to and from the UK is not restricted, as this could have a negative effect on UK business. In fact the Government has already stated that it is working to make sure that we achieve a coherent data protection regime and that data flows within the EU are not interrupted after we leave, a sentiment reiterated in the White Paper. As with the existing UK Data Protection Act 1998, the GDPR includes a provision prohibiting the transfer of personal data outside of the EEA unless adequate protections are in place. If the UK were no longer part of the EEA, as envisaged in the UK Government s current plan for Brexit, the consequences of this prohibition could force UK organisations to adopt bilateral model clauses or other data protection compliance mechanisms in order for data to be able to be transferred to them in the UK from continuing EU Member States. Aside from being administratively burdensome, this is likely to also make UK organisations less attractive as commercial partners than organisations within Europe. In order to mitigate this risk, the Government may seek an adequacy decision from the European Commission, declaring that the UK is adequate for data protection purposes an option mentioned in the White Paper. However, this will only be possible if the UK has in place data protection regulation that is essentially equivalent to the GDPR, meaning that any chance for a relaxation of data protection rules in the UK would be effectively lost. In addition, the extra-territorial nature of the GDPR means that the Regulation will apply to organisations located outside the EU that offer goods and services to EU citizens or monitor their behaviour. Therefore post-brexit, UK organisations will still need to comply with the GDPR when trading with the EU, although questions still remain regarding the effective enforceability of these new data protection obligations against non-eu data controllers. Given the current importance of data in the global economy, the potential impact of Brexit on data protection is certainly not to be underestimated. Whilst the Government commits to seeking to preserve the stability of data transfer between EU Member States and the UK in its White Paper, it appears to recognise that this can only be achieved by working with the EU. 9. INTELLECTUAL PROPERTY Whatever future relationship the UK has with the rest of the EU, the effect of the Great Repeal Bill, once enacted, will mean that any existing intellectual property law having effect in the UK will continue to apply as it did post-brexit, although it will be for the UK Government to adapt or amend it subsequently. That means that intellectual property law will continue to contain all of the concepts implemented from EU Directives or applicable from EU Regulations. However, EU-wide rights defined as applying in the EU will no longer apply in the UK and the

39 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 37 Government will need to consider providing replacement rights, provision for which would need to be in place prior to Brexit. EU-wide rights will no longer apply in the UK and the Government will need to consider providing replacement rights JOEL SMITH Patents: UK designated European patents (EPs) will continue to apply in the UK and will still be able to be applied for at the European Patent Office and nationally granted UK patents will also be available. However, although the UK Government announced in November 2016 that the UK would ratify the Unified Patent Court Agreement (UPCA) and would take part in the Unified Patent Court (UPC) and thus the new unitary patent (UP) right (see our bulletin on this development and further information on the UPC and UP on the UPC hub on our website). Once it has left the EU, the UP will no longer cover the UK and it is unlikely that the UK could continue as part of the UPC system. It is worth noting that none of Spain, Poland, and Croatia is currently planning to participate in the UPC (or UP) so the UK will not be alone in this. The UK is required to ratify the UPC Agreement before it can come into effect. This requirement applies while the UK is still a member of the EU (France, Germany and the UK must be amongst the 13 or more ratifiers as they were the EU States with the most patent applications at the time of signature of the UPC Agreement). Even if the UK is not in the EU (and not in the UPC system), UK businesses with European patents designated to participating EU Member States will still be able to use the new UPC system (unless they have chosen to opt these patents out of its jurisdiction), and will of course be able to apply for UPs although the latter will not cover the non-participating States listed above, nor any non-eu European Patent Convention States (eg Turkey, Switzerland, Norway), for which European patents will still be available but which will all need to be litigated nationally as they will be outside the jurisdiction of the UPC. The UPC has advantages (central enforcement) and disadvantages (central revocation) for patentees and their competitors alike. Assuming that the UPC does go live, UK businesses with UPs and EPs will still be able to use the UPC for enforcement in other EU participating countries, whether the UK is in or out of the EU. However given concerns about how the UPC will operate in the early years and the quality of the early decisions made by it, some patent proprietors will choose to opt-out their European patents from the UPC system. As a result, business is still likely to pursue litigation in countries across Europe (including the UK) outside of the UPC system. Pan-European enforcement strategies will remain important. Indeed, current or future pan-european patent litigation strategy will still involve multiple courts and supranational management of disputes, whether or not the UPC goes ahead and with or without the UK s participation; Spanish, Polish and Croatian designated European patents will also be outside its jurisdiction (as explained above) and UPs will not have effect in these jurisdictions. Further, nationally granted patents must be litigated locally. It will still be critical to have advisers who are expert in handling multiple cross-border disputes and managing local lawyers in jurisdictions within Europe or beyond. See the jurisdiction and opt-out page of our UPC and UP hub on our website for more information on the UPC and our article published in PLC Magazine on preparing your patent portfolio for the advent of the UPC and the UP. With the UK no longer in the EU, the European Medicines Agency (EMA) may move from London. However, even if the EMA is relocated, it is crucial that the UK and the rest of the EU remain in step in terms of the ability to get pharmaceutical and medicinal products to market efficiently, whilst relying upon common clinical study data, as well as monitoring patient safety. Supplementary Protection Certificates: Supplementary Protection Certificates (SPCs) are UK national rights granted by the Intellectual Property Office (IPO) under rules determined by an EU Regulation. It is anticipated that the Great Repeal Bill, once enacted, will have the effect that all EU law applying to the UK at the day before Brexit will remain as UK law going forward unless and until this is changed by the Government or Parliament. This will mean that SPCs can continue and can be granted by the IPO post-brexit, although transitional arrangements are expected. Plant breeders rights: Whilst the UK system is similar in approach to the EU system, the relevant EU Regulation will cease to apply to the UK. Whatever the effect of the Great Repeal Bill, when enacted, it would be desirable that express provision is made by UK legislation to provide an equivalent plant breeders right in the UK for each protected variety, with the same priority date and term as the Community plant variety right. Trade secrets: The Trade Secrets Directive adopted recently is due to be implemented into national law across EU Member States by 5 July Although the proposed changes required are minimal for the UK, the UK may still decide to implement the Directive before 2018, to ensure a strong, harmonised playing field for protecting innovation and investment across Europe. This would ensure certainty and consistency of approach in the way businesses are able to respond to the challenges of safeguarding their critical trade secrets. Trade marks: EU trade marks (EUTMs) will no longer cover the UK post-brexit since their effect is determined by the territory of the EU. In order to maintain the status quo in relation to EU-wide rights such as EUTMs, it is expected that provision will be made to provide an equivalent right in the UK with the same specification, priority date and term as the EU level right previously. This would be a better solution than requiring proprietors to convert their EUTMs into a collection of national rights across the EU. Various options are proposed to convert all EUTMs into national UK trade marks at the point of Brexit (which may risk cluttering the register and allowing some marks which would not normally have been allowed

40 38 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS on the UK register) or to recognise the EU marks in the UK and convert them into UK marks by application from the proprietor at the next point of renewal (if no UK application is required then they would then lapse in effect in the UK). The main concerns of trade mark owners are that new criteria might be applied to an already valid trade mark right in the UK on any conversion and that their marks might be put at risk by the process. Further any hiatus in protection could lead to the intervention of local rights of prior use which might damage the effectiveness of any new UK registration. Due to the uncertainty about the approach that will be taken, trade mark proprietors should consider in the meantime supplementing their protection by applying for UK national trade marks for their key brands. Geographical Indications (GIs): Post-Brexit, EU GIs will no longer have effect in the UK and UK related GIs will no longer be able to be applied for in the EU. Current rights within the UK held in relation to non-uk geographical areas will either need to be negotiated to continue until expiry (with no new applications) via a transitional period or will need fresh legislation to provide the equivalent right in the UK. UK GIs will need local protection in the UK (above and beyond passing off) and will require new legislation. Some form of reciprocal recognition will be necessary for UK and EU GIs to function effectively in a European market. Designs: Provision will need to be made for the recognition of Community Registered Designs in a similar way to that for EU trade marks. Many design owners will have already protected their designs using UK registered design as well and so should have equivalent protection in the UK in any case (since the Community and national registered design systems have been harmonised and offer the same level of protection). However, if a UK registered design has not been applied for and protection is solely via Community level rights then the proprietor will have difficultly registering a UK equivalent right if the product has been on the market for more than 12 months as it would fail the novelty requirements. Thus the doubling up of registrations recommended in the period prior to Brexit for trade marks does not work so easily for registered designs. Protection via Community unregistered design arises automatically on first making available in the EU. This may mean that product launches are located in the EU (and not in the UK) post-brexit in order to acquire this right (the novelty requirements of which mean that first making available outside the EU would prevent the qualification for the right). This may have implications for industries that rely on this short term right, such as the fashion industry. There will be protection offered by the UK s own unregistered design right, which pre-dates the introduction of the Community unregistered design right, but has slightly different levels of protection: UK unregistered design protects the shape or configuration of a design and does not protect surface decoration, whereas the Community unregistered design protects aspects of the whole or part of a 3D or 2D design. UK unregistered design rights also arise automatically but last longer than the Community version (15 years versus three years) and is not dependent on the nationality of the designer (UK/EU). The simplest solution would be for the UK to create an equivalent right in the UK. Labelling: Products will still need to comply with CE-marking and other specific regulations, where their intended market is within the EU. We can expect UK regulations to continue to mirror EU counterparts in order to ensure easy access to other EU markets. Territory: Licences and other intellectual property agreements using territory references such as EU or EEA will need review to ensure that the UK continues to be covered and future contracts being entered into will need thought as to their intended future coverage. Definition of intellectual property : This may need to be revisited to check that it covers all new provisions put in place to cover rights previously held on an EU-wide basis. Exhaustion of rights: The rule that goods placed on the market in one part of the EU cannot be prevented from circulating freely within the EU, and hence intellectual property rights cannot be used to prevent the movement of goods across EU internal borders would fall away in relation to the new UK/EU border and the use of seizure procedures via Customs and Excise may thus come to the forefront; unless such free movement of goods provisions are retained in any future relationship between the UK and rest of the EU. This may have a big impact upon parallel imports from the EU into the UK, particularly in the pharmaceuticals, technology and fast moving consumer goods sectors where parallel imports are widespread. This may be an advantage to intellectual property owners who will be able to assert their rights at the new EU-UK border. However, it could be that the UK courts revert to applying international exhaustion as was their practice in particular in relation to trade marks, prior to the advent of the Trade Mark Directive, where parallel import products did not pose any sort of danger to consumers. Technology licences: The EU technology transfer block exemption legislation has been used as a framework to draft technology licences concerning licensing technology and other intellectual property within the EU. This provides guidance on what restraints may be allowed by competition law and what may not. However, these will remain relevant to any business wishing to operate across Europe on a uniform basis. Equally, businesses will still be subject to EU competition law, where they have operations within the EU or the effect of the licensing arrangement may impact EU trade; to date UK competition law has adopted the same approach as EU competition law and given a domestic exemption in parallel with the EU one and it is to be hoped this will be continued. Science, research and innovation The UK Government s White Paper acknowledges that the country has highly rated universities and is one of the top six nations in the world for university/industry collaboration in research and development and third in the Global Innovation Index.

41 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 39 Much of this success has been in collaborative projects funded by a range of EU bodies, principally under the aegis of the EU Commission s Directorate General for Research and Innovation in a programme known as Horizon 2020 with a budget of over 74 billion for the period 2014/20. Although there are occasional grants from EU funds to third countries, by leaving the EU the UK will largely cut itself off from this funding and is not obviously eligible for associate membership. Switzerland is the only country not intending to join the EU or the EEA which is participating in Horizon 2020 and it has not had an easy relationship with the EU in this area, continued membership having been linked to its national policies on immigration from the EU. It is estimated the UK received 8.8 billion in direct EU research funding (out of some 60 billion in the Seventh Framework Programme ) and continues to be one of the major recipients of research funding in Horizon The UK Government recognises that Brexit poses a significant challenge for UK research and has increased its own budget to provide another 2 billion per annum of funding by 2020/21, specifically targeted at technologies with industrial and commercial applications, such as robotics and biotechnology. The UK Government has also established a High Level Stakeholder Working Group to work with it to ensure that the UK builds on its position in research and innovation excellence. 10. REAL ESTATE The real estate sector includes a diverse community of business interests which may be affected in many different ways by the UK exit from the EU. Expect the UK to remain a safe haven for commercial property investment. The sheer weight of global capital chasing yield means the UK, as a highly liquid and transparent investment market, is likely to retain favour with investors JEREMY WALDEN To date, commentators have focussed on demand for inward investment, the impact of exchange rate fluctuations and wider political and economic challenges. Many consider that the future will be shaped by the nature of the new UK-EU relationship and until this is resolved uncertainty will remain. However, in the short term, Brexit appears to be delivering mixed fortunes for UK real estate markets with certain sectors performing better than others. Whilst there are opportunities for overseas investors and private equity funds to capitalise on market volatility, concerns as to pricing remain and available stock remains low. There remain legitimate concerns of a potentially negative impact on market confidence and some damage to investment performance. However, commentators are largely optimistic about the underlying fundamentals of the UK property market. Whether the UK is in or out of the EU, it is likely to remain a safe-haven investment destination. The legal implications largely stem from the approach the UK Government will take to the areas of EU regulation that apply to UK real estate by virtue of membership of the EU. These are primarily in the areas of State aid, procurement rules and merger control (see the Competition and Antitrust section below), planning requirements such as environmental impact assessments, AIFMD (see the Investment Funds section above) and energy efficiency measures. In many areas the current integration of EU and domestic law makes it difficult and of questionable benefit to unravel the whole and the Government is likely to be tempted to tackle the more over-complex and contentious areas first. 11. ENERGY REGULATION The precise impact of the result of the referendum on the energy sector is unclear at this stage. This is mainly due to the fact that there is a wide range of possible outcomes from post-brexit negotiations, leading to a number of regulatory and market options for the UK s relationship with the EU. Possible post-brexit arrangements include the continued membership of the Internal Energy Market (IEM) (similar to Norway s current arrangements, ie implementation of the EU s energy market regime, payment into the EU with no voting rights on the relevant legislation); tracking the EU legislative and regulatory regime without any formal arrangement; and a series of sector specific bilateral arrangements similar to the EU-Swiss arrangement as alternatives to or in addition to free trade agreements with specific jurisdictions outside the EU. Each of these options will have different implications for the energy sector depending on the policy choices of the UK Parliament. Although UK Government pronouncements to date have not commented specifically on the prospect of remaining in the IEM, this seems less likely in view of its firm opposition to arrangements that involve acceptance of EU legislation such as the relevant European Energy Directives and Regulations, and remaining part of the institutions (such as ACER, ENTSO-E, and ENTSO-G) or the CJEU having superior jurisdiction to that of national courts. However, the use of inter-connectors between the UK and Ireland and between France and the UK mean a level of interdependency in relation to electricity supply which will need to be taken into account. In the immediate future, we are unlikely to see any major changes to the current systems and regulation SILKE GOLDBERG Finally, there would be significant long-term funding implications for new projects given that access to European Investment Bank loans may be cut off by Brexit.

42 40 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS In the immediate future, we are unlikely to see any major changes to the current systems and regulation as the terms of Brexit will take a significant amount of time to negotiate. The Government has announced its intention to withdraw from the Euratom Treaty. Although this is not a legally necessary consequence of serving notice under Article 50, and will require separate notice to be given under the Euratom Treaty, it has become a political reality. Because of the critical importance of the Euratom Treaty to the UK s and the remaining EU Member States nuclear industry (including to the UK s security of supply of electricity) it can be assumed that achieving a seamless transition to new arrangements, for example through continued membership during the proposed phased implementation process, will be given a high priority in negotiations. This will be relevant to supply chains both between the UK and Euratom members as well as to all the other countries with whom the UK s trade in the nuclear sector is currently reliant on Euratom membership. 12. ENVIRONMENT At least 50% of UK environmental law derives from the EU. It has driven improvements in environmental standards and some sectors welcome a degree of cross-eu regulation and its ability to establish a level playing field amongst competitors in the EU market. It is also an enabler of the EU clean technology and environmental services industries. The Government has since the referendum continued with a business as usual approach to implementing into domestic law new EU laws that are already in force and we expect it to continue to do so right up to the UK s exit. New EU environmental laws such as the revised National Air Emissions Ceilings Directive continue to be approved and may thus make it onto the UK statute book ahead of the exit. The Government has stated in the context of the Great Repeal Bill that on the UK s exit from the EU, all legislation deriving from EU law will be kept on the statute book. Subsequently DEFRA conceded that this would be difficult in relation to at least a third of domestic environmental legislation, which employs various links to the governing EU primary legislation rather than being a simple copy out of its provisions and additional incorporation may be necessary. Subsequently, choices could be made whether the UK as a whole, or devolved administrations separately (having competence for environmental regulation in their parts of the UK), should seek to modify it or remove it from the statute book altogether. EU law implementing international treaties would be likely to be followed in UK law if the UK is individually a party to the relevant treaty, or if the UK chooses to become a party. Particular areas of EU regulation where the UK has struggled to comply such as air quality targets, or which are very burdensome such as waste law and chemicals registration, may be early targets for reform. Infraction proceedings already brought against the UK such as in relation to the failure to comply with limits on nitrogen dioxide limits in urban areas may not conclude before the UK leaves the EU. New infraction proceedings are unlikely to be brought given the timeline to UK exit. Even in the event of a significant reduction in UK regulation, UK exporters would continue to be obliged to meet EU environmental and safety products standards in order to sell into the EU market. UK manufacturers will still need to submit registrations with the relevant EU chemicals agency by the May 2018 deadline, requiring advance preparation of dossiers and information sharing, but the continued validity within the EU market place of existing registrations made by UK suppliers also needs to be assured in the exit negotiations. Another area of uncertainty concerns whether the UK would continue to participate in the EU Emissions Trading Scheme the EU s principal method of controlling industrial emissions of greenhouse gases, but also a key tenet of the UK s strategy to meet domestic carbon targets which will continue to bind the Government post-brexit. The treatment of allowances already issued to participants needs to be considered in Brexit scenarios, as does (from the European Commission s perspective) any potential destabilising effect the UK s exit might have on the carbon market. It may be that the UK would re-establish a parallel domestic cap and trade emissions scheme, linking it back into the EU scheme by agreement with the EU. Even in the event of a significant reduction in UK regulation, UK exporters would continue to be obliged to meet EU environmental and safety products standards in order to sell into the EU market JULIE VAUGHAN Any reduction in standards of environmental protection could also meet with public opposition and industry may choose to continue to voluntarily apply the EU standards as best practice with a view to avoiding reputational issues. As can be appreciated from the complex interactions in this area, separating UK environmental law from its EU context could take many years. Major elements of the UK s environmental law of domestic origin would be unaffected, including liability for clean-up of contaminated land and requirements for most environmental permits, eg water discharges and abstraction. Criminal liability for breach of offences often involving strict liability and the possibility of tort liability arising from environmental pollution are notable features of the UK system that would remain untouched. 13. TAX The precise impact on UK tax law of the UK exit from the EU will depend on a number of factors, not least the nature of the UK s future relationship with the EU. However, what is clear is that the UK s membership of the EU has had a considerable effect on UK tax legislation and policy, such that the cessation of application of EU law may have potentially significant implications for the UK tax code. Indirect taxation, particularly VAT and excise duties, is heavily influenced by EU membership. UK VAT law is based on EU VAT Directives and in theory, following

43 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 41 Brexit, UK VAT could be repealed in its entirety. Although this is unlikely given the significant UK tax revenue generated by VAT, the UK would gain increased flexibility in determining the scope of UK VAT, including setting rates (for example, determining the goods and services which are to be zero-rated) and defining exemptions. The UK would become a third country from the perspective of other Member States, which would have implications for the imposition of VAT on cross-border supplies involving the UK. VAT may need to be charged on transactions where it is currently not charged and UK businesses may need to be registered for VAT in EU countries where they are currently not required to do so. Direct taxation, including corporation tax and income tax, is generally regarded as an area of competence for Member States, but whilst a member of the EU, the UK has been required to exercise its power to tax in accordance with EU law, which has resulted in a number of changes being imposed on areas of UK tax law which were deemed incompatible. Such changes have included extending the UK s transfer pricing rules to transactions between all related enterprises (including where all parties are resident in the UK), extending the UK s group relief rules so that a non-uk resident company acting other than through a UK permanent establishment can, in certain circumstances, surrender losses to a UK company, adjusting the UK s controlled foreign company (CFC) legislation to exempt CFCs which carry on a genuine economic activity within the EU or EEA, and the UK ceasing to impose a 1.5% Stamp Duty Reserve Tax charge on issues of shares and securities to clearance services and depositaries, which has had a positive impact by reducing the tax burden on IPOs. Brexit may lead to the UK having greater autonomy to create and shape its own tax regime AURELL TAUSSIG When the UK leaves the EU, if it is then no longer bound to comply with EU law and the fundamental freedoms, it is uncertain to what extent (if any) the UK would amend these areas of tax law to revert to its former position (ie distinguishing between UK and non-uk taxpayers), and conversely whether the tax systems of EU Member States would discriminate against UK businesses. Any temptation to restore the UK tax system to one which favours domestic companies might be counterbalanced by an incentive to maintain the UK s attractiveness as a place for multinationals to do business and as a holding company jurisdiction. In some areas of law (for example, the CFC regime) the UK would in any event be constrained by international pressures, in particular, the OECD s Base Erosion and Profit Shifting (BEPS) project, which aims to combat tax avoidance and aggressive tax planning on a global scale and which has produced proposals for anti-avoidance legislation which are recommended for implementation by all participating nations (including the UK). Membership of the EU has also impacted the taxation of payments made between UK companies and associated companies that are resident in other EU Member States. EU Directives have provided a blanket exemption from withholding tax for payments of dividends, interest and royalties between associated companies in different Member States. The UK departure from the EU would mean this exemption would no longer apply and companies would need to rely on the terms of any relevant double tax treaty to reduce or eliminate withholding. In theory, this may make the UK a less attractive option as the location for a European holding company, but in practice, the UK has an extensive network of tax treaties, including with all current members of the EU, which will generally reduce or eliminate any withholding tax. The UK exit from the EU may also, in principle, lead cross-border reorganisations to become more complex and less attractive from a UK tax perspective. At present, the EU Cross-Border Mergers Directive provides for tax relief for mergers and transfers between companies incorporated in different Member States, provided certain conditions are satisfied. When the UK leaves the EU, relief may no longer be available to UK companies involved in cross-border mergers. In practice, cross-border transactions are often structured outside of these provisions, and therefore their absence from the UK tax code may not be of significant impact. The Autumn Statement, delivered by Chancellor of the Exchequer Philip Hammond on 23 November 2016, was the first major fiscal event in the UK since the referendum. In terms of tax, the announcements were relatively low key, the Chancellor seemingly taking a pragmatic watch and wait approach to the uncertainty presented by Brexit. Although the Autumn Statement included no obvious measures specifically responding to Brexit, in the sense that on the whole the Chancellor did not take the opportunity to announce measures which were obviously aimed at creating a more attractive tax environment in the UK, there were several measures, including confirmation of the reduction in headline tax rates and some relaxation of the circumstances in which non-domiciled individuals can remit income to the UK without triggering UK tax charges, which offered some insight into the fine balance which the Chancellor is attempting to strike. This balancing act is further illustrated by the Government s statement that it will continue to consider the balance between revenue and competitiveness with regard to bank taxation, taking into account the implications of the UK leaving the EU, highlighting that although the trend in recent years has been to impose taxation on the banks (including the bank levy and restrictions on their use of losses), this approach may now need to be reconsidered if the financial sector is set to suffer in the wake of Brexit. Since the Autumn Statement, the UK Government has given some further indications as to how taxation may potentially be affected by Brexit. As detailed in the Introduction above, the UK Prime Minister s speech on 17 January 2017 confirmed the UK s proposal to leave the Single Market and EU s customs union, with the aim of seeking a new customs agreement with the EU. On the prospect of no agreement being struck, the Prime

44 42 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS Minister said we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world s best companies and biggest investors to Britain. The Chancellor of the Exchequer also contributed to speculation that the UK s corporate tax rate may be lowered when he was asked whether the UK intends to become the future tax haven of Europe. He replied that he hoped the UK would remain in the mainstream of European economic and social thinking, but added that if we are forced to be something different, then we will have to become something different (interview with the German newspaper Welt am Sonntag, 15 January 2017). In summary, Brexit may lead to the UK having greater autonomy to create and shape its own tax regime and, in principle, would allow the UK to provide discriminatory incentives and reliefs to UK companies (although external pressures will still exist, principally as the UK moves towards implementation of the OECD s recommendations from its BEPS project). However, post-brexit, UK companies would have no recourse to the EU to challenge measures of other Member States that may operate to the disadvantage of UK entities, and restoring the UK s tax rules to their pre-eu position may, in many cases, hinder rather than help the UK in competing for investment and business. In any event, most changes resulting from Brexit are unlikely to happen overnight as the process for changing legislation is generally a lengthy one. The nature of any changes will, of course, also depend on the form that any alternative settlement to full EU membership takes and would be likely to be influenced by the broader balance of the negotiations at large. 14. COMPETITION AND ANTITRUST As it now seems unlikely the UK will stay in the EEA, we consider below the situation in which the UK leaves the EU and the EEA. This involves very significant changes to the current position. Antitrust The UK exit from the EU will have limited impact as far as the EU antitrust rules are concerned (Article 101 TFEU on anti-competitive agreements and Article 102 TFEU on abuse of a dominant position), because these rules apply equally to non-eu companies who carry on business in the EU or whose activities affect trade in the EU. In addition, the UK competition rules (the Chapter I and Chapter II prohibitions of the Competition Act 1998) completely mirror the EU antitrust rules and businesses are therefore subject to a very similar regime where conduct has an impact in the UK only. However, one impact of the UK exit from the EU will be that there will be many more cases where both the EU and the UK could in parallel open an investigation and impose fines and other remedies for anti-competitive conduct affecting both the continuing EU and the UK. While the UK is within the EU it cannot investigate where the European Commission takes jurisdiction. This could potentially add to risk and costs for affected businesses. We should also expect a number of changes to the Competition Act 1998 after Brexit. Section 60 of the Competition Act 1998 requires UK competition law to be interpreted as far as possible consistently with EU law and decisions of the EU courts and the European Commission. This requirement is likely to be removed and its removal may over time result in a divergent approach under UK and EU competition law. One impact of the UK exit from the EU will be that there will be many more cases where both the EU and the UK could in parallel open an investigation and impose fines and other remedies for anti-competitive conduct affecting both the continuing EU and the UK DOROTHY LIVINGSTON EU block exemption Regulations (eg on vertical agreements, technology transfer agreements, research and development and specialisation agreements) are imported into UK competition law by virtue of Section 10 of the Competition Act 1998 which provides for a system of parallel exemptions from the UK Chapter I prohibition. The Government will need to redefine this parallel exemption and decide on its approach to equivalent exemptions under UK competition law. Merger control In respect of merger control, again the impact of exit is likely to be parallel investigations. The EU Merger Regulation (EUMR) introduced a so-called one stop shop regime, under which a transaction that qualifies under the EUMR is no longer subject to the merger control regime(s) of the relevant Member State(s) (subject to some exceptions). Once the UK is no longer a Member State, the EUMR and UK merger control regimes would run in parallel. A transaction that qualifies under the EUMR may also be subject to UK merger control (provided the jurisdictional threshold for UK merger control is met). This could add a burden and cost for businesses, in particular in view of the level of the UK merger fees (ranging from 40,000 to 160,000 depending on the UK turnover of the enterprises acquired) and the longer time frames for UK merger control clearance. Once the UK is no longer bound by the EUMR there will be greater scope for the UK competition authorities to intervene in mergers on public interest or industrial policy grounds. Currently, once a transaction qualifies under the EUMR, the UK can only intervene in limited circumstances on the grounds set out in Article 21(4) EUMR (public security, plurality of the media, prudential rules and any other public interests requiring approval by the European Commission on a case by case basis). This provision has to date been applied successfully in only very few cases. The UK Government has already announced its intention to adopt legislation in order to increase its powers to review mergers on public interest grounds not related to competition, and to give it greater control over foreign ownership in particular in respect of critical infrastructure.

45 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 43 Private enforcement Follow-on damages actions for breach of competition law, in which the claimant relies on an existing infringement decision are increasingly common in the UK. Following Brexit, EU infringement decisions will cease to have a binding effect on the UK courts and claimants may look to other jurisdictions when choosing the forum to bring such claims, although this change should not affect claims dating back to when the UK was a member of the EU. In addition the English courts are likely to be ingenious in finding a basis for jurisdiction in relation to claims against parties subject to the jurisdiction of the English courts for breach of EU competition law and, because of wide English law disclosure rules, the English courts should remain an attractive forum. State aid and public procurement Post-Brexit, the continued application of the EU State aid rules will likely depend on the degree of EU Single Market access that the UK and the EU agree as part of any post-brexit free trade agreement. In the event that the UK leaves the EU without any new free trade agreement or interim arrangement with the EU in place at all, and relies on the WTO rules, the UK would only be subject to the WTO anti-subsidy regime which is much narrower both in terms of its substantive scope and procedurally in terms of enforcement. The result from the UK-EU negotiations could be some kind of sui generis regime that could be in-between the full application of EU rules and the WTO regime. This is a sovereignty related issue and the UK Government would be likely to choose to keep the flexibility gained from this change as far as possible. The same structural outcome applies to public procurement rules. However, these rules ultimately derive from WTO requirements that the UK will continue to need to meet and, as the UK currently has quite stringent procurement rules of its own supplementing the EU regime, it is incentivised to continue with public procurement rules and an enforcement regime closely based on current EU law. 15. AVIATION Traffic rights will be one of the biggest issues facing the aviation industry post-brexit, and will potentially impact airlines, airports and other industry participants both in the UK and also overseas. The EU is a liberalised aviation market, meaning that any airline owned and controlled by nationals of EU Member States is free to operate anywhere within the EU without restrictions on capacity, frequency or pricing. Additionally, EU carriers are able to take advantage of the traffic rights contained in the many air services agreements that the EU has negotiated on behalf of all Member States with non-eu countries. This includes, most significantly, the EU-US open skies agreement which enables airlines from the EU and US to fly between the EU and US. Without membership of the EU, the UK will have to find other ways of obtaining these European and overseas traffic rights for UK owned and controlled airlines. There are several ways in which these rights might be obtained. One option for access to the EU market would be for the UK to join the European Common Aviation Area (ECAA), which extends the liberalised aviation market and EU aviation laws beyond the EU Member States to other European countries, such as Norway. Another option would be for the UK to negotiate a bilateral aviation agreement with the EU, as Switzerland has done. For traffic rights to non-eu markets, the UK could seek to become a party to the EU s existing air services agreements, which Norway has done for the EU-US open skies agreement. Alternatively, the UK could seek to negotiate its own bilateral air services agreements with non-eu countries. In its White Paper the UK acknowledges these issues and indicates its expectation that all sides will want to support affordable and accessible air transport for all European citizens, as well as maintaining and developing connectivity. The UK Government commits to seeking bilateral arrangements with the US, to replace UK participation in the EU-US open skies agreement. Traffic rights will be one of the biggest issues facing the aviation industry post-brexit, and will potentially impact airlines, airports and other industry participants both in the UK and also overseas KIM DIETZEL However, regardless of the approach that is taken by the UK Government, there is no guarantee that UK owned and controlled airlines will enjoy the same traffic rights and benefits as EU-owned airlines both within the EU and in other jurisdictions. This could potentially result in UK airlines looking to base themselves elsewhere in Europe, in a similar manner to Norwegian Airlines which recently moved its headquarters from Norway to Ireland to take advantage of EU membership. This could in turn have a broader impact on airports and the aviation industry in the UK. For example, easyjet recently announced that it is setting up another airline based in continental Europe which would operate within the EU post-brexit under existing EU traffic rights. Its current UK based airline will become a subsidiary to the new EU airline. easyjet has stated that it will, nonetheless, continue to maintain its current headquarters in the UK. 16. MIGRATION There are estimated to be over two million EU nationals currently working in the UK, accounting for around 7% of the workforce, with over one million UK citizens living and working in other EU countries. The ease with which EU citizens can come to live and work in the UK, and vice versa, is therefore likely to be a significant concern for employers, employees and expatriates whose access to skilled workers, jobs, healthcare and pensions could be impacted by a UK exit from the EU. Under the principle of free movement, EU nationals have an automatic right to live and work in the UK. In its White Paper, the UK Government clearly states that it intends, post-brexit, no longer to abide by this principle and instead to impose UK controls over EU citizens wishing to come and work in the UK.

46 44 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS There is unlikely to be any change to the UK immigration rules whilst terms of withdrawal are being negotiated. Options being considered by the Government for the post-brexit regime include a targeted work permit system, to cut the number of EU migrants but retain those in highly skilled and highly paid jobs. A reduction in low-skilled EU migrant workers would obviously have a significant impact on sectors such as agriculture, manufacturing, hospitality, construction and healthcare, which would be likely to affect many regions, not only London and the South East. However, the Government is likely to come under pressure to ensure labour shortages are avoided. Any new system may also make it more difficult and expensive for multinationals to arrange cross-border secondments, which could have a significant effect on recruitment and retention of talent in sectors such as financial services and others. Short-term business travel to the UK could also become more problematic. Of course, if the UK were to impose such restrictions, other EU countries would be likely to reciprocate in restricting UK nationals travelling to and working in their countries, a factor which the Government will have to bear in mind when approaching negotiations. Under the principle of free movement, EU nationals have an automatic right to live and work in the UK the UK Government clearly states that it intends, post-brexit, no longer to abide by this principle CHRISTINE YOUNG One particular pressure point is whether any new restrictions will be applied to UK and other EU migrants already living and working in a Member State other than their home state. The UK Government has stated that it would have liked, but has been unable, to resolve this issue ahead of the formal Brexit negotiations, and remains ready to reach a reciprocal deal on the issue at the earliest opportunity. It therefore seems likely that reciprocal rights will be negotiated to ensure existing migrants are given the opportunity to seek indefinite leave to remain, but there are no guarantees. Whatever the UK Government adopts as its immigration policy will be put forward as a separate piece of legislation, not in the Great Repeal Bill, according to the White Paper. Employers should bear Brexit in mind when agreeing terms for recruitment or secondment of employees cross-border. They should also audit the extent, location and immigration status of their migrant workforce, and the workforces of the businesses in their supply chains, with a view to: communicating with employees, particularly those who might be affected by changes in immigration law, and providing reassurance that they will be kept informed as the position becomes clearer; considering if any current EU citizen employees working in the UK can apply for British citizenship or permanent residence now, and vice versa in the case of British employees working in the EU; and formulating contingency plans and keeping a close eye on what transitional arrangements may be agreed. 17. EMPLOYMENT The UK vote to leave the EU will lead to considerable uncertainty in the long term from an employment law perspective, because key areas of employment law are derived from EU legislation and so might fall away automatically, be abolished or be amended. It seems very likely, however, that they will initially be adopted as continuing EU law (see above the section entitled Replacing EU law: the Great Repeal Bill). These areas include working time, agency workers, fixed-term employee and part-time worker protection, health and safety, acquired rights under TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006), collective redundancy consultation, works councils, discrimination and certain family-related rights. Some employment legislation giving effect to EU rights predates or gold-plates the relevant EU Directive (eg some forms of discrimination, family rights, TUPE), making it particularly unlikely that these would be repealed. Indeed, the Prime Minister announced on 2 October 2016 that existing workers rights will be guaranteed during her premiership. This is confirmed in the White Paper which states that the Great Repeal Bill will maintain the protections and standards that benefit workers (in addition to setting out current or planned enhancements to workers rights independent of EU law). Perhaps the most likely targets for abolition or amendment in the longer term would be the Working Time Regulations and the Agency Workers Regulations, which have both been heavily criticised as imposing unnecessary burdens on business. Amendments might also be made to TUPE to make it easier for employers to harmonise terms of employment, and the Government might also consider placing caps on compensation for discrimination claims. Some of these rights will have been transposed into employment contracts and policies and therefore would continue to apply until varied. Given the uncertainty over possible changes to employment law, there are some practical steps that employers should consider at this point CHRISTINE YOUNG Where legislation is retained, a key question will be whether courts would continue to follow decisions based on rulings of the CJEU (even if not required to) in those areas or be willing to re-examine and potentially overturn established doctrines. Much-litigated issues such as holiday pay could be re-opened, making the legal position

47 HERBERT SMITH FREEHILLS IMPACT FOR BUSINESS 45 unpredictable until suitable cases are decided by the UK courts. Given the uncertainty over possible changes to employment law, there are some practical steps that employers should consider at this point: Multinationals who have set up European Works Councils under UK legislation (as their central management is based in the UK) will need to develop contingency plans. Employers contemplating restructuring in response to the UK exit should ensure they are up to speed on their information and consultation obligations TUPE can apply in offshoring situations. The possible impact of Brexit on business and employment plans may be an issue that should be addressed where there are obligations to inform and consult with employee representatives eg in the context of a proposed TUPE transfer. It is prudent for employers to continue to prepare for compliance with the General Data Protection Regulation, given that this will be directly effective from 25 May 2018, before the two-year window for negotiation of withdrawal terms ends and therefore likely to be before the terms of a new relationship are agreed. 18. PENSIONS The EU regulatory framework currently impacts on UK pension schemes in a number of ways. Equal treatment The Equality Act 2010, which aims to implement the requirements of the EU Framework Directive on discrimination, is the consolidating legislation that now prohibits pension schemes from discriminating on grounds such as a member s sex, age, sexual orientation and religion. (Many of these requirements have their roots in CJEU case law, older Directives and predecessor domestic legislation.) Practically speaking, the most pertinent examples are the requirements: to have equal retirement ages as between men and women; to admit part-time workers into pension arrangements on the same basis as full-time staff; and not to follow any age-discriminatory practices when operating pension schemes. The majority of schemes have amended both their rules and their administrative practices to comply with these requirements and in some cases provide more generous benefits than the minimum now required. Scheme funding First, the Cross-Border Regulations, which implement certain requirements of the IORP (Institutions for Occupational Retirement Provision) Directive, subject UK cross-border schemes to more stringent funding requirements than UK schemes not operating cross-border as well as requiring them to be approved by the Pensions Regulator. As a direct consequence the vast majority of UK schemes with international employees took specific steps, back in 2005 when the Directive was being implemented into domestic legislation, to ensure that they would not be classified as cross-border for IORP funding purposes the result being that very few, if any, UK occupational pension schemes are currently actually subject to the cross-border funding regime. Meanwhile the Pensions Act 2004, the relevant parts of which implement the majority of the original IORP Directive, places domestic schemes under lower (but still onerous) funding obligations which collectively form the statutory funding objective or scheme-specific funding regime. And finally, a revised version of the Directive, IORP II, was published in the Official Journal on 23 December 2016 and must be implemented by Member States no later than 12 January 2019, albeit without the significantly-heightened funding regime based on an insurance industry style capital adequacy test that, until July 2016, was widely anticipated would form part of the new regime. The EU regulatory framework currently impacts on UK pension schemes in a number of ways ALISON BROWN Protection of employment TUPE, the Transfer of Undertakings (Protection of Employment) Regulations, which implement the Acquired Rights Directive, gives full protection of employment rights (other than relating to pensions) on a business transfer; but are themselves then subject to exceptions in relation to enhanced pension rights on redundancy and early severance, which are required (by two notable decisions of the CJEU) to be maintained following the occurrence of such a transfer. Corporate failures The Pension Protection Fund (PPF), established by the Pensions Act 2004 in order to give effect to the pensions-related aspects of the EU Insolvency Directive, provides compensation to members of schemes that provide defined benefits where the employers have entered administration or become insolvent. Other aspects of the UK pensions legislative framework (such as the Pensions Regulator and its anti-avoidance or moral hazard regime), whilst not being an explicit requirement of the EU regulatory framework, have come into being as a direct consequence of it. Data protection An often overlooked side-effect of our EU membership is the application of the Data Protection Act 1998, which derives from the Data Protection Directive, to controllers of personal data such as pension scheme trustees and their actuaries and administrators. Pursuant to the new EU General Data Protection Regulation a much more stringent regime will come into force in May 2018, with direct effect (and hence without any need to be transposed into domestic legislation) and will increase the obligations faced and the risks of (much greater) regulatory sanctions run by those who control or process personal data. See the Data Protection section above for further detail.

48 46 IMPACT FOR BUSINESS HERBERT SMITH FREEHILLS The general position post-brexit If the UK were no longer subject to these Directives, as could be the case post-brexit (but depending ultimately on the extent to which the Government s intended Great Repeal Bill hard-codes existing EU law into domestic UK legislation), it would in theory have more of a free hand to legislate in these areas, with the precise impact on pensions depending on the extent to which domestic legislation in these areas is altered. Retrospective change seems extremely unlikely, however, and even prospective change must be considered against the odds, whether in order to maintain the UK s competitive edge in the IT and financial services industries (via an ability to continue trading relationships with remaining EU Member States) or due to potential political backlash in response to the removal of what are now regarded as long-standing, domestic legal cornerstones. A lesser degree of influence from the rulings of the CJEU can however be expected, albeit predominantly on a forward-looking basis given that many of its existing judgments are now also firmly enshrined into our domestic legal system. We do however foresee some scope for change (and, in the meantime, uncertainty) where the detailed application of EU legislation has been the subject of a ruling by the CJEU not then mirrored by consequential changes to our domestic laws. By way of example, some of the finer detail of benefit equalisation; the pensions exception on a TUPE transfer (particularly the protection afforded to enhanced redundancy rights); and recoverability of VAT by scheme sponsors (something which continues to tax both HMRC and the pensions industry generally), would all potentially be candidates for reform once Brexit has taken place. Equally, however, in certain situations we can see how our departure from the EU may have an impact that needs addressing: The position of UK-based employees in overseas schemes is a case in point how will they fare as members of an EU scheme, formerly (legitimately) operating cross-border, in a post-brexit scenario in which UK employees may no longer have the ability under EU law to remain in membership of such an arrangement? More generally, if an internal market for occupational retirement provision does develop sufficiently under the auspices of IORP II before the UK s departure from the EU (however unlikely that may seem at the present moment), it may subsequently prove difficult to un-pick any UK-related element of that wider picture once Brexit does take place. And finally, are there opportunities as well as challenges? Could a repeal of the (wholly unpopular) Cross-Border Regulations allow UK occupational schemes to once again admit into membership internationally-mobile employees and thereby achieve, outwith the EU, the very thing that its IORP Directives have long-striven to achieve? Pan-European pensions something to ponder Last of all a further specific question mark must also, we think, hang over the extent to which those occupational pension arrangements with a mixture of UK and EU members will be able to continue as such, post-brexit. In some ways the impact can be expected to be negligible, for reasons that include the following: First, very few UK occupational pension schemes are known to be operating on a cross-border basis due to the onerous funding obligations that would apply: see above. Furthermore the stated policy objective of the original IORP Directive, namely a genuine internal market for occupational retirement provision, via the facilitation of EU-wide pension provision for pan-european corporations and their internationally-mobile staff, is recognised to have been hampered by both (i) that self-same cross-border funding regime for defined benefit schemes and (ii) the carve-out in the Directive which permits Member States to derogate from its over-arching requirement for an internal market if national social and labour legislation on the organisation of pension systems (ie any given Member State s domestic pensions regime) would otherwise be prejudiced.

49 HERBERT SMITH FREEHILLS PREPARING FOR BREXIT: HOW WE CAN HELP 47 PREPARING FOR BREXIT: HOW WE CAN HELP We are working with numerous clients on the implications of Brexit for their activities. We have also collaborated extensively with other professional services organisations to provide holistic impact assessments and strategic advice, aligned with individual clients objectives. THE HARDEST FORM OF BREXIT AS A TOOL FOR BREXIT AUDITS In its hardest form, hard Brexit means that there would be no new (or interim implementation) trade agreements in place between the UK and the EU at the time of the UK s exit. Such a scenario could take the UK abruptly from having one of the deepest sets of trade ties in both goods and services with the other 27 EU Member States to being in the same position as most of the EU s third country trading partners with whom no special trade agreement has been negotiated. The benefits of membership of the EU include the free circulation of goods between members, without tariffs, customs formalities or other forms of border control. Members also enjoy wide-ranging rights to sell services without discrimination, for example by establishing operations anywhere inside the Single Market. A shared regulatory framework facilitates trade, with rights protected by EU law and enforced by EU and national courts. Regardless of how likely the outcome is considered, carrying out assessments for this hardest Brexit scenario is the most effective way for businesses to compare their current position from within the EU Single Market with a counterfactual position in which the UK trades with the EU and the rest of the world on the basis of World Trade Organisation (WTO) rules. From this baseline, organisations can see most clearly the potential impact of the possible changes and make a corresponding plan of action. The steps that we can assist clients with, either working alongside each other and clients or alongside client teams and their other advisors, can be divided up into the following three broad steps: 1. Analyse: diligence Initial analysis or due diligence of Brexit-related risks and opportunities, establishes risk exposures and opportunities a Brexit audit. Issues affecting organisations may be general, they may affect an entire sector, or they may be idiosyncratic and only affect a specific business. For this reason, review exercises must be tailored for individual organisations to reflect their business activities and specific operating environment. The focus of any review will be dictated by the nature of the underlying business but might include regulatory analysis (eg market access issues and deregulation opportunities), supply chain analysis (eg impact of tariffs and non-tariff barriers) and contract reviews (eg identification of problematical terms and contracting strategy issues). 2. Assess: strategic advice The conclusions of this type of analysis allow organisations to assess identified risks and opportunities, calibrating their relative importance and likelihood, and to prioritise further action. Understanding the interdependencies and lead times (political, operational and regulatory) is crucial to the development of a phased and proportionate response. 3. Address: executing the strategy As and when the time comes to take action to mitigate risks or seize opportunities, this may involve deploying arguments with Government (UK, EU and third countries) directly or through industry bodies to influence their approach based on prioritised analysis. On the operational plane it may mean strategic M&A, devising alternative legal structures, making changes to geographical footprint and workforce, re-assessing investment plans, revising compliance frameworks and so on. We continue to use hardest Brexit as a downside case for analytical purposes together with upside cases based on the UK Government s declared objectives and sector-specific considerations. Given the evolutionary nature of the Brexit process, any response requires an element of ongoing monitoring in order to sequence and trigger planned actions but also to regularly re-validate adopted strategies.

50 48 CONTACTS HERBERT SMITH FREEHILLS CONTACTS PROJECT LEADERS Gavin Williams T M gavin.williams@hsf.com AVIATION Kim Dietzel T M kim.dietzel@hsf.com CONTRIBUTORS ARBITRATION Dorothy Livingston Consultant T M dorothy.livingston@hsf.com Paul Butcher Of Counsel T M paul.butcher@hsf.com Andrew Procter T M andrew.procter@hsf.com Carol Shutkever T M carol.shutkever@hsf.com Andrew Cannon T M andrew.cannon@hsf.com Paula Hodges QC T M paula.hodges@hsf.com CAPITAL MARKETS Charles Howarth T M charles.howarth@hsf.com COMPETITION REGULATION AND TRADE CORPORATE Stephen Wisking T M stephen.wisking@hsf.com Lode Van Den Hende T M lode.vandenhende@hsf.com Kristien Geeurickx Professional Support Lawyer T M kristien.geeurickx@hsf.com Ben Ward T M ben.ward@hsf.com Stephen Wilkinson T M stephen.wilkinson@hsf.com

51 HERBERT SMITH FREEHILLS CONTACTS 49 CORPORATE (CONTINUED) Gavin Williams T M gavin.williams@hsf.com FINANCE Kristen Roberts T M kristen.roberts@hsf.com DISPUTES EMPLOYMENT ENERGY ENVIRONMENT Adam Johnson T M adam.johnson@hsf.com Anna Pertoldi T M anna.pertoldi@hsf.com Christine Young T M christine.young@hsf.com Anna Henderson Professional Support Consultant T M anna.henderson@hsf.com Silke Goldberg T M silke.goldberg@hsf.com Julie Vaughan Senior Associate T M julie.vaughan@hsf.com Dina Albagli T M dina.albagli@hsf.com Laurence Elliott T M laurence.elliott@hsf.com FINANCIAL SERVICES REGULATION INSURANCE Andrew Procter T M andrew.procter@hsf.com Karen Anderson T M karen.anderson@hsf.com Geoffrey Maddock T M geoffrey.maddock@hsf.com Barnaby Hinnigan T M barnaby.hinnigan@hsf.com Alison Matthews Consultant T M alison.matthews@hsf.com

52 50 CONTACTS HERBERT SMITH FREEHILLS CONTACTS INTELLECTUAL PROPERTY Joel Smith T M joel.smith@hsf.com REAL ESTATE Jeremy Walden T M jeremy.walden@hsf.com Rachel Montagnon Professional Support Consultant T M rachel.montagnon@hsf.com Iain Carruthers Of Counsel T M iain.carruthers@hsf.com INVESTMENT FUNDS Nigel Farr T M nigel.farr@hsf.com TAX Aurell Taussig T M aurell.taussig@hsf.com PENSIONS Tim West T M tim.west@hsf.com Nish Dissanayake Senior Associate T M nish.dissanayake@hsf.com Alison Brown T M alison.brown@hsf.com Kris Weber Professional Support Lawyer T kris.weber@hsf.com TMT (TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS) AND DATA PROTECTION Nick Pantlin T M nick.pantlin@hsf.com Hayley Brady Senior Associate T M hayley.brady@hsf.com Duc Tran Senior Associate T M duc.tran@hsf.com

53 HERBERT SMITH FREEHILLS CONTACTS 51 REGIONAL CONTACTS BEIJING Tom Chau T M tom.chau@hsf.com FRANKFURT Kai Liebrich T M kai.liebrich@hsf.com BRUSSELS Lode van den Hende T M lode.vandenhende@hsf.com JOHANNESBURG Patrick Leyden Director T M patrick.leyden@hsf.com DUBAI Nihar Lovell Associate T M nihar.lovell@hsf.com MADRID Rudolph du Plessis T rudolph.duplessis@hsf.com Judith Watson Consultant T M judith.watson@hsf.com Ignacio Paz Director T M ignacio.paz@hsf.com HONG KONG Matt Emsley T M matt.emsley@hsf.com Austin Sweeney T M austin.sweeney@hsf.com MOSCOW Miguel Riano T M miguel.riano@hsf.com Evgeny Yuriev Senior Associate T M evgeny.yuriev@hsf.com

54 52 CONTACTS CONTACTS NEW YORK TOKYO Christian Leathley T M christian.leathley@hsf.com David Gilmore T M david.gilmore@hsf.com PARIS Eric Fiszelson T M eric.fiszelson@hsf.com EDITORS Simone Pearlman Head of Legal Knowledge T M simone.pearlman@hsf.com SEOUL Lewis McDonald T M lewis.mcdonald@hsf.com Emily Lew Legal Knowledge Manager T M emily.lew@hsf.com SINGAPORE Alastair Henderson T M alastair.henderson@hsf.com SYDNEY Mark Currell T M mark.currell@hsf.com Stephen Dobbs T M stephen.dobbs@hsf.com If you would like to receive more copies of this briefing, or would like to receive Herbert Smith Freehills briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please subscribe@hsf.com. The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein. Herbert Smith Freehills LLP 2017