The UK and the EU What Would Happen on Brexit? Malcolm Sweeting and Simon Gleeson 29 October 2015
What is the risk of Brexit? UK net balance of public opinion in favour of continued EU membership, 2012-2015
How is the UK likely to vote? Recent polls show a mixed picture, with many people undecided: Date Remain Leave Undecided Source 16-18 October 44% 38% 18% ICM Unlimited 7 October 44% 39% 17% ICM Unlimited 25 September 55% 36% 8% Comres/Daily Mail 25 September 45% 38% 17% ICM Unlimited 17 September 38% 41% 17% YouGov/Eurotrack 3
What issues are affecting UK public opinion? % of people citing key issues as among the top issues facing the UK, 1994-2015
What happens next? Certain Predicted June 2016 Council December 2016 Council June 2017 Council October 2017 Council 15-16 October 2015 Council March 2016 Council October 2016 Council March 2017 Council July December 2017 UK Presidency of Council of EU 17-18 December 2015 Council June September 2016 Possible referendum dates best case April 2017 French Presidential Elections August 2017 German Federal Elections December 2017 Council 2015 2016 2017 Q4 2015 / Q1 2016 EU Referendum Bill passes into law Q1/Q2 2016 Electoral Commission designates official leave and remain campaigns Q4 2015 PM to announce detailed negotiating objectives 5 May 2016 Scottish elections, local elections in England, Mayoral election in London. EU referendum cannot be held on this date. March September 2017 Possible referendum dates worst case December 31 2017 Deadline for UK Referendum to be held Article 50 process to leave EU if leave vote Duration: two years extendable by mutual agreement The PM s current negotiating objectives Jobs and growth. Complete Internal Market, conclude more trade agreements Safeguards for non-euro members. George Osborne's top priority Controls on migration More powers for national parliaments 5
What is the EU? Status and Objectives of the EU and the four freedoms Internal market is to be achieved through the establishment of: Free movement of goods; Free movement of persons; Free movement of services; and Free movement of capital A series of multilateral treaties between sovereign states that: constitute the source of EU constitutional law; and set out the objectives of the EU, create its institutions and regulate its functioning Common economic policies in the key areas (for investment firms) of: Financial services Competition Consumer protection External trade Employment (Amsterdam Treaty) Other key areas of common include rules on immigration, asylum and visa (Amsterdam Treaty), and human rights protection and the promotion of social justice and cohesion (Lisbon Treaty) EU institutions can make laws directly affecting businesses and people in Member States (MS) within the EU s defined objectives and competencies Fundamental task is to establish an internal market, Economic and Monetary Union, and an ever closer Union among the peoples of Europe 6
The "four freedoms in the context of financial services The four freedoms Goods Persons Services Capital Not relevant. Free movement of citizens (Art. 20-21 TFEU) Freedom of Establishment (Art. 49 TFEU) Free movement of capital (Art. 63(1) TFEU) Free movement of workers (Art. 45 TFEU) Freedom to provide, receive services (Art. 56 TFEU) Free movement of Payments (Art. 63(2) TFEU) Relevant law on Banks (CRD IV) Payment Systems (PSD) Investment Services (MiFID; MiFIR) E-Money (EMD) Money Laundering (3 MLD)
How the four freedoms are implemented in law Regulations & Directives Directives legal acts which must be adopted by Member States through a form of legislation. Some leeway for Member States to adapt measures e.g. MiFID. Regulations legal acts which are directly enforceable in all EU Member States. Increasingly popular as uniform application across the EU e.g. EMIR. Lamfalussy Process Level 1: Directives, Regulations, Decisions Since the Lisbon Treaty, the Council of the EU and Parliament may delegate power to the Commission to adopt: Delegated Acts non-legislative acts to supplement or amend certain non-essential elements of a legislative act. For example, the delegated Regulation on OTC Derivatives transactions by non-eu counterparties. They are general. Implementing Acts non-legislative acts implementing the legislation i.e. the essential elements of a legislative act. They are specific. Level 2: Adopted by the Commission Adopted by Council (and Parliament) Delegated acts Implementing acts For legislation affecting financial services, at Level 2 the Commission will be helped in drafting delegated and implementing acts by the EBA, ESMA and EIOPA the Supervisory Authorities (ESAs) 8
Alternatives to EU membership Yes No Partial Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro 1 (UK) Status Quo or variation 2 EU Minus 3 EU Plus Partial Partial 6 Partial 8 Partial Partial 7 Partial 9 Partial 4 (Norway) EEA + EFTA 5 (Swiss) Bilateral agreements + EFTA 6 (Turkey) Customs Union 7 UK/EU FTA 8 WTO Partial 3 Partial 4 Partial 5 Partial 1 Membership of and voting rights on the Council, Council of the Union, the Commission and Parliament. 2 Nomination of a judge to both the Court of Justice of the Union and the General Court of the Union. 3 The EEA agreement provides for access to the EU s Internal Market although at present it does not offer full access to the Internal Market in financial services. 4 See Analysis of Bilateral Agreements and EFTA at page 22. 5 Access to the EU Internal Market for goods without the need for Rules of Origin. 6 The UK has the right to opt in / out of certain measures. 7 The UK would have a right to opt in / out as it saw fit. 8 The UK has a protocol that clarifies that the CFR does not create rights in UK courts. 9 The UK would retain a protocol that clarifies that the CFR does not create rights in UK courts. 9
Financial Services Market instability in the run-up to a referendum Funds Worst case scenario Disorderly Brexit in Q3 2018 Possible consequences Short term impacts of Brexit Relocation risk Medium / Long term impacts of Brexit 10
The UK outside the EU - How could UK Financial Firms Access EU Markets? Activity Relevant EU Relevant Provisions Legislation Investment Services MiFID; MiFIR Third country recognition criteria in Art 46 MiFIR would permit passported branches in the EU dealing with professionals. Retail selling would require branching (MiFID 2 Art 39) Securities offerings PD PD does not provide for exemption for equivalent markets (apart form the limited concessions for employee offers set out in 4(1)(e)). Thus any offer document approved in the UK would have to be submitted to an EU competent authority for approval in order for securities to be publuicly offered in the EU. Also, the UK government would lose its current exemption from EU prospectus requirements (although it would retain its TD exemption). Derivatives Clearing EMIR Under Art 25 EMIR and 38(1) MiFIR, a non-eu CCP may be recognised for the purpose of being permitted to provide clearing services to EU venues Payments PSD PSD only applies to payments within the Euro area, so payments between UK and EU would not be covered. Trade repositories EMIR Derivatives repositories outside the EU may be recognised as equivalent (EMIR Art 77), Banks CRD IV Art 47 CRD prohibits an EU member state from granting approval from a non-eu bank branch unless it is subject to "equal treatment". Retail Funds UCITS UCITS funds must have EU-established management companies, but may appoint non-eu managers and invest in non-eu securities. Thus UK-managed fudns could continue to be sold in the EU provided that appropriate infrastructures were put in place within the EU AIFs AIFMD Art 40 AIFMD contains provisions enabling AIFs managed by non-eu AIFMs to be marketed in the EU with a passport provided that equivalent regulation is in place in the home jurisdiction 11
The UK outside the EU How could EU firms continue to do financial transactions in London? Activity Mandatory securities trading Mandatory derivative trading Mandatory derivative clearing Relevant EU Legislation MiFIR MiFIR Relevant Provisions Art 4(1) PD, adopted by Art 23(1) MiFIR. This would have the effect that dealing on an exchange recognised in this way would satisfy the requirement for EU regulated entities to deal on a recognised market. Determination is made by the commission at the request of the competent authority of member state (i.e. not the UK). Art 28(4) MiFIR provides for the recognition of derivatives venues. 28(1)(4) provides that trading on such venues satisfies the MiFIR requirement for EU regulated firms to execute certain derivatives trades on recognised vbenues. Determination is made by the commission of its own motion. Under Art 25 EMIR, a third country CCP may be recognised, and trades cleared on such a CCP are deemed to satisfy the EU mandatory clearing requirement, and to qualify for the 2% QCCP risk weighting for EU banks and investment firms. Securities Clearing CSD CSDs must be established a member state Crest (Euroclear UK) would cease to be a CSD. However Art 25 permits recognition of third country CSDs subject to equivalent regulation. Money Laundering 3 MLD Third money laundering directive permits EU banks to rely on non-eru intermediaries from ML certification Payment Systems PSD Payments regulation will require full (rather than abbreviated) information to be provided in respect of a payment to a UK bank from an EU payment service provider E-Money EMD Art 8 E-money directive permits the commission to agree equal treatment for third country e-money institutions 12
Further legal consequences Lending, Restructuring, Commercial Contract Terms Data Protection and Intellectual Property A Brexit could impact a wide range of legal areas Antitrust Tax Employment 13
Lending, Restructuring and Commercial Contract Terms I It is important to stress test contracts and consider the implications that Brexit might have on them, for example Brexit could constitute a material adverse effect on a party's business, ability to perform its obligations or even the enforceability of the underlying contract in certain situations. If Brexit were to result in market disruption through a material disruption to the payment systems in place between banks based in the UK and those based in other member states of the EU preventing any party from complying with their payment obligations under a financial contract, Brexit could trigger the disruption event provisions in the contract. Brexit could result in illegality provisions being invoked in contracts if a business' licence to provide goods or services depended on EU legislation and the UK leaving the EU could put the applicability of such legislation in doubt. 14
Lending, Restructuring and Commercial Contract Terms II As a member of the EU, the UK is subject to the EU Insolvency Regulation. This provides for crossborder recognition of an EU member court's decisions in respect of insolvency proceedings (with the exception of Denmark which has opted out.) This mechanism smoothes the progress of restructuring across EU members borders. The English courts apply law to determine the governing law of a contract in instances where this is uncertainty as to what the governing law should be. Brexit could thus affect what principles the English courts use to determine the governing law of contracts where an express governing law has not been chosen. Outside the EU the UK may have to seek to have its judgements recognised through instruments such as the Hague Convention, which currently have very few signatories. The English courts currently apply EU law to determine whether or not they have jurisdiction. Brexit could affect whether and the extent to which enforcement of judgements obtained in UK is possible in the courts of EU member states. Arbitration should be unaffected as all the EU s current members including the UK are members of the New York Convection, which is unlikely to change. 15
Antitrust, Tax and Employment Antitrust The UK Competition Act 1998 and Enterprise Act 2002 largely mirror EU legislation so Brexit would not necessarily mean immediate divergence in competition, however divergences could arise over time. Turnover achieved in UK is unlikely to count towards EU Merger Regulation thresholds. Deals involving UK will need to be assessed under UK national merger regime - voluntary system but lower control threshold of decisive influence which will be relevant to acquisition of minority stakes. There is the possibility that UK enforcement practices in relation to mergers may diverge over time from those of the EU. Employment A significant portion of UK employment law is derived from EU law including the legislation that governs maternity and paternity leave, agency workers' rights, paid holiday and the protection of employment upon the transfer of a business. Following a Brexit the UK government may seek to repeal certain pieces of EU law which apply in the UK such as the Working Time Directive. Tax Direct taxation is a member state, not EU competence, however taxes must comply with certain basic principles of EU law. The UK government would be able to apply tax law without reference to EU. For example, it could exercise its power to tax, in a manner which would currently constitute state aid incompatible with Art 107 TFEU. The UK and EU would be able to discriminate against each other by imposing tariffs and other measures. 16
Data Protection and Intellectual Property Data Protection The UK data protection regime is largely based on EU law on data protection and privacy. A new, and more stringent, EU Data Protection Regulation is proposed, likely to take effect in 2017 or 2018. Brexit would allow the UK Government to chance UK law to create a relatively light-touch regime. In particular, it seems unlikely that the UK would seek to reproduce the new and burdensome requirements of the proposed Data Protection Regulation. This approach would lose the key advantage of the proposed Regulation regulatory consistency for businesses operating across Europe. It would also raise the question of whether the UK would be regarded as an "adequate" destination for personal data transferred from the EU. Intellectual Property Various intellectual property rights cover the whole EU through a single unitary right. Much of our national IP law today is based on Directives. Following a full Brexit the UK would not be bound to comply with these, allowing our law to diverge. Were there to be a full exit, and the UK to be removed from the protection given by the EU unitary right, there is the risk of rightholders being deprived of protection here if they do not have equivalent national rights in the UK. Potentially, the UK could allow for some form of automatic or optional conversion to a national right. Many IP licences and other IP agreements operate territorially and the territory may be EU or EEA. Unless this is clearly drafted to mean the member states at the date of the agreement, Brexit may affect the scope of the contractual rights. 17
publications Britain and the EU - Alternatives to Membership and Prospects for Renegotiation Brexit Topic Guide Financial Markets toolkit Coming soon - EU Topic Guide 18
Annexe The Options in Detail 19
Scenario I Reform within the existing treaties Yes No Partial 1 Reform within existing treaties Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Partial Partial 6 Partial 8 Free to regulate own Financial Sector Membership of the euro Factual basis The UK is one of the 28 members of the EU, having joined on 1 January 1973. The UK has access to the Internal Market, full voting rights in the Council and Parliament and nominates a commissioner to the Commission. Analysis EU membership comes with significant rights and obligations. The current status quo is already unique and highly tailored to the UK and could be described as the UK Option. As a member, the UK can change the EU from within. 20
Scenario II EU-minus: less integration through treaty change Yes No Partial 2 EU Minus Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro Partial Partial 7 Partial 9 Factual basis The UK would remain an EU member having secured opt-outs in certain areas. Possible elements: A financial services emergency brake. Red card. Remove the EU s competency in the area of social and employment law. A treaty safeguard for the Internal Market vs euro area. Remove the EU s competency in the area of policing and crimine. Abolish the Strasbourg seat of the Parliament, ESC, CoR. Establish new controls on the free movement of people. Remove the principle of ever closer union from the EU treaties. Analysis The risk is that any attempt to unpick the current treaties would lead to every member state reintroducing settled matters. 21
Scenario III EU-plus: further integration Yes No Partial 3 EU Plus Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro Partial Factual basis The UK could, if it wished, join the various areas from which it has opted out, such as The Euro. The Schengen borderless zone. Iceland, Norway, Liechtenstein and Switzerland, all non-eu members, are part of the Schengen area. Take part in Justice and Home Affairs (JHA). Analysis This is highly unlikely. 22
Scenario IV EEA + EFTA membership Yes No Partial 4 EEA + EFTA Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro Partial 3 Factual basis The UK would leave the EU and pursue a similar relationship to that enjoyed by Norway as a member of the Economic Area (EEA) and the Free Trade Association (EFTA). First, the UK would have to invoke Article 50 of the Treaty on Union (TEU) to leave the EU. Second, the EU would have to amend its own treaties to reflect UK departure. Third, the UK would have to negotiate with EEA and EFTA members to join those organisations. Fourth, the UK would need to re-establish its independent tariff and trade regime, setting its own external tariffs. Analysis The UK would maintain access to the EU s Internal Market, but would lose all formal legal influence over legislation while still having to implement the bulk of it. The EEA agreement caters for financial services but has not caught up with the Supervisory Authorities (ESAs). That market may fracture over time, leaving the UK increasingly isolated. 23
Scenario V Bilateral agreements + EFTA Yes No Partial 5 Bilateral agreements + EFTA Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro Partial 4 Factual basis The UK would leave the EU and would emulate Switzerland in agreeing sector-by-sector treaties with the EU, and Free Trade Agreements with the Free Trade Area (EFTA) countries. Analysis This is not an off-the-peg option, and might not even be available. The Swiss model is arguably unique. There is very strong opposition to any perceived watering down of the four freedoms. The current set of bilateral agreements between the EU and Switzerland do not provide for Swiss access to the EU Internal Market in financial services. 24
Scenario VI Customs Union Yes No Partial 6 Customs Union Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro Partial 5 Partial Factual basis The UK would leave the EU and would emulate Turkey and enter into a Customs Union with the EU. Analysis Gives access to the EU Internal Market for goods without the need to comply with EU Rules of Origin for non-eu countries. The UK would have to impose the EU common external tariff on imports from outside the UK/EU customs union. The UK would lose its current right to provide services, including financial services, on equal terms with EU members. The UK could enter into services - but not goods - agreements with third countries. The EU would have the right to negotiate trade agreements in goods without input from the UK. 25
Scenario VII UK/EU FTA Yes No Partial 7 UK/EU FTA Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro Factual basis The UK would be outside the EU but could seek to negotiate a comprehensive Free Trade Agreement with the EU. Analysis This scenario resembles the Swiss model, in that it would involve a bilateral agreement with the EU, but be on the basis of a single comprehensive agreement instead of many sector-by-sector agreements. The UK would set its own tariffs, conclude its own FTAs, regulate its own financial services sector and set its own VAT regime. The UK would, however, lose the right to influence the rules of what is currently its home market, especially in the area of financial services. The negotiation process would likely be lengthy with a highly uncertain outcome. 26
Scenario VIII The WTO option Yes No Partial 8 WTO Access to the EU Internal Market Freedom to set own external trade Council Commission Parliament 1 Court of Justice of the Union 2 Social and employment Common Agricultural Policy Contribute to the EU budget Justice and Home affairs Schengen area Charter of Fundamental Rights Free to regulate own Financial Sector Membership of the euro Factual basis The UK would leave the EU and rely on its membership of the World Trade Organisation as a basis for trade with the EU. Analysis This is the purest form of the out scenario, with no formal connections or negotiated agreements. UK established financial services firms could not passport into the EEA. Relying upon the GATS would not provide to the UK financial services industry any guarantee of access to the EU Internal Market in financial services on a comparable basis to EU membership. The UK would no longer automatically be party to about 50 existing EU trade agreements. 27
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