On June 24th, 2016, a referendum in the UK resulted in a vote in favour of the UK exiting the EU. Even though from a strictly legal perspective, the referendum is not binding in the UK, it is expected that the UK will notify its decision to exit the EU.
What we know:
According to article 50 of the EU Treaty (see Annex), the UK has to issue a notification to the EU to confirm this exit. We do not know when this notification will be issued – if it will be issued.
As of this notification EU and UK have two years to negotiate the terms of the exit. Pending the negotiations, the UK remains a member of the EU and remains subject to EU law and passporting rights are maintained. So much is certain, nothing changes right now.
Any final deal at the end of the two year process would need to be ratified by EU leaders with a qualified majority vote, a majority of the European Parliament and by the national parliaments of the EU 27. If the UK needs more time to complete the negotiations, an extension of the two year period is only possible providing that the 27 other member states unanimously consent hereto; any member state can veto such extension.
Alternatively, if no agreement is reached and no extension to the notice period is agreed, as a fallback the UK would become a “Most Favoured Nation” with trade agreements falling under World Trade Organisation (WTO) rules. Passporting rights and market access in the EU would however automatically be terminated.
All things considered, and barring the possibility of a withdrawal agreement being reached in much less than two years, which seems unlikely, the earliest practicable effective date for the Brexit will be in 2018.
Upon effective Brexit, the UK will no longer be subject to EU law, nor will it benefit from the EU include tariff-free trade agreements (no import rights); its financial institutions will no longer have the right to freely provide cross-border financial advice, or run branches in other EU Member States (passporting) for example.
What we do not know
The UK will have to secure many new international agreements; this is not limited an agreement on a new relationship with the EU, it will also need to enter into new trade agreements with a large number of non-EU states (because the UK will no longer benefit from free trade agreements of the EU with third countries).
As for the relationship of UK with the EU, we do not know yet what will be on the table, we can only speculate that it is likely to be one of the three following options:
- A status similar to Norway, Iceland and Lichtenstein): the UK would join the European Economic Area (EEA) and also the European Free Trade Association (EFTA). The EEA countries have full access to the Single Market and do not contribute to the EU budget (but are still required to contribute to EEA grants and the funding of specific policy programmes). The UK would no longer be part of the customs union but would be obliged to implement all EU legislation covering the four freedoms – free movement of goods, services, persons and capital (while it would no longer be able to influence such legislation at all).
- A status similar to Switzerland: this solution would allow the UK more right to tailor the UK’s relationship with the rest of the EU. Though it is a part of EFTA, Switzerland has also negotiated a series of bilateral agreements with the EU. Compared to the EEA option, this route would allow the UK to pick and choose areas where the UK would gain definite benefits from accessing the EU Single Market and would only require implementation of the EU legislation in the areas covered by the bilateral agreements. For those areas of market access that are not covered by bilateral agreements, the UK would need to demonstrate “equivalence” (in broad terms, deemed to be comparable in aims and stringency) with the relevant EU legislation. In both cases, the UK’s influence over the development of EU legislation will again be limited.
- Opting for a pure third party regime would mean regaining independence on regulatory, fiscal and other matters. However, at least in the area of financial services legislation, as above, these freedoms may be offset by the need to have domestic regulations which are “equivalent” to EU legislation in order to gain access to the EU’s single market as a third country. Equivalence is usually granted by the EU on a case by case basis. Experience to date with other third countries seeking equivalence determinations indicates that this could be a lengthy process.
At this stage it is unknown what arrangements will exactly be on the table, let alone what the outcome will be.
Impact we can expect so far
No immediate impact
Implementing Brexit is expected to take at least 2 years, during which UK is still a member state of the EU and all European legislation still applies.
Yet in the interim period
In the interim period between the notification and the effective exit, it is unclear if and to which extent new European law (such as the second Payment Services Directive due to apply in Q1 2018 or the General Data Protection Regulation due to apply in Q2 2018) will apply to the UK.
Upon the effective exit, as common EU rules will no longer apply, divergence in policy will become possible. For example in competition law enforcement, in the regulation of financial markets, telecommunications, rules about conflict of laws, VAT, state aid, …
Have a look at your contracts!
Many contracts refer to the European Union, e.g. by referring to the territory of the “European Union”. Upon effective Brexit, regardless of the outcome of the negotiations, you will still be bound by the terms of the contract.
Focus on industries, which are regulated by EU
A typical example is financial institutions, which are (heavily) regulated under EU law. As EU law will no longer apply to the UK, financial institutions will lose the benefit of mutual recognition of licenses to operate through passporting.
No free movement and employment across borders anymore between the UK and the EU. Unless if agreed otherwise during the interim period, works permits will be required upon effective Brexit.
Choice of law, enforcement of judgements
We are uncertain as to what UK law will be over time.
Moreover, today there is some uncertainty as to how our respective judgements will be recognised and enforced.
Therefore, it recommended to avoid applying UK law and op for UK courts in new contracts, if this can be avoided.
Intellectual property rights
The UK Intellectual Property Office made an interesting statement on the intellectual property rights, which can be consulted here: https://www.gov.uk/government/news/ip-and-brexit-the-facts
Annex: Article 50 Lisbon Treaty
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 49.