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An intertwined legal framework

24 August 2015

An intertwined legal framework - read more

The deregulation benefits of Brexit may be overstated as the UK and EU legal framework is heavily connected

The UK Government is in the process of renegotiating the terms of the UK’s continued membership of the European Union. A referendum will follow in which the UK electorate will be invited to vote either to stay in the EU on the new terms or to leave the EU altogether.

The interim period

After the referendum, there will be a two-year timetable for the UK to secede from the EU (if that is what the electorate decides) during which time the UK and EU will negotiate the terms of the withdrawal agreement. As well as negotiating its future relationship with the EU, the UK Government would have to renegotiate agreements with third countries, where these have been entered into with the EU rather than individual member states.

A major consideration will be whether the UK will be a member of the European Free Trade Area (EFTA). Three of the existing EFTA states have joined with the EU to form the European Economic Area (EEA), which constitutes the internal market. The EEA agreement includes legislation covering the four freedoms (movement of goods, services, persons and capital) and cooperation in the environment and consumer protection but not in common trade policy, foreign and security policy.

Brexit would mean that EU treaties no longer apply and any of their provisions that the UK wanted to retain would require new legislation. EU law lies at the root of much of the UK’s national legislation and it is unthinkable – for business, individuals and the state – that a void should suddenly appear where our laws used to be. The Government will likely need every day of the two-year transitional period to review the existing corpus of EU legislation, consider what to do with it and, if necessary, draft fresh legislation.

The Government would have to decide how laws reflecting EU laws are to be interpreted. EU law works on the basis of a ‘purposive’ interpretation by the courts. This is not the approach applied by the UK courts so, without legislation tackling this, we could be left with a situation in which the UK interpretation of a law differs from that in the rest of the EU. This would create huge uncertainty for business, on both sides of the English Channel.

Financial services

Some areas of law will be more affected than others. Financial services legislation, for example, in large part originates in the EU, whereas family law does not.

Under the current regime, a UK authorised investment firm has the ‘passporting’ right to carry on business in any EU country, irrespective of whether or not it has a branch in that state. This right, which gives UK authorised firms free access to financial markets across the EU, could be lost if the UK leaves the EU – leaving UK firms with restricted access only, or possibly continued access to EU markets but without the ability to vote on financial services legislation. Firms may consider relocating part of their UK operations to the EU or even setting up EU subsidiaries.

UK amendments to the existing EU legislation, which forms the basis of the UK’s financial services regime would be probable; a complete rewrite would not be. Some EU-based legislation, MiFID II for example, which has been costly to implement, would almost certainly remain at least in the short to medium term.

Existing contracts should be reviewed to see whether they contain obligations to comply with EU law. Compliance with any such provision may become impracticable should the UK leave.

Capital markets

The UK has implemented the Prospectus Directive, Transparency Directive and Market Abuse Directive into national law. If the UK Government wants the London Stock Exchange to maintain its reputation as a major international trading platform it is likely that the key provisions of these directives will have to remain a part of English law. In any event, some UK legislation, for example, concerning insider dealing, actually goes beyond the requirements of the EU legislation, in order to ensure investor confidence.

An EU exit may result in the loss, in whole or in part, of the UK’s ability to participate in mutual recognition between member states with regard to prospectuses and announcements. Where an issuer is based outside the EU, member states have the power to approve a non-EU prospectus if it is drawn up in accordance with international standards that are equivalent to the requirements set out in the Prospectus Directive.

The Commission has the power to decide whether a third-country’s laws and practices (in this case, the UK would be the third country) satisfy the equivalence test. The UK will no doubt seek to convince the Commission that it satisfies this test.

Competition law

EU competition law applies to undertakings whose activities have an effect on trade between EU member states. Thus, it is perfectly possible that EU competition law will continue to affect UK businesses trading in Europe. The Commission’s jurisdiction to enforce EU competition law does not require that the allegedly infringing business is incorporated in or has a place of business in an EU member state. Businesses should tear up those compliance policies.

Additionally, the UK’s competition law regime in the Competition Act 1998 reflects that of the EU, however, the Government might rewrite it, keep it, or tweak it. There would be difficult areas – for example, the Vertical Agreements Block Exemption (and accompanying guidelines) is a piece of EU legislation that is fundamental to ensuring that vertical agreements affecting trade in the UK are not anti-competitive. Unless the Government took steps to plug the gap, suppliers and their distributors would be left without clear parameters as to what is and is not acceptable, in terms of competition law, in their business relationship.

Where the UK is likely to experience the effects of an EU merger, the UK would no longer have the right to ‘call in’ the merger for consideration. More significantly, under the current system parties to transactions fulfilling certain turnover thresholds can notify the European Commission for clearance throughout the EU, without having to make separate filings in each member state. If the UK should leave the EU, these transactions may require separate notifications to both the Commission and the UK Competition & Markets Authority (CMA), with adverse consequences for costs and timings. Similarly, some abuse of dominant position and cartel cases may require to be tackled at both national and EU level.

On state aid, the UK government will have more scope to provide aid to UK business but conversely, UK business will have less ability to complain about aid that is granted to competitors in the EU.

Finally, there is a practical point. The CMA currently shares its enforcement workload with the Commission and without its support, the CMA’s resources will be severely stretched.

Data protection

In the data protection context, much will depend on whether the UK remains part of the EEA. The Data Protection Act 1998, implementing the Data Protection Directive, prohibits transfers of personal data to countries outside the EEA, unless they have been recognised by the European Commission as providing ‘adequate protection’ for personal data. Until the UK is approved as such, EU businesses would have to consider whether they could lawfully transfer personal data to the UK, so there would be some disruption, at least in the short term. It is also not certain that the UK would be approved by the Commission – it has been criticised in the past for not fully implementing the Directive and, in any event, the Directive will give way to the General Data Protection Regulation, which will set a new yardstick for the UK’s data protection to be measured against.

The Government has been critical of the regulation and may decline to implement it – but the UK’s existing legislation is already struggling to keep pace with technological developments and is regarded as in need of an overhaul.

Finally, UK businesses trading with EU consumers will need to adhere to the EU data protection legislation – this includes businesses trading via their websites. In practice, applying the EU standards may turn out to be the most sensible course for the Government to follow.

Contracts

UK businesses should review existing contractual arrangements to assess how these will be affected if the UK leaves the EU. For example, leaving the EU could constitute a ‘force majeure’ or a ‘termination’ event. There may be a defined term ‘EU’, which could mean the loss of exclusivity in the UK for a distributor or licensee of intellectual property, should the UK leave. Contracts negotiated between now and the date of the referendum should be drafted with the possibility of Brexit in mind.

The effect of Brexit on employment law, consumer protection, tax or intellectual property, for example, merit further exploration. Given how closely EU and UK law have become intertwined since 1973, unpicking the two will not be straightforward. Despite the uncertainties, UK companies wanting to trade with the EU will still have to comply with EU regulations, even though the UK Government will no longer have any input into those regulations. The potential benefits of any deregulation that may result from the UK leaving the EU may be overstated given the drastic changes that businesses and regulators may face.

Robert Crossley is an associate at Walker Morris LLP

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