Asia Pacific - BREXIT: What now?

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Asia Pacific Legal Updates


23 July, 2016


BREXIT: What now?


An overview


The results of the referendum on whether or not the UK should remain in the European Union (EU) are in and the British public have voted to leave. What does this mean?


This overview only explores some of the possible ramifications of Brexit. There are a number of difficult constitutional questions but we have not addressed these. 


When will Brexit actually happen?


The government could trigger Article 50 of the Treaty on the European Union and notify the European Council of the UK's intention to leave the EU. This is however, not obligatory and not the only route open to the government.


Vote Leave proposed the partial repeal of the European Communities Act 1972 with the aim of "immediately end[ing] the ... European Court of Justice’s control over national security, allow[ing] the Government to remove EU citizens whose presence is not conducive to the public good (including terrorists and serious criminals), end the ... use of the EU’s Charter of Fundamental Rights to overrule UK law, and end payouts under EU law to big businesses." Rather than triggering Article 50, the government could enter into direct negotiations with EU on the terms of the UK's withdrawal from the EU.


It seems likely that the transition process will take at least two years and probably longer. 


What form would a Brexit take?


In very broad terms, Brexit could take any one of at least five different forms:


(a) remain in the EEA (the Norway option): likely to mean similar financial services rules (including reciprocal passporting arrangements) but reduced influence for the UK in Europe;


(b) join the EFTA only (the Swiss option): would preserve more limited ties with the EU and require negotiation of numerous new bilateral agreements;


(c) form a customs union with the EU (the Turkey option): would facilitate more comprehensive free trade arrangements than the World Trade Organisation (WTO) option (below) but would otherwise keep integration limited;


(d) rely on WTO membership only, like 130 other countries (the WTO option): this would enable UK-EU trading based on established WTO trading models at a global level (including G20 agreements); or


(e) rely on a network of bi-lateral trade agreements (the Bespoke Bilateral option): many Brexit supporters believe that Britain could forge a new, more favourable set of bilateral terms for UK-EU trading that strikes a better balance between independence and integration (although it is difficult to see what the incentives would be for the EU side). 


Great Britain, Little England?


The UK's status as an EU member state currently includes England, Scotland, Wales and Northern Ireland. As the results have proved, Scotland is largely pro-EU; it would not be unreasonable to expect the result to trigger demands for a (second) vote on Scottish independence from the rest of the UK, with Scotland likely having to re-apply to join the EU. 


Funds and financial services


Possibly the biggest immediate concern for both buy and sell-side financial institutions will be the continued availability of the pan-EEA financial services passport under the CRD, MiFID, UCITS and the AIFMD. If the UK were to become a member of the EEA, then the passports under these four directives should remain available for UK entities.


MiFID and CRD: If not then rights to use the various passports (i) to market their products and services across the EEA, (ii) to provide their services cross-border in the EEA and (iii) to establish a branch in the EEA may be lost. If the UK maintains 

"equivalent" rules, this may enable UK firms to continue to operate in the EEA from the UK on a cross-border basis. For certain services, however, (particularly retail business) firms may need to establish further branches and/or subsidiaries within the EU.


AIFMD: Timing is crucial with respect to AIFMD passports. The European Committee will likely begin to extend the Pan-EEA AIFMD passport to third country managers from 2016. Assuming that the UK does not repeal its AIFMD implementing regulations the UK’s regime should be deemed AIFMD equivalent and, the AIFMD passports should be extended to UK AIFMs. It will however be crucial that non-EEA managers in the UK be authorised before the date on which the UK ceases to be a member of both the EU and the EEA in order for them to continue to use the AIFMD passports.


MAR: The new Market Abuse Regulation will come into force on 3 July as expected. As the UK has been at the forefront of the prohibition on insider dealing and market abuse in Europe, we can expect MAR or equivalent legislation to remain in place in the UK regardless of Brexit. 




A key area of focus in the post-Brexit world will be customs duties. If the UK sits outside the customs union, there is the prospect of tariffs and customs procedures being imposed on trade with the EU and elsewhere. What this will actually mean is difficult to tell and will depend on the UK’s ability to negotiate beneficial free trade agreements with the EU and the rest of the world.


It is very unlikely that we will see any major structural changes to VAT in the short term. However import VAT on goods moving between the UK and the EU may be introduced. In the short term, we may see some changes in rates and reliefs for political reasons. Over the longer term, particularly as the UK would no longer be bound by decisions of the CJEU, we may see a steady divergence between the UK and EU VAT systems.


Group structures which rely on the Parent-Subsidiary Directive or the Interest and Royalties Directive in order to avoid withholding taxes may need to be looked at again. In many cases, the UK’s existing network of double tax treaties will still remove withholding taxes but these are not comprehensive and do not always reduce withholding to zero.


More widely, there are a number of instances where the design of UK tax legislation has been restricted by the need to comply with the EU freedoms, state aid rules and CJEU case law. Examples include the group relief rules, CFC rules and patent box. 




Many rights enjoyed by employees in the UK come from EU Directives. However it is unlikely that these rights would be weakened or removed on the repeal of the European Communities Act 1972. This is because so much domestic legislation would need to be repealed and so many of the protections have become deeply embedded in the working culture of the UK. It is unlikely that protections against discrimination in the Equal Treatment Directive and under the Equality Act 2010 will be removed.


In fact, some of the protections contained in that legislation were introduced in the UK before they were imposed by the EU – sex, disability and race discrimination, for example.


However some EU sourced employment law may be watered down: The 48 hour limit on a working week and complex rules around holiday pay imposed by the Working Time Directive may be reformed. The protection provided to agency workers under the Agency Workers Regulations 2010 could also be subject to repeal. In addition, the very restrictive provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") could be watered down to make them more business friendly – perhaps by making it easier to harmonise employment terms or dismiss employees after a transfer. Generally, it is likely that there will be a move towards greater freedom of contract in the employment sphere. 




Immigration was one of the most controversial aspects of the referendum campaign. Immigration control was one of the primary motivations behind Brexit. There is likely therefore to be substantial political pressure to reduce overall inward immigration. In the event of a complete Brexit with no free movement arrangement, three million EU migrants currently in the UK by virtue of exercising their "Treaty rights" would become subject to UK domestic immigration law. In order to reach a deal on movement of people, it is likely that the UK will have to enter into negotiations with the EU as a whole and, therefore, will not be able to treat French nationals, say, more favourably in terms of UK immigration rights than those from Romania and Bulgaria. Alternatively, the UK government could choose to enter into bilateral agreements with each of the remaining 27 Member States. This would be hugely complex from a legislative perspective and there is no certainty that all Member States would engage with the UK at all.


Given the numerous economic incentives on the UK to negotiate favourable withdrawal terms with the EU and the disruption that would be caused by imposing domestic immigration law on all EU citizens, it has been widely speculated that there may be little change to immigration for the post-Brexit UK; at least for the immediate future. 




EU competition law is a key area for business which currently benefits from a ‘one stop shop’ structure based around the European Commission’s Competition Directorate (DG COMP) and national competition authorities (NCAs) in each EU Member State.


Companies involved in large-scale international M&A have used the existing European merger regulation to secure a single merger clearance from the European Commission valid for the entire EU, rather than seeking multiple approvals from various NCAs. With the UK leaving the EU, some transactions may fall outside of DG COMP’s jurisdiction but within the scope of certain NCAs’ merger regimes. Should the UK enter the EEA, then the UK will remain subject to the European merger regulation.


However, outside of the EEA, the merging parties would have to notify both DG COMP and the relevant NCAs. This may leave transactions open to greater political pressure from national governments.

UK-based companies selling into the EU will still be subject to the EU’s prohibitions on anti-competitive conduct, such as fixing prices and abusing a dominant position, just as US or Japanese companies have always been. However, UK-based ‘leniency’ applicants seeking immunity from or reductions in fines in respect of cartel activity may have to make duplicate applications in the UK and to DG COMP, increasing the risk of that material being disclosed to other authorities, including criminal prosecutors in the UK or US.


For companies seeking to bring damages actions against infringements of competition law, the English courts may not be as attractive as they have been to-date, as they have served as a ‘one stop shop’ for claims covering the entire EU. Future actions might only cover the UK rather than the entire EU. Therefore any awards would be limited and further actions might need to be brought in other countries, increasing cost and uncertainty. 


Intellectual property


Over the past 20 years, IP rights have become more harmonised, particularly with the development of a number of pan EU IP rights, such as the EU Trade Mark and Design Right. As a result, there are many EU decisions which apply in English law. There are also a number of other harmonising directives in the pipeline such as the trade secrets directive. There is also the Unified Patent Court, where London has been designated as the location of the court dealing with life science patents. With so much harmonisation and integration of legal systems in this area, it must be one of the most difficult areas to deal with in the event of a Brexit.


Some of the most important and pressing questions for clients will be what will happen to their pan EU rights, together with what should be their filing and enforcement strategy, pending resolution of the laws in the field of IP, which could take years. 


Private wealth


We would expect the any post Brexit Budget to be pro-business, given that the international business community will be re-assessing its relationship with the UK. We have already seen a massive flight from the UK's stock market and currency, so the government will want to make sure that our business tax regime remains attractive. On the personal tax front, we would expect planned increases in the personal allowances and thresholds to be delayed or cancelled. We cannot rule out tax rises. More structural changes will follow in the coming years, given that much of our domestic tax legislation is based on EU rules, most notably VAT. 


Data Privacy


Data Protection is something that has been driven by the EU. Regulators act in a co- ordinated manner across the EU. The current legislation is a UK statute – the Data Protection Act 1998. In 2018 EU General Data Protection Regulation is due to come into force across the EU. Unless UK Legislation was put in place, it would not come in force in the UK. Such a national act would in our view be highly likely. The UK Regulator has already stated that data protection and information rights are very important in the UK. The terms of any legislation are likely to be very similar to the Regulation. As the recent controversy surrounding so-called "Safe Harbour" and the transfer of personal data to the US shows, ensuring "adequacy" of data protection laws is a key incentive to continue to have a law on equivalent terms with EU requirements. 


Insolvency and restructuring


Once the exit is effected, English insolvency regimes and their effects will no longer be automatically recognised elsewhere in the EU. The recognition of English insolvency proceedings in the EU will become dependent upon specific cross border insolvency rules of other Member States which may exist over and above the uniform recognition framework of the EC Regulation. For example, certain European jurisdictions have adopted the UNCITRAL Model Law on Cross Border Insolvency which provides an alternative gateway for the recognition English insolvency regimes.


EU insolvency regimes will no longer benefit from automatic recognition in England.


Schemes of arrangement are a very popular, flexible and effective process for effecting debt restructurings, and English schemes are often used by foreign companies wishing to restructure their debts, as few other jurisdictions have an equivalent mechanism.


Schemes of arrangement are not an insolvency procedure and so the EC Regulation does not apply to them. Their utility (and attractiveness to both English and foreign debtors) is unlikely to be affected by Brexit. 




The main legal impact of the Brexit vote from a debt finance perspective is uncertainty relating to the possible loss of EU passports, i.e. losing the right to sell products and services into Europe from the EU. This may result in banks needing to change their European legal entity structure and the location of some roles. In terms of wider impact, the extent (if any) to which the UK loses its leading role in banking, trading, clearing and financial services is the big question. Banks may cut staff and costs in London and shift global resources from London to the Eurozone due to uncertainty over the terms of exit. Further, Eurozone banks with operations in London may be impacted by the FX translation as sterling weakens and it is quite likely that the European Central Bank will try to drive euro trading activities - today done largely in London - back to the continent. 




Many key aspects of pensions law driven by EU law are already merged into domestic legislation (for example pension provisions on equal treatment obligations pension scheme funding requirements). We expect the UK Government would be reluctant to amend these where much of the legislation offers protection to employees/members of pension funds.


Trustees should assess the impact of Brexit on the financial covenants of their sponsoring employers. A weakening of the covenants may require them to revisit the funding valuation and funding plans to support the pension fund.


Employers need to be ready to respond to trustees who will be carrying out this further assessment and as such the employers may want to have a risk assessment updated to address the impact of Brexit on their business. Employers and trustees of pension funds should be prepared to review their investment strategy with a view to assessing whether pension funds are exposed to too much risk post Brexit. 




International Regulations and Conventions: most international regulation of shipping, including the two most important Conventions, SOLAS (safety provisions) and MARPOL (pollution provisions), emanates from the International Maritime Organisation (an agency of the United Nations) and is implemented by UK legislation. These will not be affected by Brexit. EU Regulations regarding sulphur content in fuel: these have been implemented in UK legislation and therefore, unless they are repealed, will still apply to the maritime industry.


There are also many aspects of maritime law which are derived from International Conventions and given effect by UK legislation, for example cargo liability regimes (Hague-Visby Rules), shipowners’ limitation of liability (Limitation Convention 1976) and the arrest of ships (Arrest Convention 1952). None of these will be in any way affected by Brexit.


Charterparties and COAs: references to the EU (eg in charterparty trading areas) may need to be reconsidered. Depending upon the nature of the contractual obligations, it is possible that a contract could be frustrated by Brexit, or that Brexit might constitute a force majeure event under the contract. This would be a matter to consider when drafting long-term contracts. 


Litigation and Arbitration


Choice of law clauses: in the EU the Rome I and Rome II conventions which govern the choice of applicable law in contractual and non-contractual situations will continue to apply. The effect of this is that EU states will be obliged to recognise choice of law clauses in favour of England. In England, whatever rules are adopted to replace the Regulations, it is safe to say that a clear express choice of the law applicable to a contract will continue to be given effect by the English Courts. It is unclear how the law applicable to a contract will be determined in the absence of express choice, or how the law applicable to a non-contractual obligation will be determined. (It may be that the UK will simply enact the Regulations.) In any event, these issues do not often arise in practice.


Jurisdiction: At present issues of jurisdiction and the recognition and enforcement of judgments within the EU are governed by an EU Regulation. It is unclear what will replace this for the UK. English Courts will continue to give effect to a clearly worded jurisdiction clause. However the effect given to an English jurisdiction clause by EU states would be a matter for the local law of each state.


Following Brexit, litigants in England and Wales will not be able to rely on provisions in the Regulation that deal with parallel proceedings in different EU states. However, it is likely that anti-suit injunctions (which are currently not available in relation to European proceedings brought in breach of a jurisdiction or arbitration agreement) will once again become available to support litigation or arbitration in England and Wales.


Arbitration: For the most part, arbitration is not affected by Brexit. Enforcement of arbitration awards is usually effected under the New York Convention 1958, and Brexit will have no effect on this. 




The UK is bound by EU sanctions, which are in force in relation to a number of countries and individuals. Following Brexit, it would be a matter for the UK to decide whether or not to implement such EU sanctions. It is likely that it would, given that the UK has generally been in favour of such sanctions.


In many cases there are also UN sanctions in force, and the UK would still be bound to implement these. Sanctions imposed by the EU would, of course, remain in place, and would continue to apply to activity within the EU and the actions of EU persons and EU registered ships. 




There are two main areas of concern for insurers (including P&I Clubs):


Passporting: UK insurance companies currently write business in other EU countries without requiring authorisation of the local regulatory authority. This is due to the passporting arrangements, which mean that authorisation in the UK is valid for any other country in the EEA. EU insurance companies carry on business in the UK in the same way. If such arrangements do not continue, the UK insurance companies operating in other EU countries will need to obtain local authorisation to continue trading, or establish a subsidiary, with its own capital, in that other EU country. EU companies operating in the UK would similarly need to obtain UK authorisation. As well as imposing extra regulatory burdens on UK insurance companies, there is the potential for it to impact London and Lloyds as the leading insurance market.


Solvency II: This EU-wide insurance regulatory regime came into force in the UK on 1 January 2016. It requires, among other things, that insurance companies have sufficient capital to withstand a 'one in 200 year' financial shock and still be able to pay out on pensions and policies. It has been criticised by many and regarded as unnecessarily onerous. It has been argued that Brexit would be beneficial for insurers as it would allow relaxation of this regime and attract more trade from outside the EU. Such a relaxation is unlikely to happen for two main reasons:


(1) The PRA (Prudential Regulation Authority) was heavily involved in the negotiations of the Solvency II Directive and it was largely driven by and is in line with UK regulatory perspectives. The UK has gold-plated the regulations in a number of areas. Brexit is therefore unlikely to impact much on the PRA's position.


(2) If UK insurance companies wish still to have access to and write business in the EU market, they will need to be governed by a regulatory regime which is the equivalent of the Solvency II Directive. 




For further information, please contact:


Jezamine Fewins, Partner, Stephenson Harwood

[email protected]