Brexit: A Conclusive Legal Summary
30 Jun, 2016
Though a definitive decision has been made on whether to leave the EU, the UK’s political and economic future is still very uncertain, and while there are many questions, there are far fewer answers.
The pound has fallen 10% as of the 24th June, the day after the vote, and it is expected to take a deeper hit in the weeks to follow. Economically, buying goods and services from businesses outside of the UK is expected to cost more, inflation is forecast to rise, and the cost of goods and services outgoing to other nations are projected to dip.
The Bank of England may raise interest rates, making loans and property mortgages to become more expensive to pay, at which point rent costs would also increment.
However, the UK’s leave phase will last at least two years from the moment the UK government takes action on the referendum. Therefore spending cuts will have to stay curbed for the remainder of those two years, and national taxes could change for the British public.
Here to give us in-depth expertise on a number of matters are specialists from the legal industry and surrounding fields, who are eager to convey the effects of the Brexit and what it means for the future of Britain’s and the EU’s sectors.
Lesley Batchelor OBE, Director General of the Institute of Export (IOE):
At a time where a world recession is biting and just less than 50% of our trade is with Europe, we should question whether this is the right time. It’s a huge distraction when we should be working on trading with more markets and selling more to existing markets.
With the increasing strength leaning away from the western hemisphere it makes sense to consolidate and work with those markets we are already strong in, rather than try and develop new markets when we know that we still have much to learn about exporting from our trade figures.
The Director General says the UK needs to learn how to export properly – following the lead of the Europeans, Germans, Dutch and Italians.
Stay calm and tell your European customers they are important to you. In these uncertain times we need to remember the true nature of trade and its long-term benefits. Business needs clarity and we will endeavour to find that from government as a matter of urgency. As the only professional body representing international traders you can rely on us to find answers, to ensure messages get through and disconnects are mended.
We will ensure that global trade is at forefront of government thinking and our members’ voices must be heard in any forthcoming negotiations if we are to see prosperous economies, if we are to see Britain compete in a changing, globalised commercial world.
As Einstein said: first learn the rules of the game and then go out and play it better than everyone else!
Jonathan Beech, Managing Director of Migrate UK, an immigration law firm:
The referendum decision for the UK to leave the EU will see the introduction of costly policies for organisations that employ EU workers. Furthermore, thousands of EU migrants, currently in UK company roles, will potentially having to exit in the future if they fail to qualify under the current Points Based System that we use for workers outside the EU.
All our clients already face big challenges and costs when hiring non-EU workers under UK immigration laws, which makes it hard to find the skills they need. The UK Government needs to urgently and comprehensively revise the current Points Based System to offer different criteria to employing EU nationals compared to non-EUs, if we’re to retain the talent we need.
Unless there are transitional arrangements in place from the Government, which is not clear at this stage, current EU workers in the UK will now need to fall under UK immigration rules and the UK’s Points Based system. The Points Based System is geared towards attracting skilled migrants only with migrants requiring a certain level of English language.
As with non-EU workers, hiring EU workers will now become a very selective process, depending on the technicality and seniority of the vacancy, the rate of pay and whether there are any settled UK workers available to fill the role. It’s unlikely that EU migrants currently residing in the UK as qualified persons, would be expected to comply to the Points Based System but the problem is when they stop being a qualified person such as if they stop working for three months or more, or become self-employed.
These roles are vital for the UK economy so keeping the current system in place and limiting the number of EU workers to 100,000 a year or less would be devastating. New ex-EU arrivals in the UK could find that their ability to live and work in the UK is now less certain and they could be vulnerable to new rules under consideration. Whilst it won’t be clear for some time the extent of changes to immigration law, one thing that’s certain is that we will now see the introduction of a work sponsorship system for European workers similar to the current process in place for workers outside the EU. This means employees will face added administration, levies and surcharges, licence requirements and restrictions on employees.
Under set changes to immigration laws to be enforced April next year, employees could be looking at a five year visa costing in the region of around £7,000. It’s possible that companies will need to apply for an extended or separate sponsor licence to the one they hold for non-EU workers for permission to employ EU employees and, re-apply every four years.
UK nationals wanting to live or work in the EU and EUs wanting to do the same in the UK, will no longer have Freedom of Movement. Freedom of Movement allows EU citizens or British Nationals to reside in an EU member state as long as they are an employee, self-employed, a work seeker, a student or self-sufficient within three months of living there.
It’s unlikely that each EU member state will adopt their own immigration laws for British citizens who wish to enter and remain. It’s important now for the Government to start, what will be a lengthy and complex, transitional period so those British citizens currently employed in an EU country and classed as qualified person will be able to remain under their current terms of employment and citizenship.
The Professional Practices Alliance, a collaboration of CM Murray, Maurice Turnor Gardner, Hierons and Buzzacott law firms:
Nothing is going to change overnight, while the UK embarks on the process of withdrawal from the EU. Regulating a new trading relationship could well take longer than the two-year period set by the Lisbon Treaty. Some say it could take more than 10 years.
In a debate we hosted in April this year, we heard that there is a £20 billion trade surplus in services with the EU. The legal sector is an important part of that, so will definitely be affected by some of the unravelling that is going to follow this result. As one of our speakers said at that debate, we have now started ‘the biggest de-merger in history’.
The first thing law firms should do is reassure their staff that no residency or work permits are likely to be cancelled overnight. The UK – London in particular – attracts a large number of people from overseas. English law is the commercial law of choice worldwide, and many international firms have built up successful businesses as a result. Many firms capitalise on the ease with which lawyers and support staff can move from location to location within their networks.
New approaches to immigration may have a significant impact, but we hope that the UK government will protect this flexibility for the legal sector in its new policies.
Uncertainties about free movement are going to keep immigration lawyers busy for a while. Also, our clients tell us that they’ve been waiting to know the result before they go ahead with transactions and fundraising. Some of these deals may now start moving.
Other than changing specific references, such as to the EU Merger Regulation, it may be that commercial contracts will not need major surgery. But uncertainties are bound to arise. How will Brexit affect conflict of law rules, enforcement of judgments, applicability of WTO and other global trading agreements? Could Brexit trigger early termination, frustration of contract or force majeure clauses? These and other areas will take time and debate to work through.
We all need to keep track of the changes and advise our clients accordingly. Cutting red tape for the benefit of business and individuals is an admirable aspiration. But do we have a good track record in new or replacement legislation cutting home-grown ‘red tape’?
Emily Heard, Head of Procurement, Competition and State Aid at law firm Bevan Brittan:
We are waking to a very different future for politics, finance and governance in the UK. The pound and FTSE has already shown volatility, and David Cameron is to step down by October. But what does this mean in terms of the procurement and trade rules which have been put in place to implement European law?
There is speculation on the exact route which will be followed to implement the referendum decision and how long this will take. In terms of legal implications, the message at the moment is ‘Business as usual – until told otherwise’. This is because, for now at least, there is no impact:
1. Many of those European obligations have been implemented by way of national legislation or regulations which remain binding unless and until parliament revoke them. The TFEU principles applicable to the free movement of goods (equal treatment, non-discrimination, transparency and proportionality) are embodied in our national Public Contracts Regulations 2015, which were brought into force to implement the European Directive of 2014/24 on public sector contracts. These will remain in force, at least for now, and breaches of them can be challenged in the same way.
2. The UK’s vote to leave has no automatic consequences: the eject button has not yet been pressed. To do this, the UK will have to first invoke Article 50 of the Lisbon Treaty. Although there is now reference to this happening sooner rather than later, it is not clear exactly when this will happen. Article 50 itself envisages a 2 year negotiation period (capable of extension if all other states agree). After the end of the negotiation period the treaties cease to apply to the departing member state and instead any new agreed departure terms would apply.
3. Existing world level and future European level trade agreements mean public bodies are already subject to and are likely to continue to be subject to broadly equivalent requirements of transparency, non-discrimination and equal treatment in any event.
So for now, it is business as usual. The exact future changes to, or impact on, UK domestic law will depend on the basis on which the UK agrees its future relationship with the EU; this will be played out in the months (and years) ahead.
Nicola Fulford, Head of Data Protection, at legal firm Kemp Little:
Immediately, there will be no change to obligations as the Data Protection Act 1998 is a UK statute. In general terms, a weakening of data protection laws is unlikely given the general direction of much of the rest of the world towards greater levels of data privacy. More specifically, on leaving the EU – likely in the next 2 years – the UK would have to apply for an ‘adequacy’ decision to keep flows of data moving freely from EU countries, and therefore to continue trading in the digital world.
In less than 2 years, the EU General Data Protection Regulation (GDPR) comes into force in the EU – even if the UK has already left the EU by that stage. The UK’s laws would have to match those higher standards of the GDPR, in order either to obtain and maintain an ‘adequacy’ decision, or to join the European Free Trade Association; an there will in any case be direct compliance obligations under the GDPR for those entities with EU customers. It is therefore unlikely that, either in the short, medium or long term, Brexit will result in a material departure of UK law and practice from EU law in relation to the use and protection of personal data.
Simon Hunt, UK Head of Banking and Capital Markets at PwC:
The UK is one of the world’s leading financial centres. The banking sector plays a major part in generating exports of £23bn to the EU, which helps to drive an overall trade surplus in financial services of £20bn. Retaining this position is the challenge that banks and all stakeholders may now have to consider.
One of the most significant benefits of EU membership to the banking sector is the ability to access the Single Market via the passporting regime and the loss of passporting benefits would have an impact on the ability of banks authorised in the UK to offer products and services for EU clients.
This impact will not be limited to the UK headquartered banks but will also impact non-EU headquartered banks who have used the UK as a base for their European operations. Overseas banks currently using the UK as a base for accessing the EU market and employing an estimated 115000 staff are likely to be looking closely at their operations in the UK in the context of the leave vote.
The result of the vote does not represent the end of the debate that has impacted markets in recent months. Months, and possibly years, of negotiation will now follow before banking organisations will have clarity on what access UK-based FS organisations will have to EU countries or the rules they must comply with to secure this access.
We are already starting to see the short-term impact on the market as efforts are made to reinforce confidence in the UK banking sector. However, history has taught us that UK business is adaptable and the banking sector is one of our strongest industries and will continue to make a major contribution to the UK economy. Collectively, the financial services sector accounts for 8% of total UK economic activity and directly employs 1.1 million people – around 3.6% of the total UK workforce, generating income, investment and exports.
This result could be taken as a major opportunity for banks to work with regulators, investors and clients in order to shape a new rulebook fit for the new climate.
Ann Humphrey, leading lawyer and Tax Specialist at Excello Law:
A Brexit vote will need to be implemented in UK law so nothing changes immediately. The UK will remain a full member of the EU for the time being. In legal terms, the referendum result is only advisory so, in principle, government and/or Parliament could choose to ignore it.
The process of negotiating withdrawal from the EU will take place according to the rules set out in Article 50 of the Lisbon Treaty. There is no requirement to trigger the Article 50 process immediately. Article 50 sets out a two-year withdrawal timetable if there is no deal by then, the UK leaves automatically unless the remaining 28 member states unanimously agree to an extension. The tax changes consequent on Brexit depends to some extent on the outcome of negotiations between the EU and the UK pursuant to Article 50.
Will the UK be in the EEA/EFTA after Brexit? One outcome could be the imposition of VAT and customs duties on goods exported from the UK to the EU (and vice versa). The European Communities Act 1972 which gives effect to EU law in the UK will need to be repealed. Many EU rules affecting the UK would then lapse, unless temporary provision is made to keep these rules in place until they have been reviewed.
VAT is likely to remain but the UK VAT system will no longer be constrained by the EU VAT legislation allowing scope for more zero-rates and flexibility as to rates. Over time the UK and EU VAT systems will inevitably diverge and UK businesses dealing with suppliers or customers in EU member states are likely to face increased costs as a result.
The UK will no longer be required to give effect to, and UK companies will no longer benefit from the Parent-Subsidiary Directive and the Merger Directive. Broadly the Parent-Subsidiary Directive provides that where a parent company in one EU member state receives distributions of profits from a subsidiary company in another member state, the member state of the parent company must not tax the receipt. The Merger Directive is designed to remove fiscal obstacles to cross-border reorganisations.
In the past, the European Court has declared UK tax legislation to be incompatible with EU law and required such legislation to be amended. After Brexit, UK tax legislation would no longer be open to challenge on the basis that it is contrary to EU law.
What will be the status of existing and future decisions of the European Court after Brexit? A report produced by the UK200 Group has revealed that neither the Remain nor the Leave campaigns were certain of a cut-off point for cases going to the Court, nor of what would become of cases already before it. The Remain camp simply said the UK’s relationship with the European Court ‘would depend on the kind of future relationship Britain would have with the EU’. Leave said it ‘would be for the UK and the EU to determine the cut off’. And added ‘After we vote leave, we would expect parliament to legislate to amend or repeal the 1972 Act which gives the European Court control over our law.
Aneil Balgobin, Partner and Employment Law Solicitor at Simpson Millar:
Employers will have been making emergency plans for weeks and months; employees will no doubt feel less prepared for the impact a Brexit might have on their jobs and that reality is about to hit home. Employers need to be swift in reassuring staff, who could feel destabilised and may be looking outside Britain for a more secure role – triggering a talent drain at a time when many companies need their core capacity the most.
The contingency plans of some businesses may well include restructuring exercises, which could also mean redundancies – not least in the financial services sector. But this is a time for calm while everyone takes stock. The worst thing employees can do is make rushed decisions which they may later regret.
This could be a time of opportunity for businesses built on a sound foundation that are able to take advantage of the space left behind where others may retreat. I suspect we’ll see investment in foreign offices which could offer employees exciting new opportunities to work abroad.
Employees in the sectors that will be affected immediately might want to dig out their employment contracts this weekend and update themselves with the most relevant paragraphs such as restrictive covenants and redundancy terms. Businesses that find themselves needing to shed liabilities quickly may be keen to negotiate settlement agreements, and it is crucial that employees take legal advice to know where they stand before entering into such negotiations.
Employees who find themselves in a precarious situation – for example, having recently handed in their notice to join a business that could now be getting cold feet – should take urgent legal advice about the terms of their new job offer.
Dr Ioannis Glinavos, Senior Lecturer in Law at Westminster Law School at the University of Westminster:
One of the key themes of the Leave campaign was the return of Britain as a global trading power, negotiating and concluding agreements under its own steam. This hope seems to rest on a number of foundations. Firstly, it assumes that the European Union is not in a position to achieve terms in trade deals preferable to those that any single member state could achieve. Secondly, it rests on the premise that other nations would be willing to offer equal or even better terms to the UK, as opposed to the entire Union.
A good part of the debate concerning trade has come to rest around the contentious TTIP, currently under negotiation between the EU and the United States. A number of critics have complained that a grand trade deal like the TTIP compromises European commitments to resist genetically modified products and protect niche local markets with environmental implications. There is also concern about the desire of both sides to include Investor-State Dispute Settlement (ISDS) in the deal. Would the UK be able to achieve a better deal with the Americans on its own?
Assuming Britain could even get its foot in the door (President Obama showed no desire to prioritise a lonesome UK over other nations), could we avoid a lowering of standards and ISDS? Do we have more in common with the USA in our method of doing business than with the EU? An illustrative example is consumer arbitration clauses. In the US, if your computer malfunctions after a defective installation of some software, you may well be bound to take any resulting dispute to an arbitrator because you clicked ‘accept’ on a licence agreement that appeared on your screen. Currently in the UK, losing access to the courts for consumer disputes is prevented by European legislation. Were the UK to negotiate deals with the USA directly, could it avoid the import of these practices? It would be extremely unlikely considering its relegation to junior trading partner status.
Will the post-Brexit world be one where the UK sails away under its own steam? It could, but on someone else’s terms.
Markus Schomer, CFA, Chief Economist at PineBridge Investments:
First, we expect markets to be hit with an immediate volatility shock. Markets have never dealt with an event like this before, so analysts have no framework to evaluate it. Moreover, most investors were positioned for the opposite outcome: that the ‘remain’ camp would win. So the shock will be global, similar to the way the localized Chinese equity crash last year quickly spread around the world.
Both UK and eurozone assets are likely to sell off sharply, raising the likelihood of relatively swift intervention from the Bank of England (BOE) and the European Central Bank (ECB). The BOE will likely cut rates and restart its quantitative easing (QE) program. The ECB has few additional options left, yet it could announce more targeted purchases of peripheral sovereign bonds in the case investors start betting against the euro again.
Second, there will be no immediate change in the relationship between the UK and the EU. It will be the start of a two-year negotiation period to reach a deal for the UK to leave its current institutional arrangement. British businesses will continue to have access to EU markets, and EU citizens will continue to be able to travel, live, and work in Britain. No foreign investor will move out of the UK immediately. We could, however, see are some early announcements of cancelled future investment projects.
One of the first issues to watch out for would be the names of the negotiation teams. However, it will take a while before the scope of the negotiations becomes clear. Initially, the EU may play hardball. But over the course of the next six to 12 months it will become clear that both sides are interested in a deal.
Third is the risk of EU referendum contagion. Since British voters got an opportunity to decide whether an ever closer union is what they want, others may demand a similar vote. Referendum movements could spring up in countries like the Netherlands, Finland, or Denmark – all of which have growing Eurosceptic populations. Even France and Italy are not immune to EU and eurozone membership challenges. In any case, Brexit threatens to undermine the EU and the euro in a much larger way than merely through the questions of Britain’s continued EU membership.
The fourth issue is the likelihood of snap elections in the UK. Prime Minister Cameron may be forced to resign given the outcome of the vote. New elections could bring in an even more conservative and, thus, even more business-friendly government. That prospect and the growing instability of the EU could change the way investors look at the UK and the remaining EU. Initially, UK assets will likely bear the brunt of the market selloff. However, it should become clear that the impact on the UK economy is not imminent, whereas further challenges to the EU or eurozone are likely to focus investor attention fairly quickly on markets there.
Paul Killen, Employment Partner at Osborne Clarke:
Although a great deal of UK employment protection legislation, including Equality rights, is underpinned by EU Regulation, it has been enshrined directly into UK law. Therefore, there will be no immediate or automatic change to the legal position simply as a result of the exit vote.
Any fundamental change in UK employment/Equality laws would require legislative change in the UK. However, a number of leading campaigners have indicated an intention to reduce regulation on business, citing employment legislation (and specifically the regulations governing Working Time) as an example of legislation that could be abolished.
Following the exit vote, it is theoretically feasible that we could see significant aspects of UK Employment Protection removed and the UK could move towards more of a US employment at will approach. However, in the medium term, it is likely that the government would take a more nuanced approach – for example, by limiting the application of statutory holiday pay entitlement or making more employment/equality rights subject to qualifying service. An example of this latter approach has been the decision of the previous Coalition Government to restrict unfair dismissal rights to those with two years’ service.
Catherine Wolfenden, Head of the Regulatory Group at Osborne Clarke:
Following the exit result, the Government will be looking to calm the markets so any immediate change to business regulation is highly unlikely. Nothing is going to happen overnight. Where the Government considers, most probably after consultation, that it is in the interest of businesses to amend UK regulatory law that was in place at the behest of EU law, that will only take place after the UK has legally left the EU.
I believe that over the next five years there will be a gradual separation of some regulatory regimes between the UK and EU member states. As this happens UK businesses will need to be alive to stricter business regulation in the EU when bidding for public contracts abroad or exporting goods and services to EU member states. Ultimately, businesses looking to export goods and services to the EU will still have to meet regulatory requirements in those countries.
Gavin Jones, Head of Immigration at international legal practice Osborne Clarke:
We don’t expect any immediate changes following the referendum as it will take roughly two years for the exit vote to have an impact. With that being said, the most recent figures from ONS find there are circa 2m EU nationals in the UK and approximately only a quarter of those are in skilled work that would meet work permit skill-level requirements. Whilst it is highly unlikely there will be any retrospective changes to work permit rules, we expect significant discussions between Government and industry representatives to ensure that vacancies can be filled.
Doug Crawford, CEO of My Home Move:
As we know from our own research, people choose to move home for many different reasons – many of which are unlikely to be affected in the short term by the outcome of the EU Referendum. This decision has been made against the backdrop of a UK housing market that is, arguably, leaner and fitter than at any point in the last 15 to 20 years.
A strong regulatory structure, in particular through MMR, has meant we have sensible lending and the heat has already been taken out of the Buy to Let market with the most recent SDLT changes. Combine these factors with strong rental demand in the Private Rented Sector and an acute shortage of housing stock relative to the UK’s needs and it all suggests a stable market in the medium term.
Michael Siebold, Chairman of global legal network Interlaw:
The result of the UK referendum on EU membership has been surprising for many. But, with many companies operating in the international business environment, including doing business with the UK, now more than ever is the time for cooperative collaboration. More than most, we know that collaboration from a point of independence is possible, but it requires work. It could take years for the UK regulatory dust to settle following the UK’s departure from the EU, but in the meantime cross-border cooperation will be vital for business to continue as usual.
Steve Davies, EMEA Fintech Leader at PwC:
London is emerging as the fintech capital of the world. This is in part because of the UK’s relationship with the EU which looks set to change fundamentally. While the uncertainty is over, it has been replaced with fresh concerns around what happens with regulation, business and investor confidence and access to global talent pools. Quick and decisive actions in these areas would be much welcomed by the fintech community.
Chairman of the UK Bar Council, Chantal-Aimée Doerries QC:
The Bar of England and Wales is ready to assist in an achieving an orderly restructuring of the UK’s relationship with the EU in the coming months and beyond. The long-term effect of Brexit on the legal services sector’s contribution to the UK economy will depend significantly on the nature and terms of the post-Brexit relationship with the EU. Despite all the turbulence, however, I am confident that London will remain a leading centre for international dispute resolution. The reputation of barristers and our judiciary overseas, beyond the EU, is very high and I expect it will remain so in the years to come. We shall continue to work closely with our partners in European Bar Associations.
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