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Brexit

Posted on: 5 April 2017

What will be the impact of ‘No Deal’?

 

The Government has said that it would rather accept no deal than a bad deal for the UK, yet it accepts that no economic assessment has been performed that might evaluate the cost to the UK economy if no deal is reached with the EU by the end of the Article 50 process. We consider a few of the potential effects of failing to reach any form of agreement.


The limitations of the Great Repeal Act

The enactment of the Great Repeal Act will ensure that most EU legislation in force in the UK at the time of Brexit will remain in force, unless and until it is amended and/or repealed. It simply isn’t possible for the UK government to review all elements of the UK legal system that derives from EU law within the timeframe of the Article 50 process.

However, maintaining the legislative status quo will not be sufficient where, for example, EU agencies exercise regulatory functions that apply to organisations within the UK. The effect of a Brexit without any form of agreement would be to leave potentially significant regulatory gaps. The UK would either have to develop alternative agencies or to attempt to negotiate continued participation in the activities of the agency in question.

Examples include:

• The European Food Safety Authority (which evaluates products involved in the food chain and provides scientific advice and technical support);

• The European Chemicals Agency (which reviews chemicals registered under REACH by manufacturers and importers)

• Financial Services Supervisory Agencies (a number of agencies and institutions have a regulatory or policy function in relation to financial services).

• The European Medicines Agency (which provides for a single assessment and marketing authorisation valid throughout the EU for pharmaceutical products);

• The European Aviation Safety Agency (which regulates aviation safety through a certification system for equipment, aircrew and undertakings involved in civil aviation);

Tariffs
Immediately following a Brexit without any form of agreement, the UK would be required to trade on WTO terms. As identified in a previous post, in such a situation the UK plans to adopt the same tariff schedules as it currently applies as part of the EU (albeit that some of the tariffs may prove harder to substitute than others).

It isn’t certain that the UK would have secured agreement on its proposed schedules by the end of the Article 50 process. This may lead to the newly independent UK trading with the EU on WTO terms, where the EU applies its current common customs tariff (that currently applies to all imports from non-EU countries unless another form of agreement has already been negotiated) and the UK applies its own schedules based on the common customs tariff (which it intends to be the basis for its WTO schedules).

The UK may try to take advantage of the free trade agreements that have already been negotiated on its behalf by the EU with other countries (through a simple but binding international agreement), but where no free trade agreement exists, the UK would also trade on WTO terms with the rest of the world.

While tariffs on UK exports to the EU would on average be low, in some sectors they would be high enough to inflict serious damage on UK trade. By way of two examples, WTO terms based on the common customs tariff require a 10% tariff on the import of cars and 30-40% on the import of some agricultural products, including meat and dairy produce.

Passporting
Passporting means the ability of a UK financial operator, capitalised and regulated in the UK, to carry on business throughout the EU without the need for subsidiaries in other EU countries to be capitalised and regulated in those countries.

If Brexit leads to trading on WTO terms without any form of transitional arrangement, this would lead to the immediate loss of passporting rights for UK financial services providers. This is because such rights are available under EU single market legislation, but would not be guaranteed under WTO rules. A UK financial institution that therefore relies on passporting to carry on cross-border business in the EU would have to terminate its business unless it had set up a subsidiary which was capitalised and regulated within the EU.

It should be pointed out that there is no guarantee that passporting rights would remain in a future trade agreement between the EU and the UK, although it is to be anticipated that this will be one of the focal points of the negotiations.

UK banks and other financial institutions are likely to make contingency provisions, at a time much earlier than the deadline for the Article 50 process and potentially significantly in advance of any potential agreement (even in an outline form). This may lead to passporting being less of an issue than first thought, as the benefit of retaining passporting will have already been lost. Alternatively, the UK is currently the EU’s leading financial centre and it may still be considered that obtaining equivalence rights for UK financial service providers is worth fighting for. Savvy EU negotiators may consider this a bone to throw to the UK when and if the practical effect of the Brexit process is that the major financial institutions have already relocated their business.

 

Please note – the next Brexit Law Update will be published on Wednesday 19th April

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