31 January 2020

Final countdown to Brexit: where are we now?

This article was written by Alix Prentice, Vanessa Docherty, Rosanna Muñoz-Britton, Grace Saltearn and Patrick Yu.

Following Boris Johnson’s win of an 80-strong Conservative Party majority in the UK’s general election on 12 December 2019, the government’s withdrawal bill has worked its way through the House of Commons and the House of Lords and then finally received royal assent from the Queen on 23 January 2020. This means that at 11pm on 31 January 2020, the UK will leave the EU.  

Transition period

Following ‘exit day’, a transition period will begin which will run until 31 December 2020. The purpose of the transition period is for the UK and EU to agree the terms of their future relationship. The most recent legislation passed by the government makes a number of changes to the withdrawal bill that was introduced to parliament last year including a prohibition on the ability of UK minsters to agree an extension to the transition period.  

During the transition period:

  • The UK will still be in the customs union and the single market;
  • The UK will be able to negotiate free trade agreements with other countries and trade blocks;
  • The European Union (Withdrawal) Act 2018 and the European Union (Withdrawal Agreement) Act 2020 will repeal the European Communities Act 1972 but also provide that during the transition period, EU law will continue to have effect in the UK as if the UK were still a member state and new EU laws created during the transition period will also apply in the UK;
  • Existing ‘passporting rights’ for regulated financial institutions will continue to be effective;
  • The negotiations between the EU and the UK will be based on the parameters set out in a political declaration which was agreed before exit day;  
  • The UK will have no say regarding new EU laws;
  • The European Court of Justice will continue to have jurisdiction; and
  • The UK will continue to contribute to the EU’s budget.
     

At the end of the transition period, if the UK and EU have successfully negotiated a free trade deal, the transition ends and a new trading relationship begins at which point:

  • A new body of retained EU law will be created as UK domestic law;
  • The UK no longer needs to give effect to all EU laws, and policy changes envisaged by the UK government may start to take effect more widely; and
  • Northern Ireland will continue to follow some EU rules. The Northern Ireland Assembly will need to give its consent to these arrangements every four years for them to continue. If at any time, it is voted against, a UK-EU joint committee would be set up to consider necessary measures once the arrangement finishes. The Brexit deal stipulates that goods entering Northern Ireland from the UK will be subject to import taxes if they are considered ‘at risk’ of entering the Republic of Ireland. If the goods subsequently remain in Northern Ireland, companies can apply to have the taxes which they have paid refunded.   

If no trade agreement is negotiated by 31 December 2020 (and there is no extension of the transition period), the UK could still crash out of the EU on WTO terms.

It is estimated that the bill due from the UK to the EU as part of the Brexit deal, to be paid over a number of years will be approximately £30 billion. This is made up of contingent liabilities (such as EU civil servants’ pension obligations) and the UK’s share of the EU budget during the transition period. The overall amount due was previously thought to be approximately £39 billion but a portion of this amount has now been paid.

Brexit for businesses:

It is anticipated that much of the required adaptation for businesses will need to occur during the transition period. It is highly likely that Brexit will impact most UK businesses in one way or another and each business will need to carefully review its practices and standards (if it has not done so already). The level of change required will depend largely on the result of UK-EU trade negotiations and resulting equivalence decisions.  

Comprehensive guidance has not been widely available and it is clear, particularly for small businesses, that many are finding it hard to prepare for circumstances that are not fully understood.

Areas of particular concern that may affect business in the UK generally following the transition period include, but are not limited to:

  • Potential blockages at ports – it is anticipated that there could be delays at ports affecting the flow of goods as a result of increased border controls/drivers not having the correct permits or not having completed the appropriate paperwork. Many of these vehicles may simply be turned away for non-compliance;
  • Heightened checks and costs for business travellers – potential changes to free mobile roaming in the EU and to freedom of movement between EU countries (such as heightened entry and exit checks) may impact business travel;
  • Rights of employees – EU citizens in the UK will have to apply for ‘settled status’ (see ‘Impact on individuals’ section below) and UK citizens working in the EU may lose access to certain benefits;
  • Supply chains reliant on current import and export laws – there may be changes to customs import and export tariffs as restrictions on free movement of goods unfold and supplies may be delayed;
  • Protection of trademarks – businesses and organisations holding trademarks registered with the EU Intellectual Property Office may no longer be protected in the UK and may need to be re-registered; and
  • Data flow to and from the EU –  the Data Protection Act 2018 adopted the EU’s General Data Protection Regulation into national law so the UK currently has equivalent legislation. However, once the UK is no longer a member state, various equivalence checks will need to be made which could affect a business’ ability to transfer data.

What about disruption to financial services?

Passporting rights will drop away, which as a major user of the passport has profound implications for UK-based firms or any third country firms that have a UK hub that extends into Europe.  UK regulators have set up a ‘Temporary Permissions Regime’ (TPR) which allows incoming EEA-based firms to continue doing the same business in the UK for up to three years after Brexit, during which time they may apply for a local, British license.  While there have been limited concessions for UK-based firms at individual EEA member state level, nothing like the extent and coverage of the TPR has been offered at a pan-European level.  While this means that many UK firms have already established separately licensed undertakings in the European member state of their choosing and moved staffing accordingly others need to take a close look at their businesses, customer bases and distribution models to make sure that they can continue to operate, whether as business as usual or according to a modified strategy.  Still, there is possibly light at the end of the tunnel: a recent Freedom of Information Act request revealed that over a 1000 of the Europe-based applicants to the TPR as at October 2019 did not yet have a physical presence in the UK, indicating that those applicants could be on track to open post-Brexit premises here bringing with them jobs and trade.

Impact on individuals

Brexit will affect individuals in a myriad of ways. Here is a pick of a few:   

  • Subject to some exceptions, EU citizens who have been living in the UK for five years or more can apply for ‘settled status’. If granted, those individuals will have access to the National Health Service, can work in the UK and have access to UK pensions and other benefits. Any child born to a mother with settled status will automatically be granted British citizenship;
  • It has been confirmed that pensioners who have retired to EU countries are guaranteed lifelong state pension uprating so state pensions will increase in line with those paid in the UK;
  • It is unclear if UK nationals will continue to be able to use their UK driving licences and rely on UK insurance documents if driving in the EU as reciprocity arrangements are yet to be agreed; and

EU students in the UK and UK students in the EU currently paying ‘home’ fees (the same fees as nationals in whichever country they are studying in) may become subject to much higher ‘international’ student fees. 

Breaking down the jargon

Article 50 
Article 50 of the Treaty of Lisbon gives any EU member state the right to quit unilaterally and outlines the procedure for doing so. It gives the leaving country two years to negotiate an exit deal. 
Brexit
The withdrawal of the UK from the EU.
Conservative Party
The main right-of-centre political party in the UK. 
Customs union
The European Union Customs Union is an alliance formed by the members of the EU that ensures (a) the tariff-free movement of goods within the EU, whether those goods are made within the union or imported, (b) implements standardised rates of customs duties on goods imported from outside the union and (c) enforces a comprehensive system of regulations for the region’s imports and exports.
European Communities Act 1972
The ECA gives direct effect to all EU law in the UK and provides for the supremacy of EU law in the event of any conflict with UK law.
European Union (Withdrawal) Act 2018
Will repeal the European Communities Act 1972 and make other provision in connection with the withdrawal of the United Kingdom from the EU.
European Union (Withdrawal Agreement) Act 2020
Will implement, and make other provision in connection with, the agreement between the UK and the EU under Article 50(2) which sets out the arrangements for the UK’s withdrawal from the EU.
House of Commons
Part of the parliament in Britain whose members are elected. 
House of Lords
Part of the parliament in Britain whose members have not been elected. 
Northern Ireland Assembly 
The Northern Ireland Assembly is the devolved legislature for Northern Ireland. It is responsible for making laws on transferred matters in Northern Ireland and for scrutinising the work of ministers and government departments.
Passporting rights
Passporting rights allow any EEA-established financial services firm operating under a single market directive (so including banks, insurers, asset managers, funds, broker-dealers, investment advisers, payment services and emoney providers) to ‘passport’ in to other member states on either a services or branch basis without the need to set up a fresh subsidiary and seek a license other than their home state license.
Political declaration
Sets out the framework for the future relationship between the EU and the UK based on trade and economic cooperation, with a focus on a free trade agreement with the EU. Not legally binding. 
Single market
Refers to the EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. 
WTO terms 
Without a free trade agreement in place, trade between the UK and EU would be governed by World Trade Organisation terms meaning that import duties and various controls would be imposed on trade between the UK and EU. Trade in services would be much more restricted if subject to WTO terms. 

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