29 June 2016

Brexit - Beyond the rhetoric

In preparation for the EU referendum, King & Wood Mallesons spent a six-month period studying the implications of Brexit, working with clients, industry leaders, academics, heads of both the ‘in’ and ‘out’ campaigns, media influencers and others.

Following the decision to leave the EU, we offered a webinar to our clients, to outline the real implications of the vote, beyond the headlines and the rhetoric.

It is important to remember, of course, that overnight, nothing has changed: EU law continues to apply, as do UK laws derived from the EU. However, companies should begin considering which pieces of legislation and regulation are valuable – or unhelpful – in the context of your business. There will also be a role for the business community to play in helping to shape Britain's future relationship with Europe.

We talk through the expected developments and address some of the immediate queries we are seeing from clients.

Follow along with the presentation

Transcript for Brexit - Beyond the Rheotric

Hello and welcome to the King & Wood Mallesons webinar on Brexit. This webinar is hosted by Philipp Girardet and Tom Usher, partners in our Competition Law practice in London together with Jeremy Schrire, a Commercial Law Partner in our London office, Adrian Brown, a Financial Regulatory Partner in London and Carl Richards, an Employment Partner in our London office.

The purpose of this webinar is to respond to a lot of questions from clients but also questions and concerns raised in the public debate that there has been a lack of clarity around some of the very basic facts. We are trying to stay away from politics and instead provide a clear summary of some of the key facts and issues for the UK following the UK’s decision to leave the EU.

I am going to make some introductory comments on the vote, I think it might be helpful to briefly talk about the key EU institutions again, who is going to be engaged in this process going forward as you would expect, we want to do a bit of a deep dive on Article 50 of the Lisbon Treaty which is much discussed in the press. We will comment a bit on the possibility of finding a reverse gear, there is talk about another referendum but with that a bit, then we’ll give you again some of the basic, the basic parameters around EU law which clearly continues to apply for the time being in full and we comment on that. We will then comment on some of the exit options again, the EA option, it’s interesting that the Brexit campaign to the extent that said anything in the last few days seem to suggest that access to the single market remains an objective and we’ll comment on that. We briefly comment on Scotland, that’s an interesting dynamic clearly unfolding in relation to the Scottish’s position both in the EU institutions as well as in Scotland and then we’ll look very briefly at two hot topics from a business prospective, just some comments on passporting, you’ll see in references in the press and in the bay to the EU system of passporting aid to work across borders with a single domestic authorisation and we’ll speak a bit about data protection because clearly it’s a key issue for businesses full stop and to comment on what this Brexit process may mean for that and then have some comments on employment law implications.

Just very briefly some comments on the vote, you will be very familiar with the map and the voting pattern as it emerged with Scotland and London and Northern Ireland more strongly in favour of remain and then the remaining piece, the little piece on the map on the leave side.

I would just comment very briefly on the day itself, we worked with clients the night before who expected extreme volatility in the market. In the end, we saw very volatile markets and all the indicators are down as everyone expected, the pound was down, shares are down, the UK’s credit rating is down. I think commentators are expecting perhaps a technical recession in Q1 of 2017. We see the market steadying again today but clearly below levels, pre Brexit. What was interesting is that, I think in terms of calling this outcome you saw full alignment really of two constituencies which in the past have offered some inside to the absence of political polling being helpful in these cases and these were sort of the betting odds, as well as the foreign currency spread and both really seemed to suggest that there would be a remain result and we saw the dollar strengthening on Thursday evening to 1.50 very clearly betting on remain and then plummeting to around 1.30 on Friday in early trading but otherwise the markets remained open, I think RBS and Barclays were briefly suspended under the circuit breakup provisions on Monday in trading but that was just for a few minutes and otherwise none of the worst case scenarios materialised.

Moving on to the political and legal realm, very quickly after Brexit you clearly had a number of significant political statements being made, we highlight three here, for which I think I represent in terms of the parameters of the political debate going forward. President Tusk of the European Council (I’ll come back to exactly what the European Council even does) made it clear that they expect the UK to act swiftly in moving forward with the Brexit project but he also reminded the members that the UK remains a full member and subject to all the rights and obligations of all full members of the EU.

David Cameron as you all know gave a speech outside Downing Street in the morning announcing his resignation and announcing that he will not trigger Article 50. That is for the next Prime Minister, he said. Angela Merkel, the German Chancellor clearly a very key voice in the process going forward as been reasonably measured to date in terms of not pushing too hard for a quick Article 50 notification but she made it very clear that she would not be supportive and I assume the Council and the Commissioner not be supportive of any in former pre discussions and people who have done mergers know that you can approach condition authority in form of pre-discussions to essentially get a good sense of the issues and trying to address first before you formerly go in and notify your merger. I think it would be clearly attractive for the UK to be able to do this as well but to a scope, the sort of real sticking points and issues and test the strength appealing on the other side. It is pretty clear that that’s going to be a minimal engagement pre a formal notification, Juncker the President of the European Commission yesterday confirmed in Brussels that he has instructed his services not to engage in any informal exploratory discussion at this stage.

Just a quick refresher on the key EU institutions. The European Commission is clearly the organisation which runs the day to day operation of the Union. There is the European Parliament which I think has been depicted as an organisation without any relevance in the Brexit political debate but they are a key player in the Brexit negotiations and the agreement of finer terms so it’s going to be interesting how parties engage with the European Parliament because clearly in the Brexit political debate in the run up to the referendum the Parliament has been described essentially as an ineffectual organisation of no relevance to anyone. That’s not the case for the Brexit Process.

Then on the top right hand corner of the slide you see the European Council, not to be confused with the Council of Minister. The European Council, as you may have seen in the news last night and today is meeting today in Brussels and I will briefly speak through their roles. So the European Council really is the political decision making body of the European Union. It had the permanent presidents. You remember that Tony Blair was keen for that job when it was created after 2007 under the Lisbon Treaty. He was considered perhaps not the right candidate and didn’t get close. Now the current President is Donald Tuff, a former Polish Prime Minister. Given that the rise in the number of Polish immigrants into the UK is one of the most political issues around the Brexit debate, in the UK, this adds an interesting dimension as Mr Tuff is presiding over the European Council and the Council is the organisation that will receive the Article 50 notice. The commissions would deal with the discussions and negotiations and the Parliament clearly needs to be involved.

The Council of Ministers is essentially a sort of sub committee of the European Council. It is trying to set the political agenda at a more working level and on a ministerial level in support of the Commission that wants to be European Council.

Now turning to Article 50, most of you will be reasonably familiar with Article 50 which is referred to in every political reportage at the moment. Everyone is trying to understand when Article 50 will be notified or invoked to start the form of process of withdrawal, but I thought it would be helpful for this session and for today’s audience to look briefly at the provisions of the Article itself. It is reasonably clear. Up until 2007 and until the Lisbon Treaty there was no provision for exiting the European Union. It was simply conceivable that that would be a relevant question which needed an answer but enlargement was really the aim of the Union and enlargement clearly was something the UK government was very much in favour of. Now Article 50 sets out a structured process for withdrawal, with Article 51 giving EU member states the right to withdraw. In accordance with a country’s own constitutional requirements. The UK, needs to notify the European Council – we’ve just referred to that body there with its President, Donald Tuff - and then there will be a negotiation which will take account of the framework of any future relationship with the Union, but ideally from the UK’s perspective clarity on that point pre Brexit becoming effective would be very desirable, but the noises coming out of the EU institutions, including an official statement by the EU Parliament last night, is that there should be no expectation that the new settlement would be anywhere near agreed by the time that Brexit becomes effective.

Then Article 53, you will have heard about, contains the two year timeline, so once you give formal notice you have two years to conclude the discussion and the Council will determine on what basis, you know, the exit would essentially be affected. An extension can only be done or agreed unanimously by the non exiting Council members and unanimity, as you will know, in European context is extremely difficult to achieve.

Looking in more detail at the implications of Article 50, the notice must be given to the European Council by the UK government. The European Council will then formally mandate the Commission - it could mandate someone else but I think the expectation everywhere is that it will be the European Commission – to lead the negotiations and the European Parliament in last night’s declaration in statement invited the Council to do just that, the European Commission as we all expect, to lead on the day to day negotiations of the exit terms. Then formally the exit terms need the consent of the Parliament – and this is absolutely critical – you need to have Parliament on side here, so that is an important dimension, but that is true for a lot of things in terms of EU legislation and I think that probably has been underplayed, the relevance of Parliament in the legislative process currently, so here as in other areas Parliament does have a consent or mutual right which is going to be relevant, but that needs to be approved by the European Counsel, i.e. the Heads of State on the basis of a qualified majority and that could become interesting how that would pan out. Qualified majority has a number of [hurdle] rates in it under the Treaty. It needs to be at least 55 per cent of the members of the Council – this is country by country – but they must represent at least 65 per cent of the population of the participating Council members, i.e. of the 27 minus the UK. There has been a discussion around how is notice to be given. There is no formal requirement under the Treaty, as you saw earlier under Article 50 a member state must give notice in accordance with its own constitutional requirements. There has been a bit of a discussion of whether one could inadvertently trigger the notice period by simply referring to an intention to withdraw given that there are a lot of political speeches by Cameron on this point. There was a nervousness in Whitehall that a Cameron speech could already be seen as deemed notification under Article 50. That has been addressed; I think no one wants that because it clearly would be starting the process in a disorderly manner which is in no one’s interest, so an EU spokesman confirmed there needs to be a formal act. It has been interpreted in a communication to the UK government this can be a letter but it doesn’t need to be a letter, it can be a speech, so that’s no formal requirement but it must be unequivocal.

The UK does not have a single written constitution which makes it unique in Europe certainly and therefore you need to look at constitutional conventions and we’ve heard a little by professors of constitutional law in the last couple of days on how constitutional conventions may apply to the referendum and Brexit process. What is pretty clear that I don’t think anyone suggests there is a convention which required Parliament to give consent to the giving of the notice, but again, has this been debated and there are views which suggest that Parliament should endorse that fundamentally important political step. So that is an ongoing debate. It is interesting I’ve got just here on one slide the BBC’s latest count of where MPs in the UK House of Commons fit on the issue of Remain and Leave and you see it is strong and we know that was one of the tensions in the referendum debate, that most Parliamentarians, most MPs, or a clear majority, let’s put it that way, favour Remain. So the question is, if you have to put anything to a vote in the House of Commons, MPs’ position is strongly on the Remain side, but they may feel they need to act in accordance with the referendum outcome, but these are all very difficult personal and political questions. So the issue is at what point does Parliament need to vote on any of this is extremely significant in the process going forward.

This sort of links in to my next point - is there a reverse gear here? There is clearly talk of a second referendum. There is support as much by social media platforms and networks in an attempt to gather support for a second referendum. I don’t know where the current number of signatories stand - it’s probably around two, two and a half million – it’s going up daily. Clearly it is quite difficult to see what the, I guess, the legitimate justification for a second referendum now would be. It is important to recall that the first referendum did not have any hurdle rates attached to it and in hindsight I think many believe that it was probably a problem because it is a decision of such fundamental importance that a certain margin may well have been a good thing to build in, but clearly that then there is a tension between that and the idea of a simple majority decides things, in British politics, on most points where, for example, in the German constitution you need a three quarter majority, or two thirds majority to overrule some constitutional or fundamental rules so it needs to be a strong consensus to change the state - it can’t just be a one or two per cent margin. Anyway, there are no hurdle rates in the first referendum so it is what it is. Constitutionally it has no binding affect whatsoever, it is advisory, but clearly politically the message is deciphered and definitely all MPs who have spoken on the issue have accepted that essentially it is a mandate to act and they now must act.

The second referendum proposes that there should be hurdle rates and so the idea is to introduce hurdle rates now and have the thing again, I don’t see a lot of chance that this is going to be a legitimate exercise which will find support by the major parties. Then going back to the rule of the House of Commons or the UK Parliament in the process, it is difficult to see whether you need a vote on giving notice – you may not - but again that’s being debated. It is going to be interesting to see how that debate develops. Secondly, should there be parliamentary ratification of the negotiation mandate? I mean, if anyone of us goes into a negotiation, before you go into a room to discuss you are left internally within your organisation, in your firm, agreed the parameters of your negotiation mandate. How far can you go? What are you redlined? What is the ultimate objective and at what point am I happy to give and what points am I not mandated to make concessions? It is, at the moment, very difficult to see how the Brexit campaign or grouping which will support a new Conservative Prime Minister in due course, but have clarity and a common position on all of this in September, but we will need to see. So it’s going to be interesting what Parliament’s role will be there. It seems pretty clear that Parliament may need to ratify the finer terms at the end of the process, so again this is applying constitutional conventions in this context and they are certainly anything but clear on this unique position we find ourselves in.

The last comment on the reverse gear I would have is clearly looking at the next general election because while a second referendum may not be a legitimate way to look at this issue again in short order, fresh elections clearly would be fought absolutely on that issue one way or another. Now the question is when will the next elections be under the new fixed term Parliament Act which was agreed under the coalition government we had a few years ago, sets the date for the next general election in 2020. The question whether by then the Brexit process has been finalised or not. It could be under the two year timetable but we will need to see, but there could be earlier elections clearly, if there is a vote of no confidence or there are exceptional circumstances and clearly this Brexit position clearly followed by the exceptional circumstances. If people wanted to accelerate the timetable for general elections but it is important to know, I mean, no one has suggested that to date. At the moment it is all about who will lead the Conservative party and who will be the next Prime Minister.

So these were just a couple of comments on the immediate process going forward in terms of notification and in terms of ironing a reverse gear which some people are clearly looking for.

I’m going to hand over to Tom now to comment a bit on another dimension which is a very hot topic at the moment and that is Scotland and where Scotland fit in this debate.


The situation is clearly very politically driven in Scotland. The mood is a proactive one. We must do something; let’s not just wait. We can’t afford to wait. The real question of course is what can Scotland actually do? We’ve already heard from Philip that some pretty key people within Europe are saying we will have no informal discussions, no pre discussions until Article 50 is triggered and I suspect many of you know that the first minister of Scotland, Nicola Sturgeon, is actually in Brussels at the moment trying to do exactly that, i.e. to have her informal discussions and to get people on side.

Scotland voted 62 per cent Remain, 39 per cent Leave. Within the Scottish Parliament I believe that only around five per cent of the MSPs are in favour of leave, which perhaps demonstrates why the feeling in Scotland is so strong that we must find some way of remaining in Europe even if the UK leaves and in fact can we do anything to stop the UK leaving at all? This question arose over the weekend with some people feeling that actually Scotland could potentially block Brexit. My view, I think, is a pretty clear ‘no’ and I believe that the Scottish Parliament has come to that conclusion itself as well.

The UK’s membership of the EU is not a dissolved matter. As with all foreign policy it is reserved to Westminster. Will there be changes to the Scotland act? It’s interesting because you take Section 29 which provides the Acts of the Scottish Parliament are not valid if they are incompatible with EU law. That of course means that the Scottish Parliament can still ensure that its legislation is compatible, if the UK ceases to become a member of the EU. One of the issues for Scotland in those situations is that of course when we do leave there will be no recourse to the cause in Luxembourg and therefore, taking an issue which is very close to the Scottish government’s heart at the moment, minimum alcohol pricing. Some of you will know that the ECJ effectively overturned the decision of the Scottish Parliament in that respect, that is something of course going forward in a scenario where we do leave that will have no more relevance in Scotland and therefore it will perhaps become easier to pass those types of laws. So, if Section 29 remains in place and the Scottish Parliament decide that its own laws must not be incompatible with EU, it is still open to Westminster to amend the Scotland Act itself and there is actually nothing that the Scottish Parliament can do about it if Westminster decides to take that course. It will of course be hugely unpopular. ‘Unpopular’ is exactly what this is at the moment which has of course raised the spectre of a second independence referendum in Scotland. Now that is a hugely political subject. What I will say is that currently the UK government has indicated is that if Scotland moves to having a second independence referendum then it will not stop it and it is a distinct possibility. If that happens, the mood at the moment is likely to be that Scotland will seek to break away from the United Kingdom. The question, of course, is when might that happen? It may happen towards the end of a period when the UK is negotiating with the European Commission its own Brexit terms which we will come back to shortly and it is very much going to depend, I think, the result of that on the status of the UK’s negotiations with Brussels. If those are looking positive – if they are going to end up being the sort of agreement that Scotland is happy with – then there is a chance that the second independence referendum may never happen or indeed, if it does, that the majority of Scots will vote to remain with the United Kingdom, so it’s a question really of waiting to see what is being negotiated, I suspect, but of course, at the moment the mood in Scotland is so proactive that we don’t quite know from one day to the next what is actually going to happen.


Thanks Tom.

Briefly looking at one more topic before we move on to the exit scenarios, from an EU law and a UK constitutional law point of view, it is absolutely clear that EU law continues to apply and will continue to be made for the next two years and so I thought it would be helpful for us to briefly look at the UK representation in Europe for the next year, until a Brexit becomes effective. I mean the UK does have MEPs - Members of the European Parliament and they continue to be represented and they continue to have a vote on all matters other than Brexit, I would assume, so they are still present.

The European Council continues to meet and David Cameron was participating in the European Council discussions yesterday as a full member with a vote. Issues on the agenda are migration, security and the single digital market, all of which are hugely important projects which are continuing and on which very significant and far reaching decisions will be taken in the months and years to come. Clearly the UK is excluded in Council meetings which discuss the Brexit position because all 27 Heads of State are currently discussing the UK position and exit term strategies in Brussels at the exclusion of the UK. The only UK Commissioner, Lord Hill, charged with looking after the financial services sector voluntarily resigned because he felt he no longer could speak on behalf of European projects because commissioners who are coming from a member state really need to pursue the EU project agenda and he felt that was no longer possible, so at the moment there is a vacancy and the UK has no commissioner left in the Commission. Those UK staff employed within the EU institution, particularly the European Commission, their employment contracts do not make their continued employment conditional on the UK membership of the EU. They are now officially EU officials and therefore that’s the position which has been communicated to staff of the Commission over the last couple of days, but what is clear is there is a new glass ceiling. Senior appointments in the Commission are very political and the UK representatives, so UK nationals are unlikely to be appointed to these more senior positions going forward which will lead very likely to exits of probably the most talented UK staff, so it’s a very quick reigning of UK influence also of the operational level in the Commission of its parting, reasonably soon.

A final reminder on the law – clearly EU regulations and directives remain relevant and there are new regulations directives coming through the system which need to be implemented and we know in the financial services sector there are some important regulations which need to be implemented at latest 2018 and that will still be probably something the UK needs to adhere to as a full member. I’m just going to mention – I’m not going to go into any detail – Article 50 has been much discussed but there is Article 7 of the Lisbon Treaty which allows the member states to be suspended and there has been some commentary that the UK may decide to ignore the EU law ahead of a final Brexit decision becoming effective. That will be a fundamental breach of EU Treaty obligations and a member state can be suspended through a process in such a situation.

I think we’re going to now move on back to Tom with some more comments on the various options on the table and some of the key considerations in that regard.


Some of you will be able to see this slide. What I will do is take you just to a few points in relation to each of the options. Just briefly going back to Scotland for a moment, of course, it is worth saying that if Scotland does decide that it is going to become independent from the rest of the United Kingdom, it is going to be extremely difficult for them to maintain their current position as a member of the European Union without leaving and then reapplying. Reapplying involves Article 49 on the Lisbon Treaty and not quite talked about as much as Article 50 but that will, I suspect, require Scotland to make a new application, possibly to join the queue. These things are flexible. It may well be that given that it has been in it will be a lot easier to get back in. Some of the others that are in that queue but nonetheless there will be quite a lot of scrutiny of Scotland’s economic situation in order to get back in.

So the rest of the exit options – we do of course have some precedence here with the treatment of countries like Norway, Iceland, Lichtenstein, who are members of the EEA and not the EU. Some of you will know the quote from the Norwegian ministers, who has been quite vocal, about the UK possibly becoming a member of the EEA. He said “If you want to run the EU then stay in the EU, if you want to be run by the EU, then join us in the EEA”. That is very much the sort of Norwegian view on the right wing side of the country. There is no automatic right to join the EEA. Every EU and EU member state will have a right of veto. We still as a country would have to make substantial financial contributions. We will be required to accept frequent movement in order to get access to the single market, so this looks currently – given the view of the Brexiteers – to be a pretty unlikely scenario, but it is one nonetheless that must remain on the table. In fact, they are all on the table. The next one is to follow the Swiss model to become a member of EFTA which is effectively a series of bilateral agreements. Again, if that model is followed we will need to accept as a country free movement of persons and we will also need to make significant budget contributions. There would be no access or financial services which, of course, is something which perhaps points to this not being an attractive option in addition to the fact that pre movement would need to be guaranteed. What is described as the Turkish option, i.e. simply joining the EU customs union, where there is no acceptance of free movement, of course, this is all done on a mutual basis so it means that there will be no right for UK citizens to move around Europe either. There is partial access to the single market under customs union but it does not cover any services and certainly not financial services and, again, just thinking about opposition within Europe and within the world, it seems to me to be pretty clear that anything we do negotiate with Europe would need one way or another to cover financial services and we will come back to that specifically in the moment.

Then there are the free trade agreements - the Albanian or the Canadian options. This perhaps gives the clue to where we may well end up. In other words a simple bilateral free trade agreement where you can build anything in and dig anything out providing that your negotiating power is good enough. One thing that we need to bear in mind when considering negotiating power is that currently at least the EU represents 40 to 50 per cent of UK exports and the UK only represents about six per cent of total exports by other EU countries. There was a statement made yesterday, I believe, by David Cameron as a bit of a parting shot that we will require access to the single market but we will not give access to free movement. These are some pretty grand statements. Really saying “If the EU wants to trade with us then these are our requirements” may not necessarily be the ideal starting point in negotiations. If nothing happens during the course of the next two and a half years, if no agreement is actually finally concluded and it is going to take a hell of a long time, then no doubt we will be able to fall back on general WTO options and a more general non discrimination principle, but of course, we would lose the current free trade agreement which the EU has with other countries and we will be negotiating all of those fresh ourselves all at the same time, which is going to be quite an enormous undertaking.


In the slides you will find also an infographic which was published in the Financial Times recently and we thought we’d share that with you. It shows the complexity of the whole thing – of the current situation and the options going forward. I would hand over to Adrian now to commandeer more specifically on the concept of passporting in the financial services sector very briefly. We’re conscious that it is not relevant for the majority of this call but passporting will be a key negotiation topic in any Brexit discussions.


Yes passporting has been mentioned a lot over the course of the last few months so we thought we’d just take a few minutes this morning to briefly explain to you what passporting is in the financial services sector and look at a couple of possible outcomes for it as a result of a the Brexit vote.

Essentially, passporting allows any firm that is regulated by a financial services regulator in an EU member of state to provide its services either on a cross border basis and/or while establishing a branch in another EU member state without needing to get authorised in that regulated state. So, it does make it a lot easier for EU firms to provide their services on a Pan European basis. So, in terms of the possible outcomes of Brexit or passporting, well, one is, we might follow the normal existing situation that we’ve spoken about already this morning. Clearly there is a lot of political dimensions to that but we won’t go into those here, but in terms of what that would mean in the context of passporting it would allow a firm established in the UK to operate under the passport on a basis very similar although not identical to that if it were acting as a full EU member state firm. I think there are some down sides to that approach and one clearly which was referred to by Tom earlier is that we as an EE member state would lose the influence that we had in terms of sitting at the negotiating table with the other EU member states and framing amendments to a new regulatory legislation. In terms of actually achieving that outcome there are some technical issues in terms of how EU legislation would then be incorporated into our legislation as an EPO state and this has given rise to some issues in the current three additional EEA states. So for example Norway has implemented the Alternative Investment Fund Managers’ Directive whereas Iceland hasn’t. So firms are able to passport in and out of Norway in the same way they would be able to if they were a full EU member state. I think that the advantage from the perspective of the City of London and the broader UK’s perspective is that this outcome wouldn’t be a complete change to the status quo and I think although clearly firms are looking at the possibility of establishing their headquarters outside the EU and moving out of London and possibly non EU firms are considering whether London is quite so attractive as it used to be, I think it doesn’t move us as far away from the status quo as the second alternative outcome which we’ll move on to now.

So the other alternative would be what would arise I think if out really does mean out. This has been the message at least for the moment that we’re getting from the EU institutions. So we would become what’s referred to as a “third country” which is essentially any country that’s not in the EU or the EEA. So the result of that for a UK firm would be that it wouldn’t automatically benefit from the services and branch passport. So if you take them together you can see that definitely does make the EU a less attractive place to establish presence in the financial services sector. So, what could UK firms do to mitigate that? Clearly they could establish a subsidiary elsewhere in the EU and take advantage of the passport from that subsidiary. The downside with that option apart from the cost clearly is that that subsidiary would have to go through the full regulation and authorisation process in that relevant member state. Similarly, the UK as I mentioned would be a less attractive place for non firms and other third party firms which might seek to set up a subsidiary elsewhere in the EU rather than in the UK. However, the picture is not necessarily that bad from the UK firms’ perspective if they want to remain in the UK and I think the message we get a lot from our clients is that they still see the UK as an attractive place to live and work, so I think they are open to exploring other options and one of those would be to use an EU firm in another member state and benefit from that firm’s passport while it delegates or acts as an agent for the UK firm. And, we have seen clients using this structure already, clearly not for Brexit reasons but for often tax reasons where there might be an advantage to establish the manager of the fund, for example in Luxembourg but the people who really do the heavy lifting are based in London and the Luxembourg manager then delegates investment management to the London manager allowing the fund to be marketed using the Luxembourg passport but for the people who are doing the day to day work and the management to operate from London.

And, finally, Brexit and becoming a third country would not necessarily mean that passporting is out of the question forever. Ultimately I think third country firms could find themselves in a similar situation to the one that they are now. It certainly won’t mean that we will be subject to a much lighter touch regime. Any third country passport would require equivalents in terms of the regulatory regime in place in the third country with the EU regime and it would actually require the firm to get regulated in an EU country. So it isn’t the end of heavy EU regulation unfortunately.


Thank you very much Adrian. Over to Jeremy for some comments on the hot topic of data protection.


People will generally know that there is a move across the EU to heighten and elevate the importance of data protection and this is a trend which seems unstoppable. One of the inevitable questions of Brexit, I’m afraid, one of a myriad, is what is the effect of Brexit on the new regime relating to data protection and what is the likely fall out? Well I think it is helpful if I cover two questions, one is “where are we now”? And two, “what does the future look like”? I’m very conscious that most predictions have been wrong and therefore I should apply a government health warning to any prediction that I make. But as regards, where we are now, the position is very clear. We have what is delightfully known as the EU General Data Protection Regulation and that is automatically going to come into force in May 2018. Because it’s a regulation, no member state need to do anything. As of 25th May this particular regulation is an integral part of each country’s national law. As everybody knows, because of the Article 50 two year exit period that will mean that for an interim period the GDPR will inevitably be part of UK law. But, what happens post Brexit? Just to put this in context it’s important because we talk about a new world in terms of data protection and we talk about becoming front and centre and becoming a bordering issue but the reason why is twofold. One, there will be enhanced rules relating to data protection, but equally and perhaps more importantly there will be a significantly enlarged fining regime and that fining regime can mean potentially fines of up to four per cent. That’s why everyone’s interested and that’s why everybody wants to know what is going to be the outcome of Brexit as regards data protection. I think my answer would be when the UK leave the EU the likely effect is going to be neutral. i.e. we will effectively have something very small from GDPR in any event. So why do I say that? I say that because we’ve got to look at this particular issue in two respects. One is the law of the UK, i.e. “what happens to national law post exit? But the other which is equally important is “what is the law as it affects UK companies conducting business transnationally”? And that second issue is absolutely fundamental and the real issue is that for the vast majority of companies that are not very localised, i.e., I’m not talking about a Cornish company offering ice creams to Cornish people but in the case of most companies, they will be collecting data and working with subject, i.e. consumer people in other member states. And, the effect of the GDPR is irrespective of where a company is headquartered, if it is using data belonging to living individuals in the EU it will be caught by the GDPR. And that effectively means that there is an extra territoriality to the GDPR in that UK companies offering their services in the EU will inevitably be caught. So that’s as regards those companies but as regards the country more generally, i.e. the UK post Brexit, the reality is that any deal be it EEA, Swiss or whatever will almost certainly require the UK to implement equivalent legislation. We have to be adequate, the idea….even probably the Nigel Forage world are that somehow or other being able to create barriers such that data cannot flow across borders is absolutely inconceivable and therefore I think the bottom line is that one way shape or another in this extremely messy and nasty world, we will implement something equivalent. And that’s not just my view and it’s not the view of the experts, it’s also the view of the ICO and I would conclude by quoting the ICO itself which, post Brexit referendum said, “If the UK want to trade with the single market on equal terms, we would have to prove adequacy”. In other words, UK data protection standards would have to be equivalent to the EU’s general Data Protection Regulation Framework. I.e., it’s going to state the same.


Karl, please could you share a few thoughts on how the outcome of the EU referendum may impact Employment law.


On the employment side there are really three main areas of concern. People are thinking about immigration for EU nationals in the UK and with regard to that, I think there has been lots of rhetoric about it but the truth is we simply don’t know what will happen there. Nothing will change at the moment but much will depend upon the terms of whether or not we do join the EEA style arrangement or whether or not there will be a trade deal and the vast likelihood in both of those circumstances is that it would encompass some form of free movement of workers. However, if not the truth is it’s likely to an amnesty in terms of current EU nationals in the UK pending immigration reform and that many people think that it’s likely to be based on a points based system like Australia but at the moment it simply is too uncertain to call. Out advice is to take a profile of the workforce to see how many people you are looking at. Many employees will actually have other basis upon which to stay in the UK such as spouses etc. and also will want to get their documentary evidence together to prove their work profile and working life to date to show how they’ve been working in the UK.

I suppose the other comment I would raise is in terms of the immediate consequence of the Brexit vote itself. I think most employers are looking to see how the economy shapes up and whether or not we are indeed heading for a recession. But it seems likely that job cuts will be on the horizon. I would point out there that it’s got to be very careful not to ‘gun jump’. We are still subject to discrimination legislation and employers need to be very careful when considering making cuts not to prefer a British candidate over an EU candidate at this stage because that’s likely to be unlawful discrimination and I suppose in the same vein the other area to be alive to is given the apparent rise in anti EU national sentiment which we’re reading about in the newspapers, there is a risk that that could spill over into the employment relationship and particularly social media because it’s a very emotive topic and it’s not just a question of reputational damage to employers but there could be vicarious liability.


We’ve received a number of questions which we would like to respond to. There were some questions around the legal status of the referendum. Just to be very clear, it has no legal status other than it being clear in law that it is purely advisory. So simply capturing a view, it is for Parliament to take a decision as to what to do. Clearly, politically the position is quite different if seen as an instruction to act but constitutionally, it is purely advisory. But, there are some questions on the second referendum and stressing some of the arguments for a second referendum in particular the suggestion that people have made their decision on the basis of misleading information or people wish they had voted in a different way and that’s becoming quite clear for at least some of the electorate. So these are arguments in favour of a second referendum and they clearly are valid points and are being debated both in Westminster and generally.

One more technical question I thought was interesting was in relation to whether Brexit the vote or an exit can trigger a material outburst change clause. Jeremy do you want to comment on that?


I would be extremely pessimistic. You would need a very specific set of words to trigger this course of very reluctance to intervene in what is considered a bad bargain and so I would look to if there was a regulatory issue which made a contract almost un performable but outside of specifically well drafted wording, I would not expect this to have too many legs.


The final question we’re dealing with is a question on compliance training, in particular competition law compliance training. The two points to make now are that firstly, all competition law continues to apply so they remain very much relevant and need to be kept in place. Secondly, after a Brexit, competition law has in many respects become a fairly international area. The current UK competition rules are largely aligned with EU rules which are largely aligned with some international norms. But, I think it does mean duplication, more red tape if you want, for example in terms of sort of mergers and in other areas where you need to deal with the UK as well as the EU post Brexit. You lose the benefit of a one stop shop.

That concludes our session today.

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