22 July 2016

The Brexit verdict – one month on

This article was written by Philipp Girardet (partner) and Stephen Williams (managing associate).

A month has now passed since the UK voted in favour of leaving the European Union. In that period, we have seen the appointment of a new Prime Minister, Theresa May, a new cabinet and the creation of a Department for Exiting the European Union, headed by long-time eurosceptic David Davis.

As the dust begins to settle, businesses are looking beyond the immediate implications of the vote, as we begin to understand the approach the UK will take in leaving the EU. In this update, we share with you our views on the Brexit process and timetable, the proposed model and the constitutional questions.

Brexit means Brexit

Alongside Davis at the Brexit department, the Prime Minister has appointed other key Leave campaigners to the cabinet positions of relevance to the EU negotiations: Boris Johnson is now the Foreign Secretary, while Liam Fox heads the Department for International Trade.

Mrs May, for her part, has pledged that "as prime minister, I will make sure we will leave the European Union". She has also stated that “Brexit means Brexit”, in a bid to reflect the referendum result while remaining strategically vague about the exit process during the negotiation period.

Though a number of so-called exit options had been discussed, the government has started to express a preference for a form of free trade agreement with the EU. Davis is seeking continued tariff-free access to the EU's single market, but crucially, he would remove the UK from the single market itself to release the country from its obligation to accept the EU's principle of free movement of people and to avoid making significant contributions to the EU budget.

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The Brexit model

The Davis model is focused on traditional trade and at this stage, offers no solutions for the UK’s services sector, which represents 80 per cent of the country’s GDP. Financial services in particular are awaiting further developments to determine whether they might continue to operate across the EU from a London base with the aid of a regulatory passport.

Davis has yet to provide details on how services and capital would be covered by a new free trade agreement with the EU, though he has suggested it might follow the form of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU, which does allow access to provide services and bid for public contracts, for example.

Davis foresees the UK negotiating a number of similar free trade agreements with non-EU countries, and Liam Fox has already begun informal discussions. However, no agreements can be put in place while the UK remains an EU member.

CETA is the widest-ranging EU trade agreement to date, though it is not yet in force and continues to require approval from the Council of the EU, as well as domestic approval by each Member State, which will delay the process further.

The negotiations on CETA also took place over a five-year period, from 2009-2014. The UK must accept that it may be challenging to have Brexit discussions in parallel with discussions regarding a new deal with the EU. As such, individual trade deals could be many years in the making and unless interim measures are agreed, the UK could in the meantime find itself reliant on WTO terms for trade, with tariff barriers and no framework for full services access to the EU.

Having been a part of the EU for 43 years - relying on the trade negotiation expertise of EU officials - the UK is estimated to have no more than 20 officials with extensive trade negotiation experience and so would need to source skilled individuals from elsewhere. Canada, by contrast, has at least 300 trade negotiators.

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The Brexit timetable

Once notice is given under Article 50 of the Lisbon Treaty, there is a two-year window for EU withdrawal negotiations, which can only be extended by unanimous agreement of the 27 remaining Member States.

Theresa May has indicated that she will not be rushed into giving notice, to give her government time to formulate its negotiation strategy. She has indicated that she will not invoke Article 50 in 2016, though she has faced some pressure to begin the process earlier, perhaps reflecting the attitudes to Brexit in the EU.

Until Article 50 is triggered, there will be no formal negotiations, though May will meet with European leaders and informally discuss the matter in the interim. The next UK General Election is due in May 2020 - under the Fixed Term Parliaments Act - by which time the UK is expected to have negotiated its exit position.

However, there are now constitutional questions about the process the UK must follow in invoking Article 50, as well as debate about how the government should reflect the views of the UK’s constituent countries, principalities and territories. Gibraltar, for example, voted 98 per cent to remain; in Scotland 62 per cent supported staying in the EU.

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Constitutional questions

The government faces a number of challenges on triggering Article 50, resulting from the UK's unwritten constitution, which is based largely on historical convention.

The government's mandate to act on behalf of the entire UK is uncertain. Nicola Sturgeon, the Scottish First Minister, does not want Scotland taken out of the EU against its will, though it may not have the power to stop the UK government from acting. Mrs May met with Mrs Sturgeon on 15 July and acknowledged that she wants “the Scottish government to be fully engaged in our discussion”, conceding that the exit negotiations require a “UK approach and objectives”. Such measures may be necessary to stave off a second Scottish independence referendum.

May will also have to address practical concerns over any restricting of the open borders between Gibraltar and Spain, and between Northern Ireland and the Republic of Ireland.

Meanwhile, the government's ability to trigger Article 50 unilaterally is equally unclear. David Cameron’s government received advice that under royal prerogative, the executive alone could trigger Article 50.

However, on 19 July an initial hearing in the High Court took place for the first of at least seven private actions launched to question whether the government could act without first securing the approval of parliament.

A court date has been set for October, with the suggestion that the other applicants join as interested or intervening parties. The actions claim that because parliament is sovereign, it has the sole competence to pass or alter laws conferring or abrogating individual rights. As parliament would ultimately be required to approve any legislation ending the UK's EU membership – in particular repealing the European Communities Act 1972 – some argue that parliament must approve giving notice of the UK’s intention to withdraw from the EU, with others taking the view that parliament must first approve the outline of the relationship the UK seeks to establish with the UK. Equally, it appears that some or all of the devolved administrations - such as the Scottish government - are also contemplating judicial review, given that some devolved powers concern areas affected by EU law.

Lawyers for the government confirmed it does not intend to trigger Article 50 before the end of 2016, at the earliest. Provision has been made for a leap-frog appeal to the Supreme Court – bypassing the Court of Appeal – with a view to having the issue resolved this year. However, the range of potential issues that may be brought before the courts may make this timetable a challenging one.

Others have considered whether the UK can, in effect, change its mind and decide to stay in the EU, after serving an Article 50 notice on the European Council and before the expiry of the two-year exit negotiation process. Article 50 is silent on this point. This would be an issue that only the European Court of Justice would be competent to determine.

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Key considerations

Companies should now be mapping out their most pressing issues when doing business between the UK and Europe, including the regulatory framework that underpins this work.

Consider how this framework will change as a result of the referendum. What regulation that emanates from the EU is most vital to you and is there EU red tape you would like to see falling away, by not being replicated under domestic UK legislation as part of any new trade deal?

This type of strategic ‘regulatory heat map’ could inform your position on issues critical to your company’s success as the Brexit discussions start in earnest in a few months’ time.

We would of course be very happy to talk to you about the impact of Brexit on your business.

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