The Legal Ramifications of a Potential Brexit
By Stuart Buglass, VP Consulting
Editor’s note: The coming UK referendum on whether to remain in or leave the European Union could have serious ramifications for multinationals operating in the UK. This post is the first of a three-part Radius series examining a potential Brexit and the related legal, HR and tax implications companies should be aware of.
It is assumed by many that if the UK votes to leave the European Union on June 23, it will deregulate, or fully detach from EU regulations. This, however, is unlikely.
EU standards are driven by organizations such as the OECD and also by the need to maintain regulatory pace with major trading partners such as the US. For the UK to survive as a global economic force it will need to continue to match these standards, and as a result there is a limit to how far it can deregulate.
When operating in a globalized market true legal sovereignty is very difficult to attain. In order to survive in the face of international forces, any nation’s employment laws must attract talent, its corporate laws must encourage investment and its tax laws must foster expansion.
As a result, EU laws that are considered essential for the UK’s economic survival will simply be transposed into UK law. One such law is the EU General Data Protection Regulation, which will become law across all member states in 2018. The ability to receive EU personal data is dependent on the receiving country having data privacy laws that provide the same level of protection as the EU — meaning the UK must match the provisions of the Regulation whether or not it’s in the EU.
Even less sweeping EU laws are unlikley to be the subject of UK deregulation in the event of a Brexit, simply because the pace of an exit presents the UK legislature with no practical option but to transpose EU statute into domestic legislation. If the referendum results in a vote to leave, it should be noted, then Article 50 of the Treaty on European Union will be invoked. This provides a time limit of two years for a member state to exit. That period could be extended with the agreement of the other member states, though many feel this would be difficult to secure in the event of a Brexit, given the potential animosity and self-interests of other member states.
The influence the EU has over UK law is, moreover, often overstated, and the impact of a potential Brexit on UK domestic law will likely be minimal. As cases in point, UK company law, corporate tax law and foreign direct investment law are all relatively untouched by EU legislation and will remain unchanged if the UK leaves the EU. So whether or not the UK stays in the EU, it will remain at the top of most “ease of doing business” lists and continue to be administratively simpler to operate in than neighbors such as France and Germany.
The same cannot be said of sector-specific regulations, such as those applying to banking, finance and telecommunications. These laws are predominantly derived from EU law and provide beneficial passporting rights that enable free access to EU markets. For example in the banking sector, EU passporting arrangements currently allow banks established in the UK (or any other member state) to provide services across the EU. These arrangements extend to US banks with a branch or subsidiary in the UK. And US firms such as Goldman Sachs and JPMorgan have been able to operate across all EU member states from their London base.
A Brexit would put an end to these passporting arrangements, so any bank now operating from the UK would need to instead establish a branch or subsidiary in another EU member state to provide services across the EU. From a financial services standpoint, then, a Brexit would likely weaken London’s position as a global financial hub. In addition, if there is an exodus of foreign-owned banks from the UK to mainland Europe following a Brexit, the UK banks left behind will still have to abide by EU laws in order to provide services to EU member states.
So while a potential Brexit is likely to have little effect on UK’s domestic governance, it will likely strongly affect cross-border trade. This fact is at the very heart of the Brexit debate.
As the passporting example highlights, the UK currently benefits from the EU single market and the trade deals the EU has struck with the rest of the world. If the UK extracts itself from the EU, it will create a treaty vacuum that will need to be quickly filled in order for the UK to continue to trade globally.
Let’s take another example that’s relevant to the financial services sector — that of personal data transfers. Cross-border transfers of personal data within the European Economic Area (EEA) are lawful, whereas transfers to data recipients outside the EEA are only lawful if the destination country is deemed by the European Commission to have the same level of protection as that provided under EU law. Countries with national surveillance laws that undermine privacy rights are unlikely to make the European Commission’s list of safe destinations.
As a case in point, the European Court of Justice ruled that the US-EU Safe Harbor scheme, which permitted EU data transfers to those registered in the scheme, could no longer meet EU privacy standards due to the mass surveillance practices of the US National Security Agency. As a result all transfers of EU data to the US are prima facie unlawful unless supported by additional measures such as getting an individual’s consent to each and every data transfer or getting the US receiver to sign a copy of the EU Standard Clauses (the future of which is also in doubt and due to be reviewed before the ECJ in the coming months). The US and the EU are currently trying to negotiate a replacement to Safe Harbor, known as the Privacy Shield, though its final provisions are far from agreed upon.
If UK voters elect to leave the EU, there is a risk that the UK could find itself in a similar position to the US due to the wide-ranging powers of the Investigatory Powers Bill, set to become law before the end of 2016. Through the use of “bulk interception warrants,” the Bill will allow mass surveillance, which is the main reason that the US-EU Safe Harbor scheme was struck down by the ECJ. If the ECJ deems that the Bill poses a threat to data privacy rights, it may deem transfers of EU data to the UK unlawful.
The implications for UK business in that scenario would be far-reaching. The UK is often a hub location for international businesses operating or seeking to operate in the EU marketplace. Such businesses processing large volumes of personal data would, in the absence of EU-recognized data-protection laws, need to obtain individual data consent with each transfer (or be supported by the EU Standard Clauses in the event that the ECJ still consider their use lawful).
The free flow of data from the EU to the UK could be maintained after a Brexit if the UK were to join the European Economic Area. Joining the EEA would also allow the UK entry into the European single market. There are currently three non-EU countries in the EEA — Norway, Iceland and Liechtenstein. EEA membership allows these countries access to the EU’s single market, but does not give them EU voting rights to influence legislation. EEA countries are also subject to EU regulations when selling to EU member states, a state of affairs that has led to some frustration. As Nikolai Astrup stated on behalf of Norway’s Conservative Party, “If you want to run Europe, you must be in Europe. If you want to be run by Europe, feel free to join Norway in the European Economic Area.”
Beyond the issue of data transfers, then, it’s questionable whether joining the EEA would be the right decision for the UK on Brexit. Like Norway now, the UK would be at a distinct disadvantage relative to EU member states, as it would be unable to influence the regulations it was subject to.
Additional options beyond EEA membership open to the UK after a Brexit may be limited. The EU free market is wedded to the concept of the free movement of workers, and a major campaign pledge for Brexit is to limit immigration into the UK from other EU member states.
It should be noted that Switzerland is sometimes presented as an example of how the UK could operate post-Brexit. That country’s current deal with the EU, however, is based on Switzerland permitting free movement of EU workers, and it’s highly unlikely the UK would agree to this. Even if it did, the EU would be reluctant to adopt another treaty along the same lines as the Swiss deal, given the deal’s complexity (it has 120 separate bilateral agreements) and the legislative challenges that the Switzerland-EU arrangement is creating.
Frustrated that Swiss law struggles to keep pace with EU law, the EU is making demands that would speed up the process of adoption and also obligate Swiss courts to take into account case law of the ECJ. Such developments would put Switzerland in a similar position to Norway and suggest that single-market participation will only be made available to countries willing to adopt the EEA model.
In part two, we take a look at the tax implications of a potential Brexit.