Brexit: the new status quo

The EU-UK Trade and Cooperation Agreement (TCA) provides the basis for further legal certainty to be agreed following the end of the transition period on 31 December 2020. It was, as we all saw, a fairly tortuous journey and securing a deal seemed impossible at times because both sides had very different aims in mind.

Nevertheless, the deal secured a tariff-free, quota-free trading relationship and Downing St says the UK retains control of its trade policy, borders and regulations. The European Court of Justice is removed from disputes from both sides, and – the political ‘deal-breaker’ - it also secures sovereignty over UK fishing waters.

Much of the detail of the deal is, of course, now set to follow. Financial Services are largely excluded and a major question for business is whether this deal on goods will form the starting point for services, which account for most for the UK economy. Financial Services passporting, mutual recognition of professional qualifications and free flow of data all end as a result of Brexit. Looking forward, we can expect a long process to try and secure that lost access through equivalence and other mechanisms.

However, the existence of a deal arguably improves the odds of more predictable dialogue between the UK and the EU. Larger financial institutions had already reorganised their European operations in anticipation of a hard Brexit in order to manage reduced dependency on the single market. And as the UK and the EU intend to agree on a Memorandum of Understanding (MoU) establishing a framework for Regulatory Cooperation by 31 March 2021, it seems possible that some level of financial services may in the future be offered between the EU and the UK on the basis of mutual equivalence decisions.

Turning to the UK – we have entered a new political phase. The UK is already pushing forward with its own National Data Strategy, and the focus is shifting back to the City. Trade bodies are beginning to mobilise, and the focus appears to be shifting to strengthening the UK’s position as a leading global financial centre. To that end, Government will be actively seeking ideas so that it can deliver on the “Brexit dividend” message down the line, and will be asking business for input into areas where positive change could create opportunity and growth. Government will also be acutely aware that the post-Brexit landscape will be heavily scrutinized by relevant actors and that parliament will seek to hold it to account.

We can expect a raft of consultations during 2021, which will possibly begin to bear fruit in 2022 (it will be a slow burn). The government will want to identify areas where the UK’s increased regulatory control over services better suits the UK. That picture presents business with the opportunity to consider and offer an answer to what changes it wants post-Brexit.

This is the first of a series of insights into the impact of the deal on the post-Brexit landscape. Here, our industry experts provide an overview of what the new status quo means to a number of critical areas – from what was passporting, to data privacy.

Deborah Newberry

Head of Corporate and Public Affairs

Financial services and the loss of passporting

Both the EU and the UK committed to establishing a Memorandum of Understanding by 31 March 2021, for establishing a framework for Regulatory Cooperation on financial services. As the new framework focuses on cooperation and is specifically without prejudice to the “unilateral and autonomous decision making of each side”, firms should not expect it to create material changes to everyday post-Brexit business arrangements between the UK and EU states.  

With financial services getting very little attention in the post-Brexit deal, relevant provisions for the insurance sector can be found in Part 2 of the TCA, Title II on Services and Investment. So far the provisions reflect mostly a commitment to establish a favourable climate for the development of trade and investment between themthat might be seen as a basis for negotiation of further agreements.

Overall, the TCA’s approach to financial services is reflective of World Trade Organization (WTO) rules, applying the concepts of ‘national treatment’ and ‘most favoured nation treatment’. This means that each party has to allow services, service suppliers, investors and their enterprises operation in its territory on a non-discriminatory basis, compared to their own or other third party providers.

Businesses wishing to provide cross-border financial services between the UK and EU states (in either direction) need to understand the local regulatory environment in which they are operating, in a way that was largely unnecessary under the passporting regime. This may include requirements for local authorisation and a degree of substance that was previously not even considered for other EU jurisdictions.

The Temporary Permissions Regime in the UK gives EU businesses operating in the UK time to resolve this issue, but similar regimes in the EEA states are inconsistent. UK businesses that rely significantly on access to the EU market will most likely have had the time and inclination to put arrangements in place to transfer portfolios accordingly.

However UK firms with a smaller part of their business based in the EU that have not focused on post-Brexit requirements or firms looking to enter the EU market, need to be wary of simply continuing as before. Local rules may require local authorisation for activity previously covered by a UK authorisation and as such, we would expect a greater regulatory focus on UK firms’ activity in EU states than was previously the case. 

EU financial services legislation such as MiFID II, contain mechanisms allowing financial institutions based in third countries to gain access to EEA markets, provided that the third country's regulatory regime has been deemed to be equivalent to that of the EU. However, for deposit-taking, lending, mortgage lending, insurance and insurance mediation, and activities relating to Undertakings for the Collective Investment in Transferable Securities (UCITS), the equivalence mechanism is not available.

Seeking a determination of equivalence from the European Commission is a possibility to gain unfettered access to the EEA market, and negotiations to that effect are underway. It is however, at the discretion of the Commission to determine whether a third country is ‘equivalent’, which in practice will mean that political considerations affect the outcome of any determination and its timings. Also, the Commission can withdraw their equivalence decision should they wish to do so.

Potential D&O liability is likely to remain of interest. Directors may be vulnerable to claims if they have not planned appropriately for Brexit, and incurred losses as a result. Senior-level management must properly investigate their business risks and disclose them to their brokers. Care should be taken with policy renewals and D&O policy wording, as failure to present a risk fairly at renewal can lead to insurers refusing to cover claims later.

While the TCA provides some measure of certainty for political risk and trade credit insurers, the COVID-19 pandemic’s economic and social impact remains front and centre and will continue to complicate global trade and an already volatile political risk landscape.

Contacts: Kirsten Shoraka and Tobin Ashby

Cybersecurity and data protection

The General Data Protection Regulation (GDPR) is retained in domestic law now the transition period has ended, although the UK has the independence to keep the framework under review. Data collected from 1 January 2021 must comply with the ‘UK GDPR’ which sits alongside the Data Protection Act 2018. Data collected before this time remains subject to the EU GDPR.

As part of the deal, the EU agreed to delay transfer restrictions towards personal data for at least four months, which can be extended to six months (the bridge). The European Commission has proposed to issue the UK with a 'data adequacy' decision to facilitate the continued free flow of personal data from EU member states to the UK. The draft decision will now be shared with the European Data Protection Board for a ‘non-binding opinion’, before being presented to EU member states for formal approval.                       

There are some key changes when it comes to data breach response. Perhaps the most challenging of these is the loss of the one stop shop mechanism, where the Information Commissioner's Office (ICO) is identified as the designated supervisory authority. This will have clear cost implications for personal data breaches where the ICO is recognised as the appropriate supervisory authority and data subjects are scattered across the EU, as all applicable EU regulators will now need to be notified.

It remains unclear what impact the changes may have on the existing penalty structure, and whether a business could, in theory, be subject to more than one fine. Companies could find themselves in the position of appealing numerous penalties at the same time. Companies and their insurers need to be alive to these changes as they are likely to have a significant impact on the overall costs arising from a personal data breach.

The UK Government’s proposed National Data Strategy offers significant opportunities to improve the functioning of the insurance and other industries. Indeed, we believe we are at a critical moment. Through responsible and human-centred rules, the UK has a very positive opportunity in both data-driven technology and rule-making.

Contact: Elizabeth Bardsley and Tom Pelham

Employment and professional services

Under the TCA, the UK must not weaken or reduce the level of employment rights in a manner affecting “trade or investment”. This reflects the “level playing field” commitments designed to prevent either party seeking a competitive edge in various regulatory areas. As such, the status of employment rights remains largely preserved.

As a corollary of that intended ‘spirit’, there is no automatic mutual recognition of professional qualifications. However, a framework is laid out allowing professional bodies to move towards that picture in the future. Whilst the deal allows for bilateral recognition between regulators/authorised bodies in the UK and another member state, we can see a patchwork picture emerging in the future, where in some countries qualifications are recognised and cross-border supplies of services are easier to deliver than in others.

As such, businesses that provide cross-border services will need to monitor the requirements in each member state with regard to regulated professions and respond accordingly, which may include re-qualifying. Other more immediate practical considerations for employers concern the potential impact on staffing. New immigration and right to work arrangements will affect workforce planning for a number of businesses, leading to a likely increase in business reorganisations (and the associated costs). Businesses will also need to ensure that their UK employees have the right travel documents before travelling to the EU for work reasons, making short business trips, in particular, all the more cumbersome.

As far as any significant imminent impact on employment rights is concerned, the Business Secretary, Kwasi Kwarteng, recently confirmed something of a U-turn regarding the Government’s plans to carry out a review into such rights. Whilst Mr Kwarteng had initially confirmed that the intention was to maintain “a really good high standard for workers in high employment and a high-wage economy”, and to look at rather than water down employment rights (specifically referencing those related to the rights and protections arising from the EU Working Time Directive), he has subsequently confirmed that the review will not be taking place. This is perhaps a case of watch and wait, but nevertheless, we anticipate that any changes to UK employment law will be minor in the short term.

Contacts: Fleur Rochester and Matthew Leake

Health, safety and environment

The UK’s principle source of health and safety legislation - the Health and Safety at Work etc. Act 1974 (the Act) - was brought into force before the UK joined the EU. As such, it will remain the UK’s primary source of health and safety law. Numerous EU regulations and directives have, of course, complemented the Act and the complete regime will remain UK domestic law.

The Health and Safety Executive (HSE) will continue to regulate health and safety law in the UK and undoubtedly continue to aspire to a strong global reputation for rigorous health and safety law. The HSE reported in November 2020 that the UK “consistently has one of the lowest rates of fatal injury across the EU”. The UK will want that confidence to be preserved, not least to fuel the desire to attract talent in response to stimulating economic growth after the COVID-19 pandemic, and let the world know the UK is open for business.

Over time there will likely be changes in the composition of the UK workforce with fewer EU nationals working in the UK. This could result in a shortage of skilled labour, which in turn, could possibly have a negative impact on health and safety outcomes. Whether any changes to the composition of the UK workforce will impact on safety matters remains to be seen.

The Chancellor of the Exchequer, Rishi Sunak, has been asked to chair a new Better Regulation Committee that will refresh the strategy on making better regulation outside the EU, review existing rules and cut EU red tape for businesses in the UK. The Chancellor confirmed that the exercise is not about lowering standards, but “making the most of new sectors, new thinking and new ways of working”.

The UK’s environmental policy and legal landscape post-Brexit is different to the health and safety picture because a considerable amount of the legislation enforced prior to 31 December 2020 is derived from EU law. Much of that EU law has now been copied into UK law but there are changes to the regime for those operating in certain industries, most notably in the chemicals industry.

The TCA has an Annex dedicated to the trade, regulation, import and export of chemicals between the EU and the UK in respect of their “registration, evaluation, authorisation, restriction, approval, classification, labelling and packaging”. The TCA seeks to “facilitate trade in chemicals, ensure high levels of environmental and health protection and provides for cooperation between Authorities”.

While there might be some changes to UK environmental law, these are likely to be minor in the short term and the early signs are that the UK will want to maintain a strong environmental legal landscape and framework for accountability.

Contacts: David Wright and Stephanie Power

Energy and climate

With reference to energy, the TCA’s “level playing field” provisions apply in order to regulate and promote renewable sources in a non-discriminatory manner. The TCA puts in place enforceable commitments to facilitate investment between the EU and UK to support security of supply and environmental sustainability, particularly in relation to climate change and carbon pricing. A Specialised Committee on Energy has been established to assist with filling in some of the gaps and provide an ongoing supervisory role.

The key point to note is that the UK has left the EU's internal energy market but will continue to have access until 2026, when the energy part of the TCA falls away, unless extended. There remain substantial new aspects to be agreed by this date, including new provisions for electricity trading aimed at maximising capacity on electricity interconnectors (to be agreed by April 2022). Further, the TCA establishes a framework for cooperation in particular areas including markets, networks, the development of renewables, infrastructure planning and offshore energy.

The deal confirms the replacement of the EU Emissions Trading System (EU ETS), with a UK ETS regime, the aim being to increase the climate ambition of the UK’s carbon pricing policy, whilst also protecting the competitiveness of UK businesses. Allowance allocation and how participants can auction/trade allowances are yet to be announced.

Both the UK and the EU have reaffirmed their ambition to achieve net zero emissions by 2050, with the high-level principles in the TCA designed to keep both parties on track towards the Paris Agreement. However, the UK’s 2020 Environment Bill, which will establish the new office for environment protection to oversee climate issues post-Brexit, is still working its way through the House of Commons and is yet to reach the House of Lords.

Contacts: Patrick Foss and Tom Stapleton

Civil disputes and judgments

The TCA does not provide for continued cooperation between the UK and the EU on civil disputes and judgments which is unsurprising in light of the government seeking to re-accede to the Lugano Convention 2007.

The attraction of the Lugano Convention is that it is an already available set of rules which would save the UK reinventing the wheel or having to conclude separate treaties. It applies already between the EU and Norway, Iceland and Switzerland.

Until the UK’s re-accession to the Lugano Convention, there is effectively a no-deal scenario regarding civil jurisdiction and judgments. Therefore, in terms of jurisdiction between the UK and EU, the only applicable regime which still applies is the Hague Convention on Choice of Court Agreements 2005, which is more limited in scope than the Lugano Convention.

The Hague Convention only applies to contracts or agreements containing exclusive jurisdiction clauses. Therefore, agreements with asymmetrical jurisdictional clauses – commonly seen in financial documents – likely do not fall within the remit of the Hague Convention, although this has yet to be finally determined. Due to this uncertainty, enforcing EU judgments in the UK will likely become far more difficult and ultimately more costly. There is also ongoing uncertainty about whether the UK's accession to the Hague Convention will assist in cases where there are pre-1 January 2021 exclusive jurisdiction clauses. It may be best practice to redraft jurisdiction clauses by way of supplemental agreement to make them ‘Hague compliant’. The Convention generally requires any judgment granted by the court specified in an exclusive jurisdiction clause to be recognised and enforced in other contracting states, although there are limitations.

Following Brexit, Brussels I Recast (Regulation (EU) No 1215/2012) no longer applies, except to proceedings already “seised” within the English court system. Instead, we fall back on common law principles to determine whether claims involving a party outside of the jurisdiction of the English court can be brought in England. Claimants will have to seek permission from the court to serve outside the jurisdiction when dealing with foreign defendants. Courts will consider factors connecting the case to the UK including domicile, place of sale or accident. In particular, the court will have to consider whether the claim has a reasonable prospect of success. Whilst this is a long established set of rules, it will lead to a regime more open to the courts’ discretion and interpretation which will create uncertainty for claimant and defendant alike.

Rome I and Rome II with minor amendments, have been incorporated into UK domestic law. Therefore, for example, the applicable law for the resolution of non-contractual disputes is determined on the basis of where the damage occurs, or is likely to occur, regardless of the country or countries in which the act giving rise to the damage occurs.

Enforcement of a UK judgment cross-border will be dependent on the approach of the country in question. The UK has entered a bilateral treaty on enforcement of judgments with Norway. Many EU member states do enforce foreign judgments under their national laws, regardless of international arrangements. This therefore introduces a level of uncertainty as to whether a UK judgment can be enforced overseas.

Contacts: Rachel Moore and Alison Loveday

Comment

When looking at the UK Parliament’s library of research into the potential impact of Brexit on business – together with the economy and finance – there are no less than 70 briefings and reports. There are, of course, countless other sources of analysis. Looking forward, we see little reason for such consideration to dry up as the impacts reveal themselves. The UK's departure from the EU Single Market and the Customs Union has many consequences which are yet to be addressed and many aspects of the deal remain incomplete. With much of the detail still to be agreed, it is clear that the EU-UK relationship will continue to evolve and develop over time, as negotiations continue for years.

Alongside that trajectory, we expect the position of the UK Government to remain firm: the deal provides the platform for engagement between business and HMG in order to work together to promote UK Plc.

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