Introduction – where are we now?
On 23 June 2016, 51.89% of the UK population voted to leave the EU, following which the UK served notice under Article 50 of the Treaty on European Union (TEU), triggering the process for the UK’s exit from the EU. On 13 November 2018, it was announced that a Withdrawal Agreement and outline Political Declaration on the Future Relationship between the EU and the UK (Political Declaration) had been agreed. These documents received the backing of the UK Cabinet on 14 November 2018. This article examines the key provisions of the Withdrawal Agreement, immediate next steps in the Brexit process, as well as what could happen in the near future and how best to prepare for Brexit.
High level summary of the Withdrawal Agreement and Political Declaration
The Withdrawal Agreement sets out the arrangements for the UK’s withdrawal from the EU on 29 March 2019, which is two years after the triggering of Article 50 TEU. The three main withdrawal issues that were the focus of negotiations leading to the Withdrawal Agreement included: the status of EU citizens living in the UK and vice versa; the financial settlement the UK will be obliged to pay to the EU after it exits; and the nature of the border arrangements once the UK leaves the EU Customs Union (and in particular the need to ensure that there is not a hard border between Northern Ireland and the Republic of Ireland). These three issues are dealt with as follows in the Withdrawal Agreement:
- Qualifying EU citizens will be able to continue to exercise their right of free movement under EU law and live, work and study in the UK as they are currently able to do. UK citizens exercising their rights in the EU will be able to continue to do this in their host state.
- Both sides have agreed a methodology for calculating the financial settlement without agreeing a specific amount. The UK agrees to contribute and participate in the EU budget until the end of the current budget cycle (2020) as if it had remained in the EU. The UK will also contribute its share of the financing of the budgetary commitments entered into before the end of the current budget cycle but not yet disbursed at the end of 2020 (the so called ‘reste à liquider’). The UK will continue to benefit from EU spending under programmes financed by the current budget until their closure. UK beneficiaries will be required to respect all relevant EU provisions governing these programmes, including co-financing.
- “Backstop” arrangements are set out in the Agreement for the Irish border designed to ensure the free circulation of goods across the island of Ireland. In order to prevent the creation of a hard border in the Irish Sea, it has been necessary to envisage a customs union between the whole of the UK and the EU. If at the end of the transition period (see below), a solution to the border issue has not been found, a single customs territory would be created between the EU and UK (including Northern Ireland). Under this arrangement, the UK would be required to maintain the EU’s common external trade tariff. There would be no quotas or tariffs for goods traded between the EU and the UK; however, the UK would be required to abide by certain EU rules (covering, for example, labour, competition law, state aid and environmental issues) in order to ensure consistency between the UK and EU. This arrangement would remain in place unless and until a separate EU-UK agreement replaces it.
The Withdrawal Agreement includes a transition period following the date of the UK’s EU exit (i.e. 29 March 2019) through to 31 December 2020, during which EU law will continue to apply in and to the UK. During the transition period, therefore, EU law will continue to have direct effect in the UK, the principle of supremacy of EU law will apply, and for the financial services industry, the current passporting rights will remain unchanged. However, the UK will no longer be represented and participate as a matter of course in the EU institutions, thereby losing its right to influence and vote on new legislation. During the transition period, the UK will be free to negotiate, sign and ratify international agreements entered into in its own capacity, provided these agreements do not apply until after the transition period. The Withdrawal Agreement (Article 132) provides for the possibility of an extension of the transition period, decided by the UK-EU Joint Committee.
Alongside the 585-page Withdrawal Agreement, there is a five-page Political Declaration. This sets out a broad outline on the future relationship between the EU and the UK and is not binding – it is envisaged that the specifics of any trade deal will be agreed during the transition period. The Political Declaration envisages comprehensive arrangements creating a free trade area with “zero tariffs, no fees, charges or qualitative restrictions across all goods sectors” and with “ambitious customs arrangements” that “build on” the arrangements provided for in the Withdrawal Agreement, while “respecting the Parties legal orders”. The EU and UK both say that they want this new free trade arrangement to solve the Irish border problem, thus removing the need for the “backstop” mechanism (which would effectively keep the whole of the UK in the EU Customs Union). We understand a full text of the Political Declaration will be released shortly.
Immediate next steps
The Withdrawal Agreement and Political Declaration have received the backing of the UK Cabinet. A special European Council, due to be held this week, will be asked to finalise and approve the text of the Withdrawal Agreement and the full text of the Political Declaration. The deal will also have to pass through the European Parliament.
However, the main challenge for achieving a binding deal is anticipated to be the requirement for approval by the UK Parliament. The first vote by the UK Parliament is expected within two weeks of the European Council (i.e. in December 2018). If the UK Parliament approves the Withdrawal Agreement in its current form, an EU Withdrawal Agreement Bill will then need to be drafted and passed early next year. Once the Bill has passed through the UK Parliament and becomes an Act, it will need to then be voted on by the European Parliament and finally approved by the European Council.
The transition period set out in the Withdrawal Agreement will only come into effect if the Withdrawal Agreement is approved by both the UK and EU. If the UK is not successful in approving any form of withdrawal agreement before 29 March 2019, it will leave the EU with a hard Brexit, i.e. with no transitional arrangements in place for a period after Brexit (unless the Article 50 notice period were to be extended).
The future – what could happen and how to prepare?
The UK Government is seeking a comprehensive partnership with the EU after Brexit (as set out in outline in the Withdrawal Agreement and Political Declaration). Post Brexit, it wants the UK: to leave the EU single market but to remain with a free trade area for goods; to leave the EU Customs Union and be able to enter into bilateral international agreements, including with the EU and other countries; not to be bound by the principle of the free movement of people; not to be required to make significant contributions to the EU budget; and not be subject to EU law and the jurisdiction of the Court of Justice of the European Union. If the Withdrawal Agreement is approved, the UK will be treated as if it were a Member State for the purposes of international agreements during the transition period. Thereafter, the EU will seek consent from partner countries so as to ensure that the UK continues to benefit from such arrangements.
If the EU and UK fail to strike a full trade deal, they will likely trade under the terms of the World Trade Organisation. This would have the effect that UK imports into the EU would be subject to the imposition of the EU Common External Tariff, while the UK would be able to impose import tariffs on goods entering the UK (from the EU and elsewhere). Goods entering the UK would also be subject to customs checks. Any goods exported to the EU would need to comply with EU standards. In addition, post Brexit, the UK will no longer automatically benefit from the EU’s free trade deals with non-EU countries. However, the UK is currently in the process of putting in place arrangements with trading partners worldwide in order to ensure the application of the terms of the EU’s existing free trade agreements to the UK.
Considerable uncertainty remains around what Brexit will look like in practice – this is reflected in the current slump of the British Pound. Nevertheless, given that Brexit will result in a seismic shift in the relationship between the UK and EU, it would be sensible for companies to take practical steps to prepare for all possible scenarios (including the prospect of a no-deal Brexit scenario). For example, companies should:
- review their supply chains to manage the impact of any possible tariffs and quotas that may be imposed post Brexit;
- be aware that companies may stockpile products to ensure consistent supply and minimize any delays due to border restrictions;
- determine whether any potential litigation action will be disrupted by Brexit and develop strategies to avoid such disruption;
- renegotiate supply contracts and/or moving business operations to or from the UK, as applicable;
- determine whether any corporate transactions are effected by Brexit in terms of transaction structure, deal value, required regulatory approvals or otherwise;
- review the location of all key personnel and company policies relating to the mobility of employees; and
- keep abreast of developments in the UK in relation to Brexit and related issues, such as financial services and foreign investment controls.