Regulation among biggest Brexit concerns

Of all the risks to emanate from the Brexit vote, regulation ranks among the biggest concerns.

While it is difficult to predict with precision what legislation changes will take place until the UK’s exit route becomes clearer, there is plenty for risk managers to consider now, according to Lord Tim Clement-Jones CBE, London managing partner of international law firm DLA Piper.

In his keynote speech at the September forum, Lord Clement-Jones, appraised the UK’s situation in the initial aftermath of the referendum and said “nothing will happen immediately” and the process for departure would take years. In the meantime, “we are going to have to abide by European laws until Brexit itself”.

Nonetheless, there are risks which need to be addressed now.

Triggering Article 50, the formal requirement to start the departure process, needed to be undertaken as quickly as possible, Lord Clement-Jones said, “to limit uncertainty”.

“The one thing we have very much in our favour when we start these negotiations is the institutional power struggle,” Lord Clement-Jones said.

“There isn’t always a single view coming out of Brussels so there is always negotiation that takes place within the institution in Brussels, which is something in our favour.”

A radical response, however, remained unlikely.

“In terms of negotiations themselves, nobody is going to want to deviate too much from the four pillars of the European Union,” Lord Clement-Jones said.

“Even when Article 50 is invoked it is going to be a very complicated situation, the only precedent we have got is Greenland with 50,000 people and that took three years to negotiate and then we have got all the political and legal uncertainties that follow.”

The current political process, he said, was contributing to an overall lack of certainty around Brexit because the UK was seen to be “dragging its feet with no obvious plan”.

Lord Clement-Jones said that EU countries were unhappy in general about the UK leaving the European Union and, as a consequence, there was “little appetite to give the UK any special treatment.”

Looking specifically at the impact of Brexit on legislation, Lord Clement-Jones said primary legislation would remain until repealed by an Act of Parliament.

“At the back end of this process, what you need to have is a repeal of the European Communities Act which effectively means that we are obliged to incorporate regulations into UK law,” he said.

“That was what we passed right at the very beginning of membership of the European Union and so at the back end of our membership when we leave we have to repeal this so that European regulations are not automatically incorporated into UK law but query what happens on directives which are already there and have already been applied into UK law.”

Lord Clement-Jones said it was likely “we’ll have to be a bit selective”.

“We could say that anything which is already there will remain until it is repealed – but there may well be people who want to get rid of specific regulations right from the word go,” he said, which is why “picking our way through 40 years of accumulated legislation” is such a formidable task.

“We won’t adopt new regulation automatically but we will let the existing legislation stay on the statute book or stay in regulation until it is repealed. Then of course there is the whole question about the way we interpret our legislation – and this is particularly important in terms of the directly applied legislation that comes from Brussels.”

Similarly, precedents laid down by the European Courts of Justice were another thorny issue.

“The whole situation is fraught with a great number of different questions,” Lord Clement-Jones said.

Differences of opinion among EU member states would play a part but “nevertheless there is probably a great deal of commonality among them in saying that the UK is not going to get special treatment in all of this”.

Now that Brexit was happening, Lord Clement-Jones said, “we are all trying to look on the bright side, I am sure, in terms of the impact of Brexit”.

He said: “We ought to have the self-confidence to go forward, there is no point in wringing our hands in a doom-laden way but we also need to recognise that we are all going to have to work incredibly hard to counteract some of these basic facts.”

Contractual relationships “need very careful attention”.

“The review of existing contracts, which I am sure you have started, you don’t want to get blindsided by somebody exercising a force majeure because we have exited Brexit or material adverse change clauses or whatever, and so every contract does need looking at. An option,” he said “would be to repeal or amend particular laws over time, following reviews and consultations.”

However, this was likely to be a protracted process.

In terms of regulatory concerns for business, Lord Clement-Jones urged risk professionals to assess which EU regulations impacted their companies directly.

Some, he said, would stay broadly the same.

Product safety law was likely to remain in force to preserve market access to the EU, likewise food safety and labelling.

Environmental regulations were, Lord Clement-Jones said, almost exclusively governed by EU law and other international agreements – but the UK was “ahead of the game in any event” on this.

In the longer term, divergence in regulatory environments could take place, and Lord Clement-Jones said this might also create “an opportunity for innovation”.

In the meantime, existing contracts should be reviewed with close attention paid to force majeure, termination, and material adverse change clauses.

Similarly, in terms of supply chain management, risk managers should analyse the extent to which their business involves the supply of goods and or services between the UK and the EU or other countries with which the EU has trade agreements.

The impact of the imposition of tariffs should be analysed and, in some instances, relocation for some parts of the business “might be required”, Lord Clement-Jones said.

Areas of conflict

Relocation was also an option to try to mitigate the impact of any restrictions on the movement of people and businesses needed to check their potential exposure here.

Lord Clement-Jones had a further warning on this: “The pool of talent and skills available to UK business could diminish as visa requirements may make it more difficult to recruit employees from and move them within Europe. Also, individuals may prefer to be located in the EU where their movement will be unrestricted.”

He added: “This is one of the really big issues because, if you look at it, the freedom of movement for many sectors is very important.

“Businesses are still going to rely on skills from Europe and skills from the EU and we want to have a regime which doesn’t simply rely on waiting six months while the Home Office processes a work permit.”

Brexit is going to be a messy affair and disputes were likely. “Parties may well seek to terminate existing contracts in the event of Brexit,” Lord Clement-Jones said.

The issue of disputes also created other potential areas of conflict.

In terms of jurisdiction, English courts and English law were favoured by many but lawyers elsewhere in Europe were now arguing that contracts governed by English law would become problematic to enforce.

“You might not find it very attractive to have your contract enforceable by an Italian court but you might find a German court or a European court of another stripe rather more attractive and every single one of those major economies is setting up its own commercial courts system with the English language as one of their major tools and that is going to be quite a lot of competition for London as a centre for legal jurisdiction and enforcement,” Lord Clement-Jones said.

“We will not be able to enforce UK judgments in the same way after Brexit as we can now because we won’t be subject to the Brussels convention in the same way. That is one of the really important aspects that the lawyers should be looking at currently.”

Lord Clement-Jones examined a swathe of other areas which might also be affected by Brexit including:

• Bankers’ bonuses: Possible abolition of the cap on financial service sector bonuses which could “make the UK more attractive”;
• Data protection: “The UK may become a ’third country’ under EU data protection rules meaning that UK businesses operating in the EU will need to provide adequate protection for the rights of employees whose personal data is transferred from the EU to the UK”.
• Competition: Mergers which hit the UK and EU Merger Regulation (EUMR) notification thresholds benefit from the EU “one-stop shop” and need only be notified to the European Commission. “The UK will fall outside this regime post-Brexit and both EU and UK notifications could be required, with additional time and costs burdens.”
• Tax: “Various EU directives remove tax obstacles from businesses operating across the EU. Without those directives, businesses operating across the EU might face withholding tax costs, double taxation and tax charges on cross-border reorganisations. The UK may also be free to impose a 1.5% stamp duty reserve tax more widely, having had to restrict its scope to comply with EU law”.
• Intellectual Property: In terms of EU trademarks and EU design, “EU registration will not include protection in the UK when the UK leaves the EU”.
• Restructuring: Brexit would remove automatic recognition, which, without specific treaties between countries, will significantly impede the ability of UK-appointed insolvency practitioners to be recognised and deal with overseas assets.

This could result in diminished appetite to lend into the UK and to select English jurisdiction and governing law clauses.

Lord Clement-Jones said that while the overall picture remained relatively unclear, companies needed to prepare.

Among his suggestions, Lord Clement-Jones said businesses should set up a Brexit committee to co-ordinate all related issues and communications.

He also suggested that risk managers prepare an overview of the possible impact on their business and how the company might respond.

Lord Clement-Jones reminded delegates that a member state leaving the EU was “unprecedented”.

This was “I am sure you would all agree, very much unchartered territory”.