It is just over five and a half years since the Brexit referendum delivered a surprise 52/48 verdict in favor of the UK departing the European Union.
It has been a period of intense political upheaval in the UK resulting in the departure of two successive Prime Ministers and two general elections, all against the backdrop of fraught negotiations to agree with the EU a Withdrawal Agreement (WA), setting out the terms of the departure, and a new Trade and Cooperation Agreement (TCA), designed to frame the new relationship.
The WA was concluded in December 2019. The UK exited the EU on January 31, 2020, but nothing changed until the expiry of a transition phase at the end of that year, by which point the TCA was also agreed.
The dust has still not fully settled on the definitive shape of EU-UK relations as there are several as yet unresolved issues due to certain grace periods (the UK is only this year beginning fully to implement checks on EU imports) and some unfinished business (defining the modalities of the vexed arrangements for Northern Ireland). However, the general direction of travel is clear. The UK has opted for the most severe form of exit, seeking to cut most ties with the EU and aiming to achieve the maximum degree of regulatory independence.
The economic and social dislocation caused by the pandemic has made it difficult sometimes to distinguish between the impact of Brexit only versus that of COVID 19. However, this article seeks to describe, as far as possible, how Brexit has affected the business and regulatory environment across the full range of areas covered by Steptoe and Johnson practices so far, and to identify issues of potential future concern for companies.
Trade, Customs, and the Level Playing Field
Customs and Supply Chain Issues
2021 was a year characterized by supply chain issues. Not just in the EU or the UK, but globally. While trade was down in the first half of 2020 due to the global pandemic, 2021 saw a complete reversal with global ports being highly congested. This issue was felt differently in the EU as compared to the UK, however. Euro-area exports of goods in October 2021 were close to pre-pandemic levels, being only 2,34% down from October 2019.[1] In the UK, on the other hand, exports of goods were 9,6% lower in October 2021 than in October 2018, the “most recent ‘stable’ period” in the UK.[2]
A key reason why customs and supply chain issues were more acute in the UK as compared to the EU appears to be Brexit. UK companies have so far experienced more difficulties in trading under the new customs arrangements following Brexit than EU companies.[3] Indeed, the EU has been applying full customs checks to imports from the UK since January 1, 2021, while the UK has repeatedly delayed similar checks on imports from the EU. However, as of January 1, 2022, the UK has introduced full customs checks on goods imported from the EU to Great Britain, with exceptions regarding Ireland and Northern Ireland.[4] UK importers are likely to face significant disruptions, at least in the short term, as they get used to the additional red tape due to the application of full customs checks. This could have an important impact on EU export volumes to the UK, similar to the disruptions caused to UK exports to the EU when the EU started applying full customs checks on imports from the UK.
The Level Playing Field
Ensuring a post-Brexit “level playing field” was a key issue during the Brexit negotiations. A key fear of Brussels was that having left the strict rules of the EU, the UK would turn into an economy with limited regulations and uncontrolled subsidies while retaining duty free access to the Single Market. The TCA ended up including a number of components related to the level playing field, with key parts being related to subsidies and state-aid. The outcome of this on the UK side has been the UK Subsidy Control Bill 2021,[5] which seeks to strike a balance between the UK’s obligations under the TCA, while at the same time allowing the UK with sufficient flexibility to provide subsidies where it deems fit. In its current form, its principles regarding subsidy control largely mirror those of the TCA, although there does seem to be room for interpretation and it remains to be seen whether the EU will consider the implementation thereof to be in line with the TCA.
In parallel, the EU is in the process of adopting a new regime to address distortions caused in the EU market by foreign subsidies.[6] This would give the European Commission the power to investigate foreign subsidies granted to any company active in the EU and impose regressive measures to counteract any distortive effects (see our blog post describing this proposed regime here). While this proposed legislation is not specifically related to Brexit, it could have implications for UK companies active in the EU which have received UK subsidies.
The Northern Ireland Protocol
While Brexit happened on February 1, 2020, and the Brexit transition period ended on January 1, 2021, there are still many unresolved issues under negotiation. Throughout 2021 the EU and the UK have been engaged by intense negotiations regarding the Northern Ireland Protocol, which has in effect resulted in Northern Ireland remaining in the EU Single market for goods. This has, however, resulted in several disruptions in trade between the rest of the UK and Northern Ireland, with several customs checks on goods, and severe disruptions on agri-food products, due to the absence of a veterinary agreement.
These disruptions are despite the fact that all the checks under the Protocol have not yet been fully implemented, while the UK has continued to extend the “grace period” during which lesser checks apply.
Towards the end of 2021, the situation got very tense, with the UK threatening to unilaterally suspend part of the Protocol over continued trade disruptions caused by the Protocol. Although at the time of writing the situation seems to have somewhat settled down, UK red lines remain, and the UK remains prepared to suspend part of the Protocol should the parties not come to an agreement.[7]
Should the UK suspend (part of) the Protocol, the EU has indicated that it may initiate dispute settlement proceedings and/or take retaliatory measures. There is even the potential that the EU may renounce the TCA in its entirety if the UK suspends the Protocol, although this appears less likely. It is clear, however, that a UK suspension of the Protocol would have significant consequences for EU-UK relations; not only in terms of trade but also other issues dealt with in the agreement.
Regulatory landscape
Competition
Since the end of the transition period, EU competition law ceased to apply to the UK and EU competition law is no longer applied by UK enforcement authorities. Although they must have regard to EU guidance and future EU case law, they are not bound by future EU law and may depart where appropriate.
The UK’s competition authority, the Competition and Markets Authority (CMA) is no longer party to the EEA’s cooperation network, nor does it benefit from the 60+ cooperation agreements between the EU and third countries. The TCA envisaged such an agreement and under discussion are provisions to share information, attend each other’s interviews (M&A and infringements), and request the other to conduct raids. However, it has yet to be concluded.
EU block exemptions (which define certain types of agreements that are allowed under the EU’s competition rules) have been retained as part of the UK’s domestic law. The EU has been conducting public consultations on some Block Exemptions which will expire soon, including those concerning vertical agreements. The CMA is in the process of preparing its own version. The two are likely to diverge, not least because the EU’s Single Market imperative is not relevant in the UK context, save as between the UK nations (where the UK now has its own UK Internal Markets Act).
As regards merger control, the UK regime is voluntary and the thresholds are unchanged. It is envisaged that mandatory notification may be introduced in the digital markets. The UK has now also adopted, in line with other major jurisdictions, a foreign direct investment (FDI) screening regime – the National Security and Investment Act (NSIA). Under the NSIA, there is currently mandatory notification of transactions required in 17 key “sensitive” sectors, including notably telecommunication, technology, and defense. The CMA has issued new Market Assessment Guidelines which, for example, broaden the CMA’s approach to when it will claim jurisdiction over a transaction. The CMA closely monitors the market and has significantly increased the review of transactions and called in completed transactions for investigation.
Sanctions
During Brexit negotiations, the EU and UK stated their desire to coordinate as much as possible on sanctions policy post-Brexit without agreeing on a formal framework to do so. The past year has seen several examples of continuing cooperation when EU and UK political priorities align, including announcing coordinated measures under their respective Belarus, Global Human Rights and Myanmar sanctions regimes. Yet, the decoupling brought about by Brexit has resulted in a degree of divergence between EU and UK sanctions priorities, designations and implementation.
The UK’s establishment of an autonomous Global Anti-Corruption sanctions regime in April 2021 underlines the UK’s efforts to develop a more agile autonomous sanctions regime that is capable of swift action. The move brought the UK more into line with the scope of the “Magnitsky” regimes adopted in the US and Canada, which unlike the EU’s Global Human Rights Sanctions Regime also apply to corruption offenses. It also emphasized the UK’s commitment to expanding the roster of like-minded international partners with which it will collaborate post-Brexit.
The decision to not directly transpose existing EU sanctions regimes into the UK’s new legal framework for sanctions already has resulted in divergence in designations and the implementation of sanctions policy, bringing with it the potential to create sanctions compliance difficulties for companies that are subject to both regimes. For example, the legal tests for designation are different in the EU and UK, which has resulted in disparities between EU and UK sanctions lists. It is likely that, over time, these differences will expand further in response to the refinement of designation thresholds and shifting political priorities. The UK also has introduced new tools, such as general licenses, to enable companies that meet certain conditions to undertake otherwise prohibited activities under specified sanctions regimes. Such tools are absent from the EU’s sanctions architecture. This could potentially complicate the navigation of sanctions exemptions and licensing derogations for companies operating across Europe.
Insurance
In preparation for Brexit, many insurers rationalized their business so that UK business was handled by entities in the UK and EU business was handled by entities in the EU. Numerous books of business were transferred using portfolio transfers (almost half of those from the UK were to Ireland or Luxembourg). In other cases, insurers simply discontinued their UK or EU business.
The TCA, concluded at the last moment, largely excluded financial services.
Following Brexit, the right under EU law for insurers to passport from the UK into the EU, and vice versa, ended. However, the UK permitted EU insurers to carry on business as usual in the UK for a limited period, under a temporary permissions regime (“TPR”), the intention being to allow such insurers to become UK-authorised if they wished to do so. Fewer insurers than expected opted into the TPR. The EU did not offer any comparable arrangement, and most EU Member States now prohibit UK insurers from conducting new business and have stringent rules concerning the run-off of existing business.
During the Brexit negotiations, the possibility of the EU recognizing the UK as an equivalent regime under the EU’s insurance legislation was a key topic. Although the UK has granted equivalence to the EU, the EU has not done so with the UK’s regime. The EU and the UK regimes concerning solvency may diverge in the near future due to the ongoing reviews of an applicable framework on both sides of the Channel, which further reduces the likelihood of the EU recognizing the UK as equivalent.
UK and EU re-insurers have adjusted their operations to reflect the restricted market access rights, including by establishing local licensed entities and setting up appropriate outsourcing arrangements for the most efficient allocation of group resources.
Chemicals
Those campaigning for Brexit often cited the benefits of a more flexible, targeted, UK-centric approach to environmental regulation as one of the prizes, and in 2021 the UK government wasted no time in seeking reform. However, of all the environmental issues, the regulation of chemicals stands out as creating some of the biggest Brexit challenges.
The issue stems from the European approach of ‘no data, no market’, which requires companies to submit data on hazard properties through a registration process to obtain market access. The UK failed to reach an agreement with the EU on the existing database, so the independent regimes for the UK market require companies to populate new databases, at a cost estimated at over a billion euros.
In response to industry concerns about timescales and costs, in December 2021 the UK announced a review to explore a ‘new model’ for data packages, with longer timescales for submitting data and a greater focus on use and exposure, allowing ‘more targeted’ regulatory action. Also, in December 2021, the UK announced its approach to identifying ‘substances of very high concern’, setting a different process to the EU list. The moves generated an immediate reaction from NGOs who claim the UK is not upholding the terms of the TCA on ensuring a ‘level playing field’, and urging the EU to step in.
The arguments are likely to intensify in 2022, when the EU pushes forward with its legislative agenda to deliver the Chemicals Strategy for Sustainability, with some significant changes predicted. In 2022 we also anticipate the UK’s own chemicals strategy, first promised in its 25 Year Environment Plan back in January 2018. With chemicals underpinning so much of the economy, this is an agenda with implications far beyond the chemicals sector itself, and international companies should monitor this closely. You can read more in our briefing.
Data protection
Brexit left a question mark over the flow of personal data between the UK and the EEA. That question was not resolved until June 2021 when the European Commission issued its decision confirming that the UK does ensure an adequate level of protection. While that outcome was highly political, it was difficult for the Commission to come to any other decision given that the UK had implemented the EU’s data protection legislation into national law and, to date, applied the case law of the European Court of Justice. However, the adequacy decision is not permanent. It may be revoked by the Commission if the UK no longer provides that requisite protection and will be reviewed in 2024. If that review does not result in an extension, the decision will expire on June 27, 2025.
Notwithstanding the above, the UK has flagged its intention to deviate from the EU’s privacy strategy by adopting a supposedly more business-friendly approach. In particular, the UK is likely to adopt its own set of adequacy decisions, develop domestic data transfer mechanisms and has stated its intention to overhaul the regulation of website cookies. In addition, the UK will not be a party to the upcoming changes in the EU to the regulation of cybersecurity, AI, and more.
How quickly and how far the UK deviates from the EU’s data protection legislation is yet to be seen. Whatever the possible deviations, the key question will be how far the EU is prepared to tolerate such divergence and still grant adequacy.
Criminal Investigations
The WA and the TCA have significant implications for cross-border cooperation in criminal matters in the UK and EU.
In relation to financial crime enforcement, the key provisions in the WA are contained in Title V on ‘Ongoing Police and Judicial Cooperation in Criminal Matters.’ In relation to investigations and proceedings commenced before the end of the implementation period, requests or judicial orders received by the appropriate authority in the UK or EU prior to the end of the implementation period remain enforceable. For requests or orders issued after that time (including European Investigation Orders (“EIOs”)) mutual legal assistance arrangements will need to be relied upon instead. These arrangements can be administratively burdensome and time-consuming. There are also exceptions that allow members states to refuse to comply with a request, including where a matter has already been adjudicated on in another state, that state may refuse to comply with a request.
Part 3 of the TA concerns ‘Law Enforcement and Judicial Cooperation in Criminal Matters,’ and covers a number of areas including exchanges of operational information, cooperation with Europol and Eurojust, surrender, mutual legal assistance, anti-money laundering and counter-terrorism financing, and freezing and confiscation orders. Most significantly, the UK ceased being a member of Europol and Eurojust, with its influence and involvement being significantly reduced as a result. The availability of the European Arrest Warrant (“EAW”) in the UK also came to an end, and was replaced by a new regime known as ‘surrender’. In essence, surrender is based on the mutual recognition of arrest warrants issued by another state. In contrast to an EAW, states can elect to refuse to comply with a request for surrender on the basis that the underlying offense is ‘political’, and may also elect to refuse to surrender their own nationals or attach conditions to the surrender of their own nationals.
The TCA also expressly provides for Joint Investigation Teams (“JITs”) between UK and EU member state investigating authorities, although it is largely silent on the detail. It is envisaged that changing political moods and relationships have the potential to affect the willingness and ability of authorities to cooperate with each other.
Conclusion
While some of the impacts of the UK’s departure from the EU are becoming increasingly clear, much of the detail remains to be defined. The politics of Brexit are likely to remain fraught, both around the Northern Ireland Protocol and other areas such as fisheries, data privacy, chemicals, and financial services. Companies will need to follow very closely both the fine-tuning of existing arrangements as well as the way potential new arrangements will evolve. Steptoe and Johnson can offer detailed and informed commentary and advice on all the areas covered in this article.
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*Co-authors: Renato Antonini, Eva Monard, Byron Maniatis, Charles Whiddington, Alexandra Melia, Guy Soussan, Angus Rodger, Simon Tilling, Ruxandra Cana, Leigh Mallon, Charles-Albert Helleputte, Diletta De Cicco, Zoe Osborne
[1] See https://ec.europa.eu/eurostat/documents/2995521/11563419/6-16122021-%20AP-EN.pdf/fe1315b6-a0c5-56b3-3de3-13468db7becd, and https://ec.europa.eu/eurostat/documents/2995521/10662401/6-16122020-BP-EN.pdf/083d8003-af99-e3c6-0294-6b5df4e68156.
[2] See https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/october2021#total-trade-three-monthly-and-annual-movements. After October 2018 disruptions caused by Brexit started to kick in, further exacerbated by the pandemic starting in 2020.
[3] In December, the British Chamber of Commerce reported that 45% of UK companies have had difficulties in trading under the new customs arrangements put in place by the TCA. See https://www.britishchambers.org.uk/news/2021/12/almost-half-of-firms-facing-difficulties-trading-with-eu-under-post-brexit-trade-agreement.
[4] See https://www.gov.uk/government/news/less-than-a-month-until-full-customs-controls-are-introduced.
[5] See https://bills.parliament.uk/bills/3015.
[6] See https://ec.europa.eu/commission/presscorner/detail/en/ip_21_198.
[7] See https://www.politico.eu/article/uk-to-eu-british-position-on-northern-ireland-remains-unchanged/.