The uncertainty that Brexit has created is unprecedented and potentially requires significant planning on the part of financial service firms.
The political agreement at the end of March on a transition period, set to last until 31 December 2020, is currently only a political agreement, which means that it is not codified law and therefore open to further changes. The transition agreement has still not resolved some of the original sticking points, namely the issue of the border between the two Irelands. There was also the photo-op stunt of throwing fish into the Thames to protest against the fishing quota being in effect until the end of 2020.
In early April, the House of Commons Exiting the European Union Committee released their report on the future UK-EU relationship. Unfortunately, the report, unusually, did not have a consensus on what the future relationship should look like. The Committee examined seven existing relationship frameworks that the EU currently has in place for third countries such as Switzerland, Canada, Ukraine, Norway, and Turkey. The lack of consensus indicates that there are enough divisions within the Commons to prevent agreeing to any one of the possible options emerging for the new UK-EU relationship. Obviously, this is a problem. Due to the House of Commons having a vote on the final withdrawal agreement, the Government may be concerned that in providing the details of the costs of Brexit, the Commons could baulk at the costs of Brexit (assuming they’re high), and thereby jeopardise passage in the House of Commons.
The Committee also stated that Ministers need to set out what they want to achieve overall, as they currently have not provided sufficient detail to properly assess their positions. A knock-on effect from the lack of detail is that it could allow the EU to set the terms of the negotiations, based on the EU’s analysis of the implications of the UK’s red lines. The Committee’s expectation is that the future partnership and withdrawal agreement will be agreed in October 2018. The Secretary of State believes that the final agreement on the future relationship will be reached shortly after the UK formally exits the EU in March 2019, with the politically agreed transition period of 21 months used to implement it. However, the greater the depth and uniqueness of the future relationship, the greater the difficulty in implementing it within the transition period.
Perhaps ominously, at the end of the Committee’s report it lists fifteen criteria that will be used to judge the political declaration that they expect to be reached by October 2018. The criteria do contain some additions and omissions versus those of the Government, which will need to be dealt with at some point as Parliament gets a vote on the final deal. These demands add another set of cooks in the Brexit kitchen with more demands that add to the uncertainty of Brexit’s endgame.
As most financial services regulation in the UK comes from implementing EU law, there is also uncertainty surrounding whether UK firms will need to comply with EU regulation. As with nearly every Brexit related question, the answer is that it will depend. It will depend on whether there is a comprehensive trade deal that specifically includes financial services and spells out how they will be regulated, or whether it will be piecemeal in the form of equivalence, which would require the UK to essentially mirror all regulation decreed by the EU.
In determining the future UK-EU relationship, there are three key variables that come into consideration in affecting the final agreement. The first is the UK Government’s so-called ‘red lines’ that will affect various aspects of the future relationship. For example, ending free movement of EU citizens or ending the jurisdiction of the European Court of Justice will influence the scope of the future relationship as it will make it harder to agree to the deep relationship that Prime Minister May has spoken of. This stems from the EU repeatedly stating that the core principles of the EU; free movement of people, goods, services, and capital cannot be separated, which will make it difficult for the UK Government to secure a close arrangement of goods, services, and capital but not people.
The second variable is that the EU could be concerned about the precedent that would be set in granting the UK certain privileges. Doing so could result in Switzerland and Norway, most notably, but also the recent deals with Canada and South Korea, demanding the same privileges. This demand wouldn’t simply stem from their desire for fairness, but rather from World Trade Organization (WTO) principles. Under international trade law, Most Favoured Nation (MFN) status mandates WTO members to “immediately and unconditionally extend” to every other WTO member any trade or market access concession made to any country. MFNs don’t generally apply to an entire free trade agreement, but it does cover specific sectors that each side has agreed to. Therefore, any parts of the UK-EU future relationship that provide greater entitlements than previous free trade deals, and are covered by an MFN clause in trade agreements the EU has already signed, will require the EU to provide the same level of access to that third country.
Thirdly, the European Union faces concerns surrounding the precedent that Brexit could create for other EU members considering leaving the EU. The EU does not want to give the UK such a good deal that it encourages other countries that are considering leaving the EU to follow through. This will create pressures on the European Union in determining the depth and scale of the UK-EU future relationship that is negotiated during 2018.
There are a number of sayings that have been bandied about during Brexit, but perhaps the most salient is: Hope for the best, prepare for the worst. In our conversations and work with clients, we have recommended that they continue with their contingency planning (as all have begun preparations for Brexit) to be as prepared as possible for a hard-Brexit. Basically, we want to ensure that our clients have done all the necessary work, so that when whatever event or point in time triggers their response, they are ready to act.
It is unlikely that Brexit will be reversed for a variety of reasons, Article 50 itself does not contain wording or provisions for a reversal of and neither the Government nor the Official Opposition has spoken of reversing Brexit. Nor is the Government keen on having a referendum vote on the final UK-EU agreement governing future relations, despite opinion polls showing a majority of Brits wanting a vote on it.
In summary, Brexit consists of an array of uncertainties. On the surface, some uncertainties have been alleviated, such as agreeing to a transition period. Nevertheless, the technical aspects of Brexit that lurk below the surface, such as the impact of MNF clauses and the lack of specificity by UK Ministers, have not been resolved yet and will continue to raise uncertainty going forward and should jeopardise the future relationship.