Brexit: Transitional Arrangements

If the UK were to leave the EU without any form of agreement (including as to transitional arrangements) in place, it would be exposed to a number of potentially significant "cliff edge" risks. Examples would include:

• Financial services:  certain contracts between UK financial services businesses in the UK and their customers in the EU would become illegal to perform. Given the large sums involved, the consequences for financial stability could be extremely serious.
• Goods trade with the EU:  the sudden introduction of customs controls at Channel ports raises the prospect of serious delays and disruption, as it is far from clear that the UK has the necessary resources or infrastructure in place to cope with such a change (nor is it clear that ports or customs administrations on the continent would be adequately prepared).  See further Brexit: Customs Arrangements.

The UK government has stated that it recognises the concerns of business about such cliff edge risks and that Brexit may therefore require what it terms "an implementation phase."

Transitional arrangements providing for a continuation of current trading arrangements in some form may also be needed if, as many commentators predict, the two year period provided for by Article 50 proves insufficient for the UK to (a) renegotiate its future relationship with the EU; and/or (b) make the necessary changes at a practical level to be ready to implement that new relationship.

The Great Repeal Bill is a unilateral measure which will only provide certainty as regards legislation derived from EU law after Brexit.   It cannot deal with issues such as whether or not UK businesses can continue to provide goods or services to the EU on current terms for an interim period, since  this will require agreement from the EU.  Many transitional issues also relate primarily to practical rather than legal matters, such as the time and additional resources likely to be required to put in place an efficient system at Channel ports (both in the UK and the EU) to allow for the reintroduction of customs controls without causing significant delays to goods traffic.  Again, these issues cannot be fully addressed merely by the UK passing legislation on a unilateral basis.

The UK government has so far provided no detail on what the "implementation phase" of Brexit might involve.  In our view, given the serious cliff edge risks outlined in answer to Question 1 above, it may well be desirable for the UK to remain within the Single Market and within some form of customs union with the EU for a defined period, so as to allow both business and government more time to adapt.   However, this could prove politically controversial, as it would potentially contravene several of the UK government's red lines.  For example, the EU would be likely to insist that the UK continued to abide by rulings of the Court of Justice of the European Union as regards interpretation of Single Market rules.  It would also probably insist on the UK continuing to make budget contributions towards the administrative costs of the Single Market and continuing to allow free movement of EU citizens.

An interim arrangement modelled on the Agreement on the European Economic Area (EEA) could provide a compromise solution.  In particular, it contains provisions which could allow the UK to enact temporary "safeguard" measures so as to address concerns about immigration in the short term, pending the UK's full exit from the EU (when it will regain full control over immigration).  In addition, although EEA-EFTA member states make contributions to the EU budget, they do so at a lower level than full EU members.   

It is also possible that the UK could ask for disputes over its compliance with Single Market rules to be referred to the EFTA Court rather than the Court of Justice.  There are a number of arguments that the UK could make to persuade the public that the EFTA Court model would make a significant difference in practice and ought therefore to be acceptable for an interim period:  for example, its judgments are advisory not binding, the system for national court referrals is likely to result in fewer cases coming before the Court and it might be possible for a UK judge to sit on any panel dealing with cases involving the UK (so the UK would potentially have a greater sense of involvement in the make-up of the court, as compared with the Court of Justice where it only has 1 judge out of 28, with no guarantee that he will hear all UK-related cases).

However, EEA-EFTA States are outside the EU Customs Union.  This means that the UK would need to reach a special arrangement with the EU in order to remain within the EU Customs Union on an interim basis.  Alternatively, it could seek an interim customs union with the EU, similar to the arrangement which Turkey has (although Turkey's arrangement is not intended to be temporary).

An alternative would be to approach transitional arrangements on a sector-by-sector basis, with the UK only continuing to participate in Single Market arrangements where it felt that it was necessary for particular types of business.  Such an approach might be less prone to domestic political objections, but it is not without its own problems.  From a practical perspective, it is likely to take considerably longer to negotiate than a "blanket" continuation of current arrangements as outlined above.  From a legal perspective, it may be problematic because of WTO rules requiring trade agreements to cover "substantially all trade" in goods and/or services, as the case may be;  sectoral deals would be unlikely to meet this criterion (although if the transitional arrangements are of relatively short duration, other WTO members may be prepared to tolerate this as a technical breach of the WTO rules, but not one which they would seek to challenge).