The UK/EU Brexit deal
The conclusion of the Trade and Cooperation Agreement ("TCA") between the UK and EU on Christmas Eve was welcome news for us and our clients. The last-minute nature of the deal, however, means there was no time for businesses here in the UK or for their EU trading partners to prepare for its impact. Whilst there are some grace periods for implementation in the Agreement, notably on data protection and compliance with the new rules of origin requirements, the TCA makes few other concessions to need for time to adapt to the new framework.
We are already seeing some disruption, particularly in sectors reliant on goods trade with the EU (for more on this, please refer to this briefing).
And whilst the avoidance of tariffs and quotas under the TCA is a lifeline for many businesses, there will be non-tariff barriers for UK/EU trade which will in effect be little different to those which would have applied in a no-deal scenario.
A business-friendly guide to the TCA
We have now updated all of our guidance on Brexit-related topics to reflect our assessment of the impact of the TCA. Our full suite of guidance, now accessible via our Business-friendly Guide to the TCA on our Brexit Hub, covers the following topics:
- Implementation/grace periods
- Level playing field and disputes
- Financial services
- Investment and M&A
- Goods and non-financial services
- Data and tech sector issues
- Employment and immigration
- Tax and social security
- Intellectual property
- State aid and public procurement
- Consumer protection
- Environment and climate change
- Energy and transport
Importantly, our guide also identifies issues which are not covered by the TCA and where uncertainty remains.
Looking at the "big picture", our initial assessment of the deal is that it will allow the UK to diverge from EU regulation (in line with the Government's stated aim), although this approach will be easier to pursue as regards the technical detail and practical implementation of legislation, rather than the broad underlying principles. As such, it could enable the UK to seek competitive regulatory advantage by pursuing a series of "marginal gains" across key sectors – but a more radical deregulatory approach would risk upsetting the balance of the TCA (to which the EU could respond in a number of ways, including withdrawing benefits under the agreement). With one or two exceptions, the Government has yet to set out where it proposes to diverge from the EU and there is a lack of detail about its overall post-Brexit strategy. See our earlier briefing here, which also provides an overview of the TCA.
We are also continuing to reflect on how Brexit may reshape certain aspects of the UK economy and what new opportunities it may present for business. In 2020, for example, we looked at whether Brexit may make it more attractive to structure investments in certain EU member states through the UK in order to take advantage of Bilateral Investment Treaties. We also looked at the impact of Brexit and COVID-19 on UK ports, distribution and manufacturing, including the UK Government's proposal for a network of freeports.
Trade agreements with other territories
The UK has now also concluded "continuity" free trade agreements with a number of important trading partners elsewhere in the world, including Israel, Japan, Norway, Switzerland, Liechstenstein, Turkey, Singapore, South Korea, South Africa and others, some of which, notably the deal with Turkey, were unlocked by the signing of the agreement with the EU.
This is a significant achievement on the part of UK trade negotiators, given the relatively short timeframe and the large number of parallel negotiations. However, these agreements largely preserve the benefits of EU-negotiated trade agreements, which the UK would otherwise have lost as a result of Brexit. Negotiations continue with other major trading partners including the US, Australia and New Zealand, and the UK is also considering joining the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership).
Whilst some of these arrangements, if successfully concluded, could confer benefits on the UK (as compared with EU membership), it is likely to be some years before a positive impact on the UK economy would be felt. Meanwhile, as noted above, trade barriers with the EU are set to increase, which is likely to have a negative economic impact across a range of sectors (at least in the short term whilst businesses in the UK adapt to new post-Brexit trading conditions).
Impact on financial services
As expected, the TCA did little to address the provision of financial services from the UK to the EU or from the EU to the UK. UK firms can no longer use the EU single market passport to supply services into the EU. EU firms may not use that passport to supply services into the UK. Many EU firms dealing with UK institutional counterparties and investors are now reliant on the UK's overseas persons exclusion regime (which is under review).
Work continues on the "equivalence" assessment processes. The European Commission's MiFID/MIFIR equivalence assessment process, for example, could result in the introduction of something analogous to the passport if the European Commission assesses the UK's regulatory regime as "equivalent". In the joint declaration accompanying the TCA, the UK and the EU said that they will agree, by March 2021, a Memorandum of Understanding between them establishing a framework for regulatory cooperation on financial services. They also agreed that they will discuss "how to move forward" on both sides with equivalence determinations "without prejudice to the unilateral and autonomous decision-making process of either side". Recent pronouncements from the EU suggest that it will not be rushed as regards its autonomous process and so mutual equivalency assessments may be some way off.
Click here to see our New Year briefing on financial services regulation in 2021 which refers to this and other aspects of the post-Brexit landscape.
Impact on users of derivatives
For UK and EU users of derivatives, the end of the Brexit transition period has meant that UK (and some EU and EEA) users of derivatives find themselves in a new regulatory environment. The UK, and its domestic regulators, are now responsible for administering UK EMIR (the UK onshored version of the European Market Infrastructure Regulation ("EMIR")). While this is primarily of relevance to UK users of derivatives, EU and EEA users of derivatives with cross-border arrangements (such as European funds that trade with UK banks) will also need to understand the changes.
For example, there are some differences in the way in which derivatives need to be reported, certain deadlines for notifications to regulators, and some areas of regulatory divergence (which have, in certain circumstances, been mitigated by time-limited exemptions).
We have produced a useful checklist designed to act as a reference point for UK, and affected EU and EEA, users of derivatives to assist them in ensuring that their arrangements are in order.
Please contact Ben Chivers, Doug Bryden, Jonathan Rush or your usual contact at the firm for more information on the Brexit deal and its impact on trade with the UK, Tim Lewis to discuss financial services implications and Jonathan Gilmour to discuss the impact on users of derivatives.