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The unfinished business of Brexit: what still needs doing and how long will it take?

The unfinished business of Brexit: what still needs doing and how long will it take?

Overview

In 2019, UK voters were promised that there was a plan to "get Brexit done", so that we could all move on – and businesses could invest against a background of greater certainty. Whilst considerable progress has been made towards those goals, there remains a significant amount of unfinished business and uncertainty in key areas.

The TCA: not the end of the Brexit story

Short term unfinished business

The UK-EU Trade and Cooperation Agreement (TCA) signed at the end of December 2020 is wide-ranging in its coverage but there were a number of key requirements from the business community which it did not fully address.  As explained below, many of these relate to areas which the EU preferred to address outside the framework of a trade agreement, or where there simply wasn't time to get everything agreed before the end of the Brexit transition period on 31 December 2020. These could broadly be characterised as "short term unfinished business" (although depending on the ultimate outcome, they may well have significant longer-term consequences). They include the following, each of which is discussed in more detail below:

  • Financial services
  • Data protection
  • Jurisdiction and recognition of judgments
  • Goods trade
  • Continuity trade agreements with non-EU countries

There is also unfinished business relating to energy trading, where the TCA envisages the conclusion of a new agreement on "Multi-region loose volume coupling" by April 2022.  In addition, as pointed out in this Select Committee report, there are further areas of unfinished business relating to non-business issues such as extradition, asylum and migration, participation in certain EU programmes and the status of overseas territories such as Gibraltar. Meanwhile, although the TCA sets up a complex governance framework, this has yet to be activated.

LONGER TERM UNFINISHED BUSINESS

Beyond these areas, there is a much bigger question mark over the UK's plan for its post-Brexit future in the longer term.  In particular, the UK Government has signalled a desire to:

  • diverge from the EU in terms of its approach to regulation of business with a view to securing competitive advantage, but has so far given few indications of exactly where it proposes to do so; and
  • use its newfound control over trade policy to conclude free trade agreements with other countries beyond those covered by EU trade agreements and act as a champion for free trade, but risks generating expectations which it cannot realistically fulfil.

These issues are discussed in Section 7 below.

Financial services

Despite the significance of the sector to the UK economy, the TCA contains few provisions that specifically address financial services. At the same time as the TCA, the EU and the UK issued a non-binding joint declaration to agree a Memorandum of Understanding (MoU) on financial services, to establish a framework for regulatory cooperation.  Technical discussions on the text of the MoU have recently concluded and signing is awaited, but at the time of writing the full text had not been published.  The MoU will create the framework for voluntary regulatory cooperation in financial services between the UK and the EU – a new Joint UK-EU Financial Regulatory Forum will facilitate dialogue on financial services issues. Whilst this is a welcome development, in the short term, it is unlikely that the MoU will deliver substantive improvements upon the immediate post-Brexit position as regards financial services.

EQUIVALENCE

The bilateral TCA does not address the critical question of equivalence. This is a matter of respective unilateral decisions (taking place outside the framework of the TCA) and is not one of bilateral negotiation. It takes account of national interests and therefore does not involve an objective assessment of "equivalence". The UK has already announced a package of unilateral equivalence assessments over and above its temporary arrangements in some, but by no means all, areas. The European Commission's process of assessing the UK's regulatory framework is continuing. It remains to be seen how long it will take before there are meaningful mutual equivalency declarations and, if so, in which of the regulatory regimes there is such mutuality. While the Joint UK-EU Financial Regulatory Forum established under the Memorandum of Understanding referred to above will, among other things, include informal discussions on decisions to adopt, suspend or withdraw equivalence, this will not affect the fact that the process of determining whether or not to make an equivalence decision will remain a unilateral one.

Data protection

A key business request for the future relationship with the EU was that, so far as possible, transfers of personal data should not be disrupted. The TCA provided a short term fix in the form of a time-limited "data bridge":

THE TCA DATA BRIDGE

The data bridge lasts for at least 4 months, with a possible extension by a further 2 months (i.e. until the end of June 2021).  This is to allow more time for the European Commission to assess whether the UK's data protection framework will offer adequate protection. For the duration of the data bridge, transfers of personal data from the EU to the UK can continue without further action on the part of EU based controllers or their UK based counterparts. The data bridge is conditional on the UK not changing its data protection legislation without the EU's consent.

Is an adequacy decision on the way?

The European Commission has taken a major step towards an adequacy ruling by publishing its draft decision. In contrast to the position with financial services (see above), the signals in relation to data protection are somewhat more positive, at least as regards the short term outlook for securing an adequacy decision which is likely to mean that current EU to UK personal data flows could continue without the need for additional compliance measures. In the longer term, however, as explained in this briefing, there is a potentially significant cloud on the horizon in the form of a possible legal challenge to a formal adequacy decision reached by the EU. A formal adequacy decision would also be subject to review by the EU every four years. The upshot of this is that businesses will need to maintain contingency plans to cover a scenario where the adequacy decision is struck down by the Court of Justice of the European Union or not renewed by the EU (following a four-yearly review).

Jurisdiction and enforcement of judgments

The TCA does not contain any rules replacing the EU regime which, until the end of the Brexit transition period on 31 December 2020), governed:

  • jurisdiction in relation to disputes with a UK-EU dimension; and
  • the recognition and enforcement of UK court judgments in the EU (and EU court judgments in the UK).

The current position is set out in this briefing. Note also that the Withdrawal Agreement contains provisions governing how legal proceedings initiated on or before 31 December 2020 (i.e. before the end of the Brexit transition period) should be dealt with (broadly speaking, the relevant EU law should continue to apply, even if the dispute is not finally resolved until after 31 December 2020).

 

The UK's request to accede to the Lugano Convention

Many businesses would have preferred to retain the certainty provided for by the EU regime which applied until 31 December 2020.  With that in mind, the UK has submitted a request to accede to the Lugano Convention, which would restore most, but not all of those benefits.

WILL THE UK BE ABLE TO ACCEDE TO LUGANO?

The UK can only accede to the Lugano Convention if all of the current contracting parties to it (the EU, Norway, Iceland and Switzerland) consent to it doing so. Both Iceland and Switzerland have already given their consent, and Norway has indicated informal support for the UK's request to accede. However, it is not clear that consent from the EU will be forthcoming; the European Commission is thought to take the view that the Convention is only suitable for EU Member States and countries such as Norway, Iceland and Switzerland which have signed up to certain key aspects of the EU's Single Market (whereas the UK has not). The UK's request to accede may therefore ultimately be blocked.

Goods trade

In relation to goods trade, a key business request was for an implementation period to allow more time to prepare for significant amounts of additional red tape arising from the UK's exit from the EU Single Market and Customs Union. In the event, no bilateral agreement was forthcoming and UK exporters to the EU have had to deal with this since 1 January 2021, as the EU did not offer any grace period for businesses to adapt.  This may have been responsible for a significant proportion of January's drop in UK exports to the EU, which were down by over 40% compared with previous years (according to this analysis, the decrease is unlikely to be due solely to COVID-19, as exports to non-EU markets over the same period were only down by about 10%).

UK exports to the EU are down by over 40%

The UK, on the other hand, has allowed imports from the EU to be brought into the country without the usual requirement for upfront paperwork (such as customs declarations). Instead, customs declarations and payment of any tariffs or import VAT can be dealt with in arrears. The UK has also suspended physical checks on products such as food, which would ordinarily have to enter via a Border Control Post for such checks to be carried out. Originally, the UK envisaged transitioning to full controls on imports by 1 July 2021, but for most goods, this date has now been pushed back to 1 January 2022 - see this briefing)

In relation to goods, Brexit will not be complete until 1 January 2022 when the UK has introduced controls on imports from the EU which are broadly consistent with those imposed on imports from the rest of the world. Until it has happened, the UK is likely to have limited leverage vis-à-vis the EU in arguing for measures to reduce the burden of red tape for businesses from both sides (because as things stand, it is primarily UK exporters who are feeling the pain of this increased burden, not EU suppliers).

GOODS TRADE AND NORTHERN IRELAND

There is also unfinished business in relation to the arrangements for goods trade between Great Britain (i.e. mainland UK) and Northern Ireland. These are governed by the Northern Ireland Protocol of the Withdrawal Agreement. As widely reported, the UK Government has recently unilaterally extended the grace period for businesses to adapt to the new trading arrangements, triggering a dispute with the EU (which has not agreed to this and has initiated legal proceedings, alleging that the UK is in breach of the Withdrawal Agreement).

Continuity trade agreements

Another key business request was that the UK Government should seek to preserve the benefits of EU free trade agreements with third countries, to avoid disruption to supply chains. Whilst continuity trade agreements were in place (at least on a provisional basis) with the vast majority of third countries in time for 1 January 2021 – click here for more detail - there remains unfinished business in relation to a small number of territories, including Algeria and a number of the Balkan states. That said, despite its relative success in negotiating continuity trade agreements, the UK has not been able to preserve all the benefits that were potentially available prior to 1 January 2021, as illustrated by the textbox below.

DISRUPTION TO SUPPLY CHAINS: AN EXAMPLE

Many of the EU's trade agreements allow third country goods to enter the EU tariff free. Until the end of the Brexit transition period, those third country goods could then be transported to the UK and sold here without payment of further tariffs (or indeed any customs declarations etc). This was the case even where the third country goods had not undergone any processing at all in the EU. Under the TCA, however, such third country goods may be subject to tariffs on import into the UK unless the EU supplier can demonstrate that they meet relevant rules of origin. These generally require some level of processing in the EU – and in the case of some products (particularly in the food sector), there may be a requirement for key inputs to be sourced from the EU (so even where processing has occurred in the EU, this may not be enough to avoid tariffs on entry to the UK). It appears from some of the UK's continuity trade agreements that it was hoping to agree more generous rules of origin with the EU, which could have been less disruptive to supply chains but, given the current state of UK-EU relations, this seems unlikely to be achievable in the short to medium term.

Longer term issues

The UK Government has made much of the restoration of sovereignty on leaving the EU, arguing that (in the words of Lord Frost) it will enable the UK to "set our own rules for own benefit".  This implies that, in order to fully realise the benefits of that restored sovereignty, the framework of regulation in many key areas of the economy will need to be re-examined. The post-Brexit regulatory framework and wider trade policy (see below) are significant elements of longer term "unfinished business" of Brexit.

Regulatory reform: where's the plan?

So far, the Government has given very little indication of areas that it considers ripe for such re-examination. For example, the Government's recent Plan for Growth contains an Annex entitled "Opportunities for Growth from EU Exit" but under the heading "Making the most of regulatory flexibility" only one concrete proposal is mentioned, namely, plans to reform public procurement rules. Whilst there is certainly scope for improving those rules, as we point out in this briefing, the Government is likely to find it difficult to pursue very radical reform and the changes are more likely to be evolutionary and incremental. In our view, much the same is true of many other areas where the Government might want to explore the possibility of diverging from the EU's approach – see our assessment of the UK's freedom of manoeuvre across a range of key topics relevant to business in our Guide to the UK-EU Trade and Cooperation Agreement.

CURRENT REGULATORY REFORM INITIATIVES

  • In March 2020, the Government launched a consultation seeking suggestions for regulatory reform. At the time of writing, the relevant web page stated that feedback was still being analysed. However, previous exercises of this type have not proved notably successful in producing practical proposals for regulatory reform.
  • In February 2021, the Government announced the creation of a Taskforce on Innovation, Growth and Regulatory Reform (TIGRR) which is due to report back to the Prime Minister in April. It is being asked to consider "how the UK can take advantage of our newfound regulatory freedoms."

Is it worth it?

None of this is to suggest that regulatory reform is not worth pursuing; on the contrary, relatively modest, often incremental reforms to regulation can make a significant difference. For example, we have set out a blueprint for changes to the regulatory framework for the asset management industry, based not on a "bonfire of the regulations" but targeted rules that would be better adapted to the particular industry sector and avoid unnecessary costs and complexity. 

However, for the impact of such measures to be felt across the whole economy, the Government will need to pursue reform across a wide range of areas simultaneously. This is likely to take time and political attention to be given to numerous initiatives relating to complex, technical areas of regulation which are unlikely to grab headlines in their own right. Whilst there is an opportunity here, the record of previous governments in this area is not particularly encouraging.

TRADE POLICY

The UK Government has made much of its desire to use its newfound control over trade policy to secure free trade agreements with countries not covered by the EU's network of trade agreements. In contrast to its position on regulatory reform, the Government has a clear plan for this, involving joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and prioritising negotiations with the US, Australia and New Zealand. However, most commentators take the view that additional trade generated by these arrangements is unlikely to make up for trade lost as a result of Brexit, which has raised trade barriers with the UK's closest geographic markets. 

Ambitious trade agreements also typically require potentially painful political compromises. For example, a trade agreement with the US may only be achievable if the UK accepts controversial US food standards. Similarly, the UK may find that whilst it has prospered as a relatively open economy, other countries are more reluctant to open up their markets (whereas they might be prepared to do so in return for access to a larger market like the EU). There is therefore a risk that the UK is unable to realise the full potential benefits of controlling its own trade policy because it is not possible to deliver the ambitious, high quality free trade agreements that this would require. If so, free trade agreements could remain part of the unfinished business of Brexit for many years to come.

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