Brexit Update: Assessing the Key ImplicationsThursday, 30 June 2016
Voters in the United Kingdom have decided by a narrow majority that the United Kingdom should leave the European Union. These are uncharted waters. The mechanics for withdrawal are contained in Article 50 of the Treaty on European Union. Article 50 provides that the first step on the path to full withdrawal is for a member state to serve notice on the European Council that it wishes to withdraw. Although we have already seen a desire at the European Commission for the UK to serve that notice quickly, this is a decision for the UK Parliament. The UK Prime Minister David Cameron, who announced his resignation on the 24th of June in the wake of the vote, has indicated that he will leave the task of triggering Article 50 to his successor. That successor may not be in place until after the Conservative Party conference in October. Even after formal notification is served, Article 50 envisages a two year period for negotiations on withdrawal. Given that EU law has applied in the UK for 43 years through a mixture of European Regulations and EU Directives (which have been transposed into UK law by statutory instrument) and substantial case law, unpicking this regime and deciding what to keep and what to abandon will be a mammoth task. Uncertainty is likely to reign until a withdrawal arrangement is negotiated and agreed.
We are about to enter into what may be the largest voluntary political decoupling in history. The anticipated exit from Europe of its second largest economy provides market commentators with only one fundamental certainty: and that is of unprecedented uncertainty for some period of time.
What remains certain however is the Irish commitment to the European project, to European law, and to full participation in the world’s largest internal market.
Areas for businesses to consider when assessing the implications of Brexit are as follows:
- Most commercial contracts are a function of specific drafting so the implications of Brexit may not be so significant.
- Businesses should review their contracts to ensure that triggers of adverse market change or market disruption have not occurred as a result of Brexit. Clauses related to changes to market conditions may also be relevant.
- From a company incorporation standpoint, freedom of establishment within Europe may be compromised and may impede a pan-European corporate structure in certain situations.
Banking and Financial Services
- Brexit will alter fundamentally the UK’s engagement in the EU Single Market for Financial Services and will affect all sectors including Banking, Asset Management and Insurance. The scale of the impact will depend on the final outcome of the UK’s post-exit relationship with the EU: if it becomes a member of the EEA (the Norwegian model), if it becomes a member of EFTA (the Swiss model), or reaches some other deal.
- Investment services under MiFID will be directly affected. If the UK remains within the EEA, UK investment firms will continue to be able to provide investment services throughout the EU, although the capital implications are likely to be significant. The UK will lose the benefits of the MiFID passport regime altogether if it opts to join EFTA.
- The impact on UK investment funds will depend on the applicable EU directive. A UK UCITS fund will lose the EU passport in all scenarios. A UK hedge fund will lose the EU passport under AIFMD, but may continue to market within the EU on a private placement basis.
- UK banks that rely on EU passporting rights to provide services within the EU will have to establish a subsidiary within the EU from which to provide services on a cross-border basis or will have to establish a branch in the relevant EU jurisdiction.
- UK insurance companies that seek to provide insurance services within the EU will have to establish a branch in the relevant EU jurisdiction and that branch will not be able to provide services on a cross-border basis into other EU jurisdictions. Similarly to banks, UK insurance companies will only be able to access the EU single market by setting up a subsidiary insurance company within the EU.
- The UK will lose its seat at the table of the various regulatory authorities that set the rules for the EU Single Market in Financial Services such as the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.
- Businesses which are involved in Banking and Financial Services in the United Kingdom will need to develop contingency plans for continuing access to the EU Single Market in Financial Services depending on whether the UK opts for a settlement with the EU under the Norwegian model, the Swiss model, or some other model.
- Companies with pan-European protections may be impacted by Brexit through possible changes in the UK to Community design rights and European Trademarks and, to a more limited degree, patents. It is possible, and indeed predicted by some, that the UK will be removed from protection by the EUTM system (although a conversion system is likely to be offered). Many brand holders and other right-holders around the world who protect their rights in Europe may need a national registration in the United Kingdom.
- Brexit likely postpones or derails the unified patent court and there is uncertainty as to whether that system can and will apply to UK based patent infringement cases. The UK may no longer become part of the new Unitary Patent and Unified Patent court regime.
- EU Rules of construction may not be retained in the United Kingdom in relation to the treatment of trade marks, and design rights.
- Some right-holders may need to consider whether their rights require an EU nexus for registration. This is particularly relevant for database right holders.
- Exhaustion of IP rights: IP rights are exhausted once goods are put on the market in the EEA with the right owner’s consent. There may be issues to consider in relation to this.
- If a business needs EU protections, consider Ireland as the jurisdiction best placed to deal with the assets, having regard to ease of access, avoiding the cost of translation, language barriers, and the procedural similarities to the English system.
- Businesses should also consider the contractual and legal implications of where to store data given the risk of Brexit-related data protection regulatory divergence that may arise.
Employment law & Immigration
It is as yet unclear what impact Brexit will have on the free movement of labour.
There is uncertainty as to whether there will be divergence in data protection standards post-Brexit between the United Kingdom and the rest of Europe. These factors will need to be considered in terms of warehousing data and compliance between jurisdictions.
There may be divergence in regulations relating to trading standards, consumer protection, energy and environmental matters in the foreseeable future.
Enforcement and Recognition: choice of law and jurisdiction and insolvency
- There is a question as to whether the Brussels rules will continue to apply in the UK raising uncertainty as to the application of jurisdiction and reciprocal enforcement rules in litigation.
- There is no certainty that the EU Insolvency Regulation will continue to apply to the United Kingdom as the Brexit process evolves.
At this time, it is difficult for many businesses to fully assess the implications of Brexit or to make plans for the future. We will continue to update you on developments as they arise over the coming weeks and to keep you advised of any significant legal changes.
If you have any queries or concerns about the implications of Brexit on your organisation and/or your business interests, please contact any of our dedicated Brexit Watch team or your usual ByrneWallace contact.
ByrneWallace Brexit Watch Team:
- Gerry Beausang, Partner, Corporate
- Feargal Brennan, Partner, Head of Corporate
- Joe Gavin, Partner, Head of Financial Services
- Mark Kavanagh, Partner, Head of Banking & Finance
- Michael Kennedy, Partner, Head of Employment Law
- Jon Legorburu, Partner, Head of Litigation & Dispute Resolution
- Anthony Smyth, Head of Tax
- Michael Walsh, Partner, Head of Property