Antitrust | Banking | Commercial Real Estate | Corporate | Data protection | Employment law | Environment and Climate Change | Financial regulation | Funds and asset management | Intellectual property | Litigation | Pensions | Tax
Antitrust
Currently EU competition law: (i) prohibits anticompetitive agreements and concerted practices (Article 101 TFEU) and abuse of a dominant position (Article 102 TFEU); (ii) governs mergers in the EU that meet clear thresholds and conditions (through the EU Merger Regulation); (iii) prohibits certain State aid subsidies; and (iv) imposes public procurement obligations on public bodies to carry out fair, transparent and non-discriminatory tenders.
During the transition period, EU competition law continues to apply in the same way as prior to Brexit.
Following the expiry of the transitional period, and in the absence of any agreement between the EU and UK to align their respective competition laws:
- The UK's Competition Act 1998 and Enterprise Act 2002 largely mirror EU legislation so there would not necessarily be an immediate divergence in competition policy. However, UK courts will cease to be bound by judgments of the EU Courts, so divergences in the interpretation of the prohibitions on anticompetitive agreements and abuse of dominance could arise over time.
- The CMA will have to assess mergers and cases involving anticompetitive agreements and abuse of dominance in relation to the UK that are currently dealt with by the European Commission. This will mean an increase in merger and antitrust investigations being carried out by the CMA and the European Commission in parallel.
- There is the possibility that UK enforcement practices in relation to mergers may diverge over time from those of the EU. This could add an extra element of risk to mergers of businesses that operate in the UK and the EU given the requirement for approval in an extra jurisdiction.
- Any activities including mergers with an impact outside the UK will continue to be subject to EU law.
- EU State aid prohibitions will cease to apply. Whether the UK agrees to implement a domestic State aid regime that follows the principles of the EU regime will be a key issue in the upcoming negotiations regarding the future trading UK/EU trading relationship. Before winning the general election, the Conservative Party stated that it would introduce a domestic State aid regime based on the principles of WTO law (in particular the Agreement on Subsidies and Countervailing Measures), not EU law. It is not yet clear what form such a regime would take, if implemented, or whether it would maintain the rights of businesses to challenge subsidies granted to their rivals before the UK courts.
- EU public procurement obligations will also cease to apply. Here, the Conservative Party has stated that it will replace the EU's public procurement regulations with new laws, based on the WTO's Agreement on Government Procurement, which are "(i) simpler and cheaper; and (ii) geared towards supporting local business and promoting British business".
- The UK has in the past been influential in the framing of EU competition policy. For example the 2014 EU Damages Directive introduced minimum standards for antitrust damages claims in the EU, e.g. for disclosure, protection of leniency submissions, limitation periods, which had long been features of damages actions in the UK. The departure of the UK may see the EU become more protectionist, with the risk of a renewed push towards establishing national champions and looser State aid rules.
Banking
As there is still uncertainty as to the terms of the future relationship between the UK and the EU it remains unclear how banking transactions and loan documentation may be affected once the transition period comes to an end on 31 December 2020.
See our briefing Brexit – implications for loan documentation. However, the main points to note are:
- English law remains an appropriate choice of law for loan documentation after the transition period. EU member states will continue to apply Rome I and Rome II Regulations which require the law chosen by the parties to be applied whether or not it is the law of an EU member state. Rome I and Rome II will also continue to apply in the UK in the form of retained EU law. In terms of jurisdiction clauses we think that, on balance, the best way to proceed would be for parties to continue to follow their usual practice (i.e. opt for the non-exclusive or exclusive jurisdiction of the English courts). However, parties may want to consider this in light of the circumstances of their transaction if enforcement of English judgments in EU states is likely to be important, as, following the end of the transition period, the Brussels I Regulation (which ensures recognition of judgments across EU member states) may no longer apply. This means that a judgment of the English courts after the end of the transition period will need to be enforced under the law of each member state applicable to foreign judgments not covered by a treaty (the law currently applicable to New York judgments for example). It is also possible that arrangements for the automatic recognition of judgments may be achieved through the UK becoming party to another convention, such as the Lugano Convention or the Hague Convention, or otherwise agreed. See our briefing Brexit, English law and the English courts: where are we now? for more information.
- References to EU member state or EEA member state in documentation should be checked on a transaction by transaction basis and amended as necessary to "EU member state and the UK" and "EEA member state and the UK" to reflect the fact that the UK is no longer a member state of the EU/EEA.
- References to EU legislation in documentation should be checked on a transaction by transaction basis as should the statutory/legislative interpretation provisions. These are unlikely to need to be changed until the end of the transition period when there is more certainty.
- Article 55 of the Bank Resolution and Recovery Directive may need to be addressed in relevant English law contracts through the inclusion of a bail-in clause. Indeed, it is now common for facility agreements to include an Article 55 bail-in clause. It is not a legal requirement during the transition period to include the clause in relevant contracts however as the UK has now left the EU, its inclusion avoids the need for amendments to documentation after the transition period.
- It is too early to say whether some clauses such as illegality or increased costs may eventually be triggered. However, potential loss of 'passporting' may be an issue for some lenders (which could potentially lead to triggering of illegality provisions). The main issue would be where licences are required for the making of (or maintaining participation in) loans in jurisdictions. For flexibility, and to the extent that they do not already, lenders may want to consider inserting wording into documents which allows them to designate affiliates who meet the relevant regulatory requirements to make loans (without transferring commitment) to preserve a degree of flexibility.
- "Material Adverse Effect" provisions are unlikely to have been triggered by the vote result but it is still not clear what will happen at the end of the transition period. Whether future events will trigger a MAE will depend on the terms of documentation and the circumstances or events concerned and will need to be addressed on a case by case basis. There has been case law (the Grupo Hotelero case of 2013) which suggests that an MAE cannot be called if the situation giving rise to the MAE was already known to the parties when entering into the agreement – it could be argued that the possibility of Brexit has been known for a number of years. However, the counter argument would be that the details of the UK/EU relationship in the post transition period along with its actual effects may not have been foreseeable. When negotiating documents with MAE provisions, close attention should be paid to the MAE wording.
Commercial Real Estate
- The principles of English real estate law are derived from UK statute and common law, so EU law tends not to shape English real estate rights significantly. Therefore, during the negotiations for the Withdrawal Agreement, English real estate law was not a discussion topic and, moreover, none of the key points of the Government's agenda for the scope of UK negotiations with the EU appear likely to affect English real estate rights directly. Consequently, we would expect English real estate law to be only indirectly affected by Brexit.
- There are some specialist areas within the umbrella of a real estate transaction that derive some of their legislation from EU law, such as environmental law and health and safety law. There are also specialist (typically regulated) sectors with a significant real estate element, such as telecoms and energy distribution, which are also impacted by wider EU regulatory initiatives. Our views are:
- Following Brexit, we expect that such EU legislation which is already implemented in the UK (such as the commitment to carbon reduction) will probably be retained, at least at first, as UK public policy in this regard is unlikely to change significantly in the short term.
- While there may be divergence in the regulatory purposes of the EU and the UK after Brexit, the underlying impact on real estate law is unlikely to change significantly; energy distribution and telecoms operators typically already have considerable rights and powers over private and public property and these are unlikely to be removed (though they may be extended).
- Employment issues can play an important role within property management contracts and construction transactions. Additionally competition laws can sometimes impact on cross-border or particularly high value real estate deals. The effect of Brexit on these particular areas of law over time could be significant, with associated effects on the commercial real estate sphere.
- With the success of the Conservative Party in the UK General Election of December 2019, the possibility has significantly diminished that there will be widespread and major changes to public policy in respect of real estate (in particular, the housing sector). However, the possibility of an increase in powers for local authorities to acquire land unilaterally, known as "compulsory purchase", to enable and encourage housing development should not be completely ruled out. The conditionality around such compulsory purchase may be simplified after Brexit, to the extent that EU restrictions on exercise of state power no longer apply and there is any repeal of the Human Rights Act 1998.
- The choice of offshore structures to hold UK property is an area of possible change, as both UK and global attitudes towards such tax efficient structures evolve.
- We consider that the legal fundamentals of UK asset purchases and sales, UK development projects and share purchase transactions governed by English law are unlikely to be significantly affected by Brexit.
Corporate
Listed companies which experience large falls in their share price as a result of market volatility e.g. caused by Brexit or the final trade deal, may request the FCA to suspend trading of their shares. The FCA may do so if the smooth operation of the market is, or may be, temporarily jeopardised or suspension is necessary to protect investors.
Companies with publicly traded financial instruments should also consider whether any of the repercussions of Brexit (including the possible outcome of the trade talks) on their business amount to inside information which, once identified, should be promptly announced to the markets. Their directors and other persons discharging managerial responsibilities must not deal in their company's securities if they are in possession of inside information and they should exercise caution around dealings if the company's share price is falling significantly.
To the extent that companies have not already done so, they should consider how to address Brexit and the end of the Brexit transition period (when trading arrangements may look very different to what they are now) in their standard terms of business and when documenting future transactions, for example whether to include provisions relating to change of law/illegality, termination rights for market disruption or material adverse change (that would be triggered if there is serious disruption to the trading arrangements between the UK and the EU), how terms referencing the EU, EEA and EU law are defined and how governing law and jurisdiction clauses work.
The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies. Some parts of the Companies Act 2006 derive from EU directives, including some of the provisions relating to takeovers, accounts, statutory audit, dividends, capital maintenance, disclosure of information and various shareholder rights. Such provisions will not fall away at the end of the transition period (because they have already been implemented into domestic legislation) and are unlikely to be significantly impacted by Brexit.
There are some EU-wide corporate law concepts that we expect will fall away at the end of the Brexit transition period:
- There are three forms of EU legal entities (a European public limited company/Societas Europaea, a European Co-operative Society and a European Economic Interest Grouping) – these will not be available for registration in the UK following the end of the Brexit transition period. It is expected that these forms of companies will be converted to UK specific legal entities.
- The EU cross-border merger regime that allows mergers between companies in different EU member states will no longer to be available in the UK following the end of the Brexit transition period.
The UK equity capital markets are heavily regulated by EU legislation, in particular:
- The market abuse regime is derived from an EU regulation. The European Union (Withdrawal) Act 2018 will ensure this regime continues in the UK, although consequential amendments will be required.
- During the Brexit transitional period, the UK remains subject to the single disclosure and transparency regime for companies listed on a regulated market anywhere in the EEA (which term should be read as including the UK during the transition period). Prior to the end of the transition period, companies with a dual listing in the UK and in an EEA member state do not have to comply with separate obligations in each state. Following the end of the transition period, unless a trade deal is agreed which provides for separate arrangements in this regard, companies with a listing in both the UK and an EU member state are likely to be subject to two regimes, increasing the regulatory burden.
- In addition, during the Brexit transition period, a prospectus to offer or list shares or bonds which is approved by the FCA in the UK can be used in EEA member states without any further approval and minimal additional administrative requirements. It is not expected that this passporting right will continue after the end of the transition period – if it is not available, public offers in EU member states may become more complex for UK issuers.
- Takeovers in the UK are governed by the Companies Act 2006 (which implemented the Takeovers Directive and the Takeover Code which we expect will be largely unaffected by Brexit save in relation to the shared jurisdiction regime which will no longer apply following the end of the Brexit transition period. Brexit related changes will be made to both Part 28 of the Companies Act 2006 and to the Takeover Code.
Brexit insights for multinationals are available in the Clifford Change briefings section of this Topic Guide and on the Clifford Chance Brexit Hub.
Data protection
The UK data protection regime comprises the EU General Data Protection Regulation (GDPR), which took direct effect across the EU on 25 May 2018, and UK regulations implementing an EU Directive on privacy and electronic communications. The European Commission has also proposed to replace the EU ePrivacy Directive with a new (and more onerous) EU ePrivacy Regulation, originally proposed to take effect alongside the GDPR but now unlikely to take effect until after Brexit. The following key points should be considered:
- The GDPR restricts transfers of personal data to countries outside the EEA which have not been determined by the European Commission to ensure an "adequate" level of protection for personal data.
- The GDPR will cease to be effective in the UK on Brexit, but is likely to be replaced by a new UK law having essentially the same effect. The UK will in theory have the freedom to introduce a new, more "light-touch", regime, but in practice is unlikely to do so, at least in the short term. It may also agree not to for a transitional period through a transitional agreement with the EU.
- There is still the risk, however, that the UK will not benefit from an adequacy determination from the Commission, either in the short to medium term (because the Commission has to go through the process of considering the adequacy of the UK regime, and cannot begin that process while the UK is still an EU member state) or in the longer term (because the Commission decides that other aspects of the UK regime – for example in relation to government access to communications data – undermine the adequacy of data protection law). In those circumstances, the UK may similarly not treat the EU regime as adequate.
- Although the GDPR restrictions (and any UK equivalents) will not amount to an absolute prohibition on sharing personal data between the EU and the UK, they will impose very substantial administrative burdens on cross-border businesses. It is therefore important that, if possible, the UK is treated as adequate by the EU (and vice versa). In the short term, this is most likely to be achieved through a transitional agreement between the EU and the UK. This may give sufficient time for adequacy determinations to be reached before the transitional agreement expires.
- The UK will also need to replicate under its own law the adequacy determinations made by the European Commission in respect of other countries, so that transfers of personal data to "adequate" regimes such as Canada, Switzerland and the U.S. "Privacy Shield" arrangement can continue without interruption.
- The UK is also likely to lose the advantage of the "one-stop shop" regulatory concept in the GDPR. Businesses operating cross-border will find themselves regulated by both UK and EU member state regulators where they might previously have been regulated, at least for some purposes, only in a single lead jurisdiction.
- The UK will lose the limited influence that it has over the future development of EU data protection law, which will continue to apply to UK businesses with EU operations. The UK has been an advocate within the EU for a relatively business-friendly data protection regime. It is questionable how influential the UK's advocacy has been, but Brexit may lead to a less business-friendly regime going forward within the EU. The Information Commissioner's office has been very active in the development of pan-European guidance on interpretation of the GDPR and this role is likely to be reduced or eliminated on and from Brexit. The UK Government is keen to retain some influence over EU data-related policy-making as part of the longer-term settlement.
Employment law
A significant portion of UK employment law is derived from EU law including the legislation that governs maternity and paternity leave, agency workers' rights, paid holiday and the protection of employment upon the transfer of a business. Some of this domestic legislation has however been 'gold plated' beyond the basic requirements of EU law.
EU derived domestic legislation is perceived by some to have led to increased compliance and administrative costs for businesses. By means of the EU (Withdrawal) Act 2018 EU derived employment legislation will be converted into domestic legislation from Brexit, maintaining the protections and standards that benefit workers. In addition existing ECJ judgments will be given effect in our domestic law at the point of Brexit and will have the same status as Supreme Court decisions. However, the new EU (Withdrawal Agreement) Bill that is currently proceeding through Parliament is seeking to give government the power to specify in regulations that lower courts and tribunals will not be bound by ECJ cases or domestic cases on EU-derived employment rights. In addition, the Government has announced its intention to introduce a new Employment Bill that will potentially address the safeguarding of /non-derogation from EU derived employment rights.
Practical Implications
- It remains to be seen whether the domestic courts will be given the power to disregard existing ECJ case law, particularly in relation to Working Time Rights in relation to the calculation of holiday pay and the carry forward of holiday.
- It remains to be seen whether the domestic courts will consider themselves bound by post-Brexit decisions of the ECJ that develop employment law principles beyond the principles established in ECJ case law at the point of Brexit.
- Companies that operate European Works Councils will have to revisit their arrangements whether the Company is UK head quartered or not.
- Companies that transfer workforce data from EU locations to the UK should consider the post Brexit lawful basis for doing so under GDPR (for example a standard contractual clause) and make the appropriate arrangements.
- Companies may wish to audit their current staffing arrangements both within the UK and in EU Member States to assess which EU nationals may potentially be required to apply for a work permit if the current immigration treatment of EU nationals is not maintained. Equally UK nationals working in Member States may have to revisit their immigration status.
- Companies may also wish to provide support to their EU workforce to ensure as far as possible that they are able to continue working in the UK, and are able to clearly demonstrate having the right to work in the UK, post-Brexit. Doing so will also help to identify any EU workers who may not be able to apply/qualify for the new 'settled status', and therefore may need explore alternative visa options to ensure they can keep working in the UK post-Brexit.
- Relocation, redundancies and off-shoring may arise, potentially triggering redundancy, Works Council and TUPE consultation obligations.
Clifford Chance briefing: (September 2019) Brexit Immigration Briefing
Environment and Climate Change
A great deal of current UK environmental law derives from EU legislation put in place over several decades. The legal impact of Brexit would depend on the how the split is achieved legally, and the model put in its place governing the UK's ongoing relationship with the EU.
- EEA model: The UK would have to retain or re-enact most EU environmental legislation to ensure full access to the EU market. This would include areas such as integrated environmental permitting, water and air quality, waste management and chemicals legislation.
- Bilateral Agreements model: In general, the UK would still have to comply with all rules relating to standards of safety and environmental sustainability of products being put on the EU market. The UK might be able to relax some laws relating to operational environmental protection controls within UK borders. However, environmental and safety standards might not be significantly lowered more generally for a number of reasons:
- The presence of international agreements which the UK will still have to comply with (e.g. the Kyoto protocol on carbon emission reductions, OSPAR Convention on marine pollution, the Bern Convention).
- The UK has been a driver for stronger EU policy in some areas (e.g. integrated permitting, climate change policy and emissions reporting) where the EU has largely adopted UK practices; or the UK has pursued its own environmental framework, e.g. in relation to contaminated land remediation.
- While attempts to roll back environmental protections might find favour with some business sectors, these would be subject to close scrutiny by NGOs and be likely to be resisted by NGOS and the public alike.
- If the UK decides to weaken any particular environmental standards or regulatory frameworks, it seems likely that any change would be done through a process of gradual reform rather than an overnight cull of environmental laws. Irrespective of whether standards would be significantly lowered, it is possible that environmental policy driven purely by domestic politics would be more changeable than the longstanding and gradually evolving policy framework that currently applies across the EU.
- In Autumn 2017, the Environment Secretary, Michael Gove, made a number of statements seeking to allay concerns about weakening of environmental standards following Brexit. To this end he made a number of proposals aimed at ensuring that not only would environmental standards in the UK be maintained by Brexit, but enhanced. The Government's White Paper (dated July 2018) on a future agreement with the EU proposes a non-regression clause in relation to environmental matters, among other areas to ensure high environmental standards are maintained. In addition, the Government proposes the establishment of an independent statutory environmental body aimed at ensuring that the Government properly enforces environmental law (in light of the removal of the supervisory role performed by the European Commission).
- In relation to climate change action, even if EU legislation and targets for emissions reductions and renewable energy will no longer apply, the UK will still be bound by its own strong domestic climate legislation. The UK Government has reconfirmed its climate agenda since the vote.
Clifford Chance has also published briefings which explores some of the key issues in relation to environment and climate change law: (29 July 2016) Brexit - What next for Environmental & Climate Change Law? and (7 July 2016) Brexit and the Energy Sector: UK Climate Change and Renewables Policy and Targets
Financial regulation
- During the transition period, EU law relevant to financial services will continue to apply in both the UK and the EU as if the UK were still an EU Member State. For example, passporting and other market access rights between the UK and EU continue to apply during the transition period. This also includes new EU legislation that starts to apply in both the EU and the UK during the transition period.
- However, as of exit day, the UK no longer participates in the EU institutional arrangements such as the European Commission, the European Parliament, the Council of the EU, the European Supervisory Authorities etc. This means that the UK no longer has a formal role in shaping EU financial services law, regulation and supervisory approaches.
- The UK and EU are due to begin the next round of negotiations relating to their future relationship in March 2020. Failure to reach agreement by 31 December 2020 would lead to another "cliff edge" no deal scenario. Even if a free trade agreement is concluded by 31 December 2020, it currently seems unlikely that it would include a special agreement on market access for financial services, particularly given the UK's indications that it wants to be free to diverge from EU rules.
- Instead, the end of the transition period will likely involve a step change in market access between the UK and EU for financial services, including loss of passporting rights. In this scenario, the UK's post-Brexit status as a "third country" would be akin to that of US or Singapore now. UK financial services firms looking to provide services in the EU would have to navigate a patchwork of national licensing regimes, face restrictions on cross border business and many impediments compared with the market access that an EU or EEA firm would have.
- Some areas of EU financial regulation do have third country "equivalence" regimes that permit third country firms from jurisdictions with rules "equivalent" to EU rules to operate more freely in the EU. However, these equivalence regimes are far from being a panacea. They only apply in discrete product /service areas, e.g. recognition of US CCPs under EMIR and a limited EU passport under MiFIR to equivalent third country firms for wholesale business in the EU. Also, the Commission is not generally obliged to make any equivalence determinations and equivalence can be lost if a third country's laws and regulations fail to keep pace with EU regulatory developments.
- In the Political Declaration accompanying the Withdrawal Agreement, the UK and EU have agreed that they will endeavour to conclude all relevant equivalence assessments by the end of June 2020. However, this does not guarantee that either the UK or the EU will make positive equivalence determinations before the end of 2020, even if technical critera are met. In some cases, equivalence decisions depend on actions by national competent authorities and decisions about whether to make equivalence determinations may be influenced by broader FTA negotiations.
- The loss of passporting rights also creates uncertainties for the status and continuity of existing cross-border contracts for financial services, particularly those which contemplate the ongoing provision of financial services or carrying on of regulated activities during the life of the contract. The UK is however introducing temporary permissions and recognition regimes which would allow EU firms and financial market infrastructures to continue to provide services in the UK for a time-limited period following the end of the transition period.
- Much existing UK financial regulation (statutes, statutory instruments, rules and guidance) implements EU directives and is full of concepts and definitions taken from EU legislation. Also, some important components of UK financial regulation (e.g. the market abuse regime under MAR and rules on derivatives under EMIR) are contained in directly applicable EU regulations. The Withdrawal Act "onshores" this vast body of EU law or EU-related law at the end of the transition period. The Withdrawal Act provides that existing EU-related domestic law continues to form part of the UK domestic law after the end of the transition period even though the basis for its adoption has ceased to apply. In addition, it provides that directly applicable EU laws automatically become part of the UK domestic law at the end of the transition period.
- However, this on its own would not give the UK a workable body of domestic law as many EU-related provisions would not work effectively when the UK is no longer treated as a Member State. For example, references to EU institutions or processes will no longer be appropriate when the UK is no longer treated as a Member State. The Withdrawal Act gives the Government powers to remedy these and other "deficiencies" to reflect the post-Brexit status of the UK as a third country vis-à-vis the EU. The UK Government has made around 600 statutory instruments remedying these "deficiencies" to date and is expected to publish additional statutory instruments during 2020.
- In financial services the UK's current relationships with many non-EU countries in technical areas are dealt with at an EU level, e.g. recognition of US CCPs under EMIR and EU-US data protection arrangements. Following Brexit, the UK will also need to rebuild these types of relationships bilaterally, e.g. by regulators entering into MoUs and other arrangements for supervisory co-operation. In some cases, non-EU countries have indicated that the status quo will continue at least for a limited period post-Brexit (e.g. the CFTC in relation to EMIR-related no-action relief).
Funds and asset management
The UK funds and asset management industry currently benefits from the ability to passport both certain management and advisory activities and fund marketing activity across the EU. These passporting rights have been used extensively to further the single market and have shaped the way many asset managers conduct their business. There are a number of key areas of potential impact for funds and asset managers:
- Loss of passporting rights – based on current rules, a Brexit would give rise to loss of managing and marketing passporting rights into other EU member states. The potential impact of this on retail fund managers is considerably greater than the impact on private fund managers operating funds marketed to sophisticated and institutional investors only.
- Currently, Brexit will mean that UK firms no longer qualify for a passport under existing EU legislation relevant to fund management and marketing activity (primarily the Markets in Financial Instruments Directives (MiFID), Undertakings for Collective Investment in Transferable Securities Directives (UCITS) and the Alternative Investment Fund Managers' Directive (AIFMD)).
- Managers who do not rely on passporting rights are unlikely to be considerably affected.
- UCITS funds are likely to be more heavily impacted that the private equity fund management industry because:
- UCITS funds must be domiciled in an EU jurisdiction and managed by an EU management company. Post-Brexit, funds established as UCITS in the UK would no longer fall within the scope of the UCITS Directive and will no longer be able to rely on the passporting provisions that allow UCITS established in one member state to be managed and marketed in another.
- The UCITS regime is designed to facilitate marketing of interests in those funds to retail investors. However, UK domiciled UCITS would, post-Brexit, be considered a "non-UCITS retail scheme", which would in turn fall within the definition of "alternative investment fund (AIF)" under AIFMD. As the UCITS marketing passport would no longer be available, a manager wishing to market interests in such a vehicle into other EU member states would need to do so under AIFMD, which requires compliance with individual national private placement regimes (NPPRs). This would likely cause difficulties for existing UCITS funds re-categorised in this way because most NPPRs prevent or heavily restrict marketing to retail investors.
- The impact on private/alternative fund managers managing closed-ended AIFs will be less because there is no requirement that AIFs be domiciled in the EU, other than where an EU AIFM wishes to rely on the AIFMD marketing passport. Post-Brexit, existing EU AIFMs managing UK domiciled AIFs will be able to continue to manage those vehicles and where marketing into other EU member states will need to comply with the NPPRs as is currently the case for managers (EU and non-EU) marketing non-EU AIFs into the EU.
- UK managers of UCITS and AIFs would need to consider whether they become subject to any local licensing requirements as a result of managing and marketing activities if they are doing so in other EU member states.
- Portfolio management and advisory services: many asset managers provide asset management related services under MiFID permissions (e.g. delegation of portfolio management of certain funds or acting as an advisor to a UCITS manager or AIFM, or separate account discretionary or advisory arrangements). Currently, a Brexit would mean loss of the MiFID investment services passport for UK investment firms so they would not be able to provide those services on a cross-border basis, and they would become subject to the national rules/licensing regime relevant in each individual member state in which they want to conduct such services.
- In addition to loss of passporting rights for UK firms, asset managers operating in other EU member states would lose the ability to passport their services and market their funds into the UK. Those firms would need to comply with the current UK Financial Services and Markets Act 2000 regime and related FCA rules.
Intellectual property
Unitary rights
Some categories of intellectual property rights (and rights similar in nature) presently cover the whole EU via a single unitary right. These EU unitary rights will continue to apply in the UK until Implementation Period (IP) Completion Day (the end of the transition period) on 31 December 2020. At that point various Statutory Instruments made under the European Union (Withdrawal) Act 2018 will give rise to comparable rights in the UK. The comparable UK rights which will come into effect in this way are for:
- EU trade marks which are registered on IP Completion Day
- EU registered designs which are registered on IP Completion Day
- EU designations under international trade mark and design registrations which are in force on IP Completion Day
- EU unregistered designs protected on IP Completion Day
- EU Geographical Indications and Protected Designations of Origin (and similar rights) which are registered on IP Completion Day
- EU plant varieties which are granted on IP Completion Day
For registered EU trade marks and designs, where the legal framework is already largely mirrored at national level as a result of harmonisation of EU law, the expectation is that the grant of UK rights to replace the protection under the EU registration will be largely automatic and will only require the owners to take action if requested to do so by the UK IP Office. Holders can pro-actively opt out if they do not wish to have the UK comparable protection.
For GIs, PDOs and plant varieties, the UK will need to create national systems in order to continue protection.
The applicable Statutory Instruments preserve the rights of licensees under and security interests in EU unitary rights, by applying them to the comparable UK right, but in the case of licences this is subject to contrary agreement, meaning that a review of licences is advisable. Holders of security interests in or licences under the EU rights will also have to proactively re-register their interest to retain the protection of recordal under the comparable UK rights but are given a window of 12 months from IP Completion Day in which to do that.
If an application for registration or grant is only pending before the relevant EU body on IP Completion Day, then the applicant will have to refile in the UK if it wishes to have UK protection, but may claim the filing date/ priority/ seniority of the EU application, provided that it re-files in the UK within 9 months of IP Completion Day or other applicable specified period.
EU designations under international trade mark and design registrations will be treated similarly to EU trade marks and designs. The UK IP Office and WIPO announced on 30 January 2020 that they are discussing the most appropriate mechanism for that.
For all these unitary registered rights the Statutory Instruments contain further detailed changes to address the change from an EU-wide right to a UK national right.
Unregistered designs are presently protected by an EU unitary system and a UK national system which differ in a number of respects. To ensure continuity of protected design rights, the EU unregistered right will be mirrored into the UK national system on IP Completion Day for designs already protected, as well as for designs disclosed in the UK (or other qualifying country) after that date. Unless otherwise agreed, EEA designers disclosing their design in the EEA will cease to enjoy automatic protection under the UK unregistered design right with effect from Exit Date.
The UK does not presently have analogous national protection for Geographical Indications or Protected Designations of Origin. The relevant Statutory Instrument will therefore adopt the applicable EU Regulations as national law, subject to amendments to make the new scheme operate as a national scheme rather than an EU-wide one. Geographical Indications and Protected Designations of Origin on the EU register at IP Completion Day will be entered into the UK system.
Impact of Brexit on national rights
The existence of certain national rights created under harmonising legislation, such as the sui generis database right, currently requires an EEA nexus. From IP Completion Day, the focus will be on a UK nexus, rather than EEA, but with saving provisions for the database rights of makers from other EEA member states which are already in existence.
UK law relating to copyright and related rights will also be modified in a variety of respects to reflect the future reality of the UK’s separate status. Most UK copyright law is based on harmonising directives, but certain specific measures have latterly been introduced via EU regulations. Some of this will be adopted into UK national law, with appropriate amendments, on IP Completion Day. Regulation (EU) No 2017/1128 on the cross-border portability of online content services in the internal market will cease to apply.
The implementation deadline for Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market falls after IP Completion Day. The UK Government's present position is that it will not implement that Directive into UK law.
Most of the UK's substantive patent law will be unaffected by Brexit, as it is currently based on the European Patent Convention, which is not an EU instrument. However some changes to compulsory licensing relating to the UK’s separate status will come into effect on IP Completion Day.
Supplementary Protection Certificates, although currently issued under an EU Regulation, are already granted at a national level. The existing EU SPC regulation will from IP Completion Day form part of UK law, but with amendments to create a more standalone system. SPC applications filed in the UK prior to IP Completion Day will be preserved. However, there remains uncertainty around the operation of SPCs, particularly applications which will transition. This is because their existence is subject to the grant of marketing approvals through the medicine regulatory regime, which itself is being separated with centralised European approvals ceasing to have effect in the UK.
Open questions and the future
The actions taken to date via the Withdrawal Agreement and the United Kingdom’s implementing legislation aim to ensure that existing rights and law will largely be preserved in the United Kingdom on IP Completion Day, albeit in some cases in a different form or with slightly different rules.
For UK-based right holders, the situation is not necessarily the same in reverse, where protection or its scope currently requires an EEA nexus. This potentially has various impacts, including on UK owners of database rights and design rights in semiconductor topographies, and on UK broadcasters clearing rights for satellite broadcasts into the EEA. It is also not clear whether UK based lawyers and attorneys will continue to be able to represent clients before the EU IP Office. If an agreement on the future relationship is reached before IP Completion Day, it might be possible to clarify these issues. The shape of any trade deal will also impact on the future of exhaustion of intellectual property rights as between UK and EEA.
Over time, we may see further divergence, but at least initially UK law will remain largely aligned, but modified to reflect its future separate status.
The Unified Patent Court Agreement was ratified by the United Kingdom on 26 April 2018, indicating the UK's wish to participate in the new European system after Brexit. If and when the unified patent litigation system comes into effect this will also be the trigger for the availability of EU unitary patents. Aside from Brexit being a contributing factor, a further delay of the implementation of the Unified Patent Court Agreement has been caused by a challenge to the constitutionality of the German legislation enabling the ratification of the Unified Patent Courts Agreement (German ratification is a precondition for the system to go live). The challenge asserts that Unified Patent Court judges do not have the required degree of independence or democratic legitimacy and that the Unified Patent Court is incompatible with EU law. Assuming that the German courts determine the legislation to be constitutional, the question then remains whether the UK can continue and join the UPC. This remains a matter of some controversy, and although there are legal opinions supporting the ability of the UK to participate in both systems, there are larger political issues. The biggest of these from a UK perspective is that the UK's participation would require the UK to accept some "sovereignty" of the CJEU as a Court of reference on points of law.
Litigation
English law: Substantive English law used in transactions will be unaffected by Brexit because it is not, with trivial exceptions, derived from EU law. Regulatory changes arising from Brexit could, however, affect the enforceability of an English law contact (eg if the loss of a passport or other authorisation in a member state in which an obligation must be performed rendered contractual performance illegal in that member state, it may be that performance would be unenforceable as a matter of English law). Assuming that the Withdrawal Agreement comes into force on 1 February 2020 and, with it, the transition period to the end of 2020, this risk will only arise at the end of that period and will depend upon whether the UK and the EU enter into a long term trade deal applicable from the end of the transition period and, if so, the terms of that deal as well as local law in relevant states.
Choice of law: The validity of a choice of English law will be unaffected by Brexit. EU member states will continue to apply the Rome I and Rome II Regulations, which require the law chosen by the parties to be applied whether or not it is the law of an EU member state. Rome I and Rome II will continue to apply, with minor changes, in the UK after Brexit in the form of retained EU law under section 3 of the European Union (Withdrawal) Act 2018.
Choice of court: The English courts will continue to uphold the parties' choice of the English courts after Brexit. If the Withdrawal Agreement enters force (and subject to any long term deal between the UK and the EU), after 31 December 2020 the English courts will also be able to grant anti-suit injunctions to restrain proceedings in EU member states brought in breach of a jurisdiction clause. There may be a question as to whether courts in EU member states will uphold a jurisdiction clause in favour of the English courts (at least, unless the English court was first seised: article 33 of the Brussels I Regulation).
The UK has acceded in its own right to the Hague Convention on choice of court agreements, originally intending the Convention to come into force in the UK on 1 April 2019. The EU is already a party to the Hague Convention. In the light of the extensions of the UK's membership of the EU beyond 29 March 2019, the UK has suspended its accession to the Hague Convention until 1 February 2020. If the Withdrawal Agreement and, with it, the transition period come into force, the UK will likely withdraw its instrument of accession with a view to acceding again with effect from 1 January 2021. For contracts containing exclusive jurisdiction clauses (which do include asymmetric clauses) in favour of the English courts entered into after the Convention comes into force in the UK, courts in EU member states will be obliged to defer to the parties' choice of the English courts.
Other jurisdictional rules: Assuming that the Withdrawal Agreement and, with it, the transition period come into force, the UK will remain bound by the Brussels I Regulation until 31 December 2020. After that date, the Brussels I Regulation will cease to determine the jurisdiction of the English courts over parties domiciled in the EU and in certain other circumstances. The jurisdiction of the English courts will, in the main, revert to the rules applicable to parties not domiciled in the EU. The jurisdiction of courts in EU member states over parties domiciled in the UK will be determined by the national law of each member state, with the limited exceptions where the Brussels I Regulation applies regardless of domicile (eg proceedings relating to real property in a member state or where there is a jurisdiction clause in favour of the courts of that state).
Enforcement of judgments: If the Withdrawal Agreement and, with it, the transition period enter into force, an English judgment given in proceedings started before the end of the transition period on 31 December 2020 will be enforceable in EU member states in accordance with the Brussels I Regulation both before and after that date. Otherwise, a judgment of the English courts will cease to be enforceable in EU member states under the Brussels I Regulation but it is likely to be enforceable under the law of each member state applicable to foreign judgments not covered by a treaty (the law currently applicable to, for example, New York judgments). A judgment given by a court in an EU member state after Brexit will be enforceable in England by common law means (or, possibly, in the case of six EU member states, under treaties between the UK and those states entered into before the UK joined the EU in 1973).
An English judgment given in proceedings to which the Hague Convention applies will be enforceable throughout the EU in accordance with the Convention.
Arbitration: Arbitration is unaffected by Brexit. The UK and all EU member states are parties to the New York Convention, which provides for the recognition of arbitration agreements and the enforcement of awards.
Pensions
Much of current UK pensions legislation is domestic in origination and so will be unaffected by Brexit. However, some of it does have EU-roots. For example, parts of the Pensions Act 2004 relating to scheme funding originally derived from Europe. In addition, some of the UK's pensions practices derive from European case law.
There will be no any immediate changes during the transition period which runs to 31 December 2020. As things currently stand, UK courts will not be bound by decisions of the ECJ made after expiry of the transition period, but "may have regard" to those decisions "so far as relevant to any matter before the court". It remains to be seen in practice to what extent the English courts will follow/apply post-Brexit decisions of the ECJ that develop new pensions law principles post-Brexit.
The Occupational and Personal Pension Schemes (Amendment etc) (EU Exit) Regulations 2019 (the Pension Brexit Regulations) will come into force on the expiry of the transition period (i.e. 31 December 2020) and make minor and technical changes to UK primary and secondary pensions legislation, broadly to ensure retained EU law continues to operate effectively and to address other deficiencies arising in UK pension legislation as a result of Brexit.
Key things to be thinking about from a pensions perspective:
- Employer covenant – a key issue for defined benefit (DB) schemes is the effect (if any) that Brexit may have on the sponsoring employer's business as this may have a direct impact on the employer covenant (the legal obligation, ability and willingness of an employer to fund its pension scheme). Covenant is not something which will be new to DB scheme trustees (or employer(s)), but it will be important to understand how the employer's business (e.g. its reliance on imports or exports, plans for investment etc.) is being affected by Brexit and any further potential implications after the expiry of the transition period which will largely depend on the terms of any deal reached between the UK and EU as applicable on the expiry of the transition period.
- Funding – the longer-term impact on the funding position of DB schemes remains to be seen. The Pensions Regulator has said that trustees should not be too focussed on short-term market movements caused by Brexit and recent legislative developments (in particular the Pension Schemes Bill) also encourage trustees to focus on the longer-term funding strategy for their schemes.
- Investment issues – the impact on financial markets may also be cause for DB scheme trustees to keep their investment strategies under review, whilst defined contribution (DC) schemes and providers may consider whether the investment options made available to members remain appropriate.
- Trustees and employers should also use the transition period as an opportunity to review the terms of any funding/support packages in place, to check whether any legal or investment triggers may occur on the expiry of the transition period that may cause automatic consequences in respect of such arrangements (e.g. the downgrading in a company's credit rating may trigger the termination of a guarantee or increased funding payable to a DB scheme).
- Data protection – changes to the regime for data protection came into effect in all Member States, including the UK on 25 May 2018 under the EU General Data Protection Regulation (GDPR). The GDPR introduced new concepts and some enhancements to the protections for individuals which would have required most pension scheme trustees to alter their existing processes. Please see our Brexit update on data protection for further details.
- Impact on financial services regulation – a key issue is the impact on financial services regulation and arrangements for cross-border access and passporting rights. For example, in a pensions context, there are concerns around how insurers and other personal pension providers who currently rely on passporting rights will be permitted to continue to pay benefits to pensioners and other pension scheme beneficiaries living outside of the UK in the EU after the expiry of the transition period. Please see our Brexit update on financial regulation for further details.
- Corporate transactions – if the long-term impact of Brexit is to increase the magnitude of DB scheme deficits whilst simultaneously weakening the strength of sponsoring employers, it is possible this could make pension schemes more of a stumbling block to corporate transactions and restructurings where a UK DB scheme is involved. The government has also introduced the Pension Schemes Bill which covers a wide range of changes designed to create a "stronger" Pensions Regulator; some of which could have a significant impact on business activity (for example corporate, finance and restructuring transactions) where DB schemes are involved including new, very broadly drawn criminal offences. Please see our two client briefings on this topic for further information.
- Cross-border pension schemes – broadly, cross-border pension schemes are subject to certain additional regulatory requirements, including that they must apply for authorisation and approval from the Pensions Regulator. The cross-border regime will cease to apply to the UK on 31 December 2020. As such, the Pension Brexit Regulations revoke the UK's cross-border regulations and also remove the requirement for UK occupational pension schemes to obtain authorisation from the Pension Regulator for cross-border activities with effect from the end of the transition period. The Commission has confirmed that UK cross-border schemes will be treated as "third-country" undertakings post-Brexit, broadly meaning that they will only be able to operate in an EU Member State if permitted to do so by, and subject to, the national law of the applicable Member State.
Tax
After Brexit, the legal position as regards UK tax law will depend on the terms of the alternative settlement to full EU membership which is agreed by the UK. The key implications from a tax perspective are set out in our briefing: The tax impact of Brexit: what steps should UK and EU businesses take now?
If there is a comprehensive transitional period then most tax changes will be deferred until transition ends. However, after that time, unless there is a very expansive FTA between the UK and EU, the UK Government would be free to implement tax legislation which would not currently be compatible with EU law.
In the event, tax measures which are contrary to the free movement of goods, establishment and/or capital could be implemented, including taxes on the raising of capital or cross-border flows. Furthermore, any area of UK tax law which is currently incompatible with EU law may become valid. For example:
- Controlled foreign company legislation could be extended to its intended original scope, with CFC charges imposed on UK companies calculated by reference to the profits of subsidiaries based in EU jurisdictions with low effective rates of tax (although there is at present no indication the Government will do that)
- The 1.5% tax charge on the issue of shares and securities to clearance services or depositories, which was found to breach the EU Capital Duties Directive, could be enforced (although the Government has announced that it does not intend to do so after Brexit).
An FTA agreed between the UK and EU would likely include rules similar to the prohibition on "State aid" in Art 107 TFEU. However, if it did not then the UK would be free to enact legislation and make arrangements which would currently constitute unlawful State aid, subject only to WTO rules. For example, the Government could incentivise companies to relocate to the UK by offering tax "favours", or advance tax rulings, which provide a selective advantage to those companies over others.
We could even see regions, cities and councils compete to provide business with tax incentives (as they do in the US). Whether this is a good idea from a policy perspective is very arguable – but there could be significant political pressure on Government, at all levels, to provide State aid if able to do so.
The more immediate issue will be establishing how the detail of UK tax law is impacted by Brexit. While the European Union (Withdrawal) Act 2018 addresses some of the difficulties it will not be clear for some time how these will be resolved in practice by the courts. For example:
- The extent to which CJEU case law and EU jurisprudence will continue to influence the decisions of UK courts after Brexit and the interpretation of UK tax law (especially in relation to VAT) remains uncertain;
- It is unclear how pending (or potential) cases brought against the UK Government on the basis of UK tax law being incompatible with EU law will be resolved, particularly where the matter in question has not been referred to the CJEU before exit day; and
- The UK Supreme Court will no longer be bound to follow the principles of interpretation established by the CJEU, so the overarching cornerstones of VAT law (such as the principles of legal certainty, fiscal neutrality, equivalence and non-discrimination) could fall away, which would have a profound impact on the way in which VAT law is interpreted.
Moreover, following a legislative amendment approved by Parliament in January 2019 (the "cooper amendment"), the event of a "no deal" Brexit the UK Government may be restricted in its ability to update relevant UK tax lesgilation to deal with withdrawal from the EU without obtaining Parliamentary approval for those changes. It is not yet possible to predict the full impact of this, but this does result in further uncertainty for taxpayers.
If these uncertainties in relation to taxation are not adequately resolved in the post-Brexit alternative settlement, this is likely to result in potentially unwelcome uncertainty for UK companies. For example:
- Some UK companies may have taken comfort from the limits placed on the UK Government's taxing powers by EU law. Indeed, these limits may have been fundamental to those companies' decisions to base themselves in the UK;
- Preferential EU rules applicable to cross-border transactions may no longer apply. For example, dividends and interest paid by certain EU subsidiaries to UK parents may become subject to withholding tax as a result of the Parent-Subsidiary Directive and Interest and Royalties Directive no longer applying. Moreover, VAT may need to be charged on transactions where it is currently not charged and UK businesses may need to register for VAT in EU countries where they are currently not required to do so;
- The remaining EU Member States would equally be free to exercise their taxing powers in a manner which, by accident or design, discriminates between local entities and UK entities (or local branches of UK entities);
- The UK would lose its influence over tax-related developments within the EU. This could be significant in relation to the proposed EU Financial Transaction Tax, which the UK has so far lobbied against effectively;
- VAT provisions in commercial contracts may need to be amended in light of a full Brexit (e.g. where VAT is defined by reference to EU VAT legislation only, in which case the contractual provisions may no longer apply in relation to UK VAT); and
- In the absence of an alternative free trade agreement, the EU would impose the Common Customs Tariff on imports from the UK, and the UK would likely impose tariffs (limited by its WTO obligations) on imports from the EU.
At a wider international level, Brexit is unlikely to have such a significant impact:
- The UK would continue to benefit from and remain subject to its extensive network of double tax treaties, including (where relevant) their non-discrimination provisions;
- The UK would also continue to have influence in international efforts to drive tax policy, including the ongoing OECD BEPS project; and
- Depending on the alternative settlement reached, the UK may be free to negotiate its own free trade agreements with other jurisdictions, which could result in fewer tariffs and duties on exports and imports between the UK and those other jurisdictions.
There is one important exception for some companies in the EU receiving income from the US on which they claim relief under double tax treaties with the US. US tax treaties limit treaty benefits to certain classes of person, and in many cases one important class is private companies with EU shareholders. Any EU company in this position which has significant UK shareholders will need to consider if Brexit has the indirect effect of causing it to lose its eligibility under the relevant US treaty.
