The implications for the Scottish market in light of the recent Brexit vote, like the rest of the UK, remain unclear, with the inevitable lengthy negotiation period on the terms of our exit still yet to come. Many of the same issues arise here as in the UK, but there are a number of Scottish quirks that give us a few additional matters to consider – here we take a look at a few of these.
Few will have been surprised that, in light of the majority (62% of turnout) of Scotland voting for the UK to remain in the EU, the SNP government is considering whether to hold a second independence referendum. This continues to dominate the local press on a daily basis – indeed, we now have our very own ‘Brexit Minister’ in the shape of Michael Russell, who will have responsibility for Brexit negotiations with the UK government, with a brief to ensure that Scotland’s relationship with Europe is protected. Whether a second Scottish independence referendum is called, there appears to be continuing constitutional uncertainty ahead. The SNP has launched a national ‘conversation’ to assess the public sentiment and appetite for a further referendum.
The Scottish economy
The vote for Brexit has had a clear impact on the Scottish economy, and depending on political allegiances, there’s enough ammunition in the press to argue either way that it’s been positive or negative. The SNP government has claimed that Scotland’s GDP will be £1.7bn to £11.2bn lower per year by 2030 as a consequence of Brexit. However, the recent announcement by the first minister promising that £4bn will be spent on infrastructure next year alongside the introduction of a new £500m Scottish Growth Scheme to support small businesses has been broadly welcomed.
It is hard to discuss the Scottish economy without mentioning North Sea oil and gas. With control of licensing of oil and gas interests and North Sea tax revenues at the forefront of economic debate during the build-up to the 2014 independence referendum, the subsequent drop in oil prices and the impact this has had on the market in the north east of Scotland shows just what a significant asset it is to the country. Figures from Government Expenditure and Revenue Scotland (GERS) released in August 2016 show a significant fall in oil revenues year on year. Deficits need to be dealt with but the timescales for achieving that have loosened and in particular the Westminster government is no longer targeting a budget surplus by 2020.
Banks and financial services
The financial services sector accounts for 7% of Scotland’s GDP so there is no doubting its importance to the economy. Post Brexit, is there an opportunity to create a more attractive regulatory environment, while at the same time maintaining a robust system of regulation?
One of the key issues currently being addressed by the banks is ring-fencing – the process of separating certain core banking services (those critical to individuals and small/medium businesses) from wholesale and investment banking services. Many UK banks, including those in Scotland, are immersed in their internal discussions and planning – but what effect will the Brexit vote have on this? Even though the implementing legislation was made at UK level, there are EU law implications to consider, such as the prohibition on the ring-fenced bank having non-EEA branches. Does this mean amendments to the rules may be required, and how extensive might they be? On a practical level for the Scottish banks, looking at the new subsidiary companies that are being incorporated to hive off assets that are being retained and sold – should those be Scottish or English companies?
There is a raft of EU legislation that affects regulated industries such as the financial services sector, including banking, insurance, investment services and financial products or funds. Leaving the EU would change the basis on which entities can operate across Europe. In the event of Brexit, UK firms that have been ‘passported’ into other EU member states and operate in these additional jurisdictions on the basis of much lighter regulation (provided that they comply with main UK regulator requirements) are likely to face additional local regulation.
They would, potentially, have to set up independently-regulated branches or subsidiaries in each country in which they operate in the rest of the EU (rEU). The removal of the current ‘passporting’ arrangements would affect licences and authorisations for banks as well as ongoing regulatory compliance requirements, such as capital requirements currently subject to EU regulation.
Detailed rules applicable to products such as consumer finance contracts and mortgages are heavily influenced by EU law. At the very least a divergence of rules may affect access to rEU customers.
For the wider economy and trading businesses, the access to EU markets provided as a result of EU membership would, of course, be affected, unless it could be broadly replicated in trade negotiations and deals struck between the UK and rEU. The extent of the impact would be heavily influenced by the form of trade and regulatory rules established between the UK and rEU following Brexit. While compensation schemes in respect of funds held on deposit operate on a national basis, they are subject to an EU framework.
Currently, the EU is on track for further integration, including in the area of capital markets and their regulation. In September last year, the European Commission adopted an action plan to implement the Capital Markets Union (CMU). The CMU affects a vast range of capital-raising activity, including securitisations involving Scottish assets through the new STS principles (simple, transparent and standardised). It is designed to improve access to capital while at the same time protecting investors. The shape of the regulations as applied in the UK after Brexit would remain to be seen, however we would assume that the UK would look to follow best practice in order to maintain its status as one of the leaders in Europe in this area.
And SMEs/Corporate Scotland?
Turning to the thoughts of Scottish SMEs, PwC recently carried out an online survey of 566 UK SMEs, of which 51 were Scottish. The results showed a few areas where the answers of the Scottish respondents differed markedly from the overall UK position, including (i) a higher percentage of Scottish firms that are keen to ensure that there is sufficient liquidity within the UK financial markets (66% of Scottish entities, compared to 52% at UK level), and (ii) greater caution over capital investment. We need a clear message for the politicians and negotiators to get the right deal but make sure it is not the right deal too late. The Scottish and Westminster governments are in listening/fact-finding mode so there has never been a better time for businesses to influence the key issues to be covered in discussions.
Employment law is an area in which EU legislation has had a significant impact across sectors, not least financial services. Even if the UK has scope to diverge from EU employment law, changes may not necessarily be immediate on the point of Brexit, or ultimately far-reaching, for the following reasons:
- Much of EU employment law has been brought into effect via UK legislation, which we can expect to remain in force post-Brexit unless and until amended.
- Changes to primary legislation require parliamentary approval and the government of the time will need to consider whether reform is politically desirable. The UK has come to expect a certain level of workplace protection, and wholesale changes to the likes of, for example, discrimination law, seem highly unlikely.
- Many employment rights, including unfair dismissal and the minimum wage, do not in fact stem from the EU.
- In other cases, the UK deliberately provides protection that exceeds the EU minimum: prime examples being maternity leave and the right to 5.6 weeks’ holiday (as opposed to the EU four-week minimum). Withdrawal from the EU is therefore unlikely to prompt a change to government policy in these areas.
- Although, post-Brexit, UK courts and tribunals would not refer cases to the European Court of Justice or be obliged to follow new decisions from that court, it is less clear how they would deal with existing UK case law stemming from EU decisions. High profile examples include sickness absence and holidays; and the inclusion of certain payments in holiday pay. It is likely that tribunals would continue to apply the previous decisions of a higher UK court unless or until that higher court or parliament took a different approach.
- Employers’ internal policies and even contracts of employment often reflect certain EU rights relating to, for example, working time, sickness absence and equal opportunities. Reducing entitlements could be difficult both from a legal and employee relations perspective.
It is also worth remembering at this point that the UK consists of three separate and distinct legal jurisdictions. That fact is often overlooked by advisers, particularly those outside of the UK. While forum shopping in the context of dispute resolution is more regularly thought of in an international context, it should not be forgotten that jurisdiction and recognition issues can still arise within the UK.
In any dispute, two key preliminary issues are governing law and jurisdiction. The way courts approach these issues has been harmonised across the EU, with a high degree of certainty provided to parties that (generally speaking) their choice of governing law and jurisdiction will be upheld and applied in any member state court. Pre Brexit that certainty will remain in place, but businesses and their advisers should be considering if and how the position may change when the UK leaves the EU.
Allocation between the UK’s three jurisdictions is governed by the Civil Jurisdiction and Judgments Act 1982, on the basis of similar rules to those applying at EU level. In short, jurisdiction can usually be founded on the defending party’s place of domicile, where the actual or threatened wrong has or could take place, or where property is physically located. However, if the parties have agreed to grant exclusive jurisdiction to a particular forum, that will in most cases be binding – with exceptions for consumer and employment contracts.
One further area where Brexit will certainly have an impact is in insolvency and restructuring, where the key legislation that applies to any proceedings against a person or company whose centre of main interests is in the EU is Council Regulation (EC) 1346/2000 on insolvency proceedings (the Insolvency Regulation). Unless the UK and EU agree otherwise, the Insolvency Regulation will no longer apply to the UK automatically, which will affect the reciprocal recognition of judgments in the UK/EU. Such is the importance of the ease of recognition of judgments (and the many other issues addressed by the Insolvency Regulation, such as set-off and prior transactions) that this is an area of law where significant work lies ahead.
So, in this mixed market, what advice can we offer? At Brodies our approach has been to remain close to clients, understand the challenges they face and make sure we provide pragmatic and informed advice on the issues raised by Brexit. To that end, we have established a specialist Brexit Advisory Group, pooling relevant knowledge from specialists across the firm, have been publishing expert commentary and advice on our Brexit Hub, and offering private business planning sessions to discuss practical implications for clients.
While there will undoubtedly be challenges for some ahead, there will also be opportunities for others and we need to ensure that we are best placed to support clients, whatever the eventuality.