The big uneasy

It is the business issue that has dominated headlines for months and represents for UK plc a potentially far more profound impact than any general election or change of government. The vote on 23 June on the UK’s membership of the EU promises ominous levels of uncertainty for business and unprecedented challenges for general counsel (GCs) trying to help their companies manage systemic risks. In the second part of a collaboration withHerbert Smith Freehills (HSF), we gathered a group of senior in-house counsel to assess what legal teams should be doing now… and potentially on 24 June.


Alex Novarese, Legal Business: The purpose today is to drill into practical steps GCs can take. What are your first thoughts about managing a UK exit from the EU?

Henry Gardener, Markel International: I work for an insurance company with branches throughout Europe. The problem with considering Brexit is which of the two broad options for exit will come up. One would be more protectionist and the other a free trade idea around the Singapore or Hong Kong model.

Jeremy Barton, KPMG: I am interested in how as GCs this issue can be an opportunity. Through this event and in particular if there is an exit vote; it is an opportunity for legal functions to step up because a lot of the organisation will not know where to turn. The legal function is really well positioned.

James McRobbie, CF Partners: I am GC at [a] commodity trader and asset manager. The key thing for us is on the asset management side, and what the MiFID [Markets in Financial Instruments Directive] passport will look like afterwards and in particular on marketing in the EU.

Gavin Williams, HSF: A lot of people have not focused on the fact that the end point is yet to be defined. If there were a vote to leave, first those who back that campaign would have to decide what they will negotiate for. Then they would have to negotiate for that position with the other 27 members of the remaining bloc. There are going to be a lot of other issues and they may not be well disposed towards us.

In that context, the two-year period is woefully inadequate, not forgetting that you would lose the benefit of all of the international trade agreements. The notion that people are going to wait for the UK to sort this out for two years, five years, ten years may well be mistaken. A great deal of people are going to say: ‘We want to invest money in Europe, but we are going to put that money somewhere other than the UK.’

Rob Booth, The Crown Estate: I am experiencing déjà vu having recently gone through a referendum, followed by the passing of the Scotland Act; which devolved 3% of my business to the Scottish government. I am closer to my board now than I have ever been, based on that process because it was such an intimate issue. It will be interesting to see if the model we used for Scotland can be reapplied.

Nick Havers, Marsh & McLennan Companies: Marsh & McLennan is a US group with a significant presence in the UK and Europe. Brexit is a topic on our board agenda in London, but it has significant focus from New York as well.

Kevin Dunn, 3i: The referendum could cause material market impact. You need to plan for: what if?

One other point is the impact for our clients. We are a client service business, primarily an insurance broker, risk adviser and consultant in various financial services sectors. Our clients are in all manner of other sectors and widespread locations. Some of them would be more affected by Brexit than others so we must think how we can plug the gap and service them if, for example, the regulatory passporting regime were revoked? How could we retain them?

Sam Clark, Lockton Companies: I work in a US-owned insurance broker. In the UK we look after not only our UK business but also all our operations outside the US. What I am looking at from a Brexit perspective is twofold. Firstly, whether there are opportunities for us as a business. Is there something from an acquisition perspective that we could look at where people just want to get out and we can purchase businesses? Secondly, how would the financial market in the UK stand up? Much as I want to believe that everything is going to be the same, I do not think it is.

Kevin Dunn, 3i: As a board and as an ExCo we had a look at what we thought the key areas of risk were for the business over the past few months. We decided trying to predict the outcome was largely an exercise in futility. What we could predict is that if the vote is to leave, there will be some period of uncertainty. That uncertainty will affect not just the UK but also the broader EU and elsewhere.

Although we are a global business, our main focus is European, US and developed markets, where our [private equity] business invests mostly in the mid-market. Many of the businesses that we invest in are domestic businesses in various stages of becoming international. Brexit might mean that temporarily there will be fewer new investments to look at in the UK.

In the meantime, Brexit could impact the UK economy by perhaps 1-1.5% of GDP per annum. Reasons for such a drop seem likely to be the impact on consumer confidence, lower investment and potential falls in asset prices. However, eventually the UK might start to look very cheap, which could provide opportunities for firms like3i.

Alex Novarese: The general sense is that with so many variables GCs have not looked too closely at Brexit scenarios. Has anyone drawn up concrete plans?

Sam Clark: I would love to but I do not have the resources. We have had a discussion at board level about how it would affect us. No one has the answer. We are concentrating more on what we say to our clients and staff if it comes to a vote to leave and then go from there.

‘Post the result is the point where you go from supporting your board in consideration of the potential scenarios, to being the person who is all over the detail.’
Rob Booth, The Crown Estate

Alex Novarese: Has anything emerged from that?

Sam Clark: It is a case from a client perspective of saying: ‘Don’t worry, we’re looking at it. We are going to be in this massive period of uncertainty but please do not move from the UK insurance market. We all still love you.’

James Wood, Legal Business: As a US company, does that not change the dynamic with the board?

Sam Clark: No, they are relatively relaxed about it on the basis that we are a UK enterprise with only a couple of European businesses. We have an Irish company, we currently passport out to Ireland but we would potentially look to get that Irish company to be regulated in its own right and then use that probably as the head rather than having a shadow EU company in the background with passport rights around the rest of the EU. The US is more concerned about regulatory change and how that might be affected.

Kevin Dunn: In the event of a Brexit, it seems likely that EU regulators will be more questioning of structures where ‘mind and management’ of EU-regulated businesses might be considered to be from outside the EU.

Gavin Williams: We have seen it in certain countries already within Europe with trends towards subsidiarisation in some sub-sectors of financial services. In Italy and Spain there is a lot of pressure to incorporate local subsidiaries, to be locally regulated. The setup with MiFID as it currently stands you are able to devise structures that may enable you not to move many people around to achieve more or less the same results as you have now. Politically that may become much less viable.

Henry Gardener: We looked at the lead-in times for the changes that we would need to make. That was the key thought: how long would some of these changes take us if we needed to make them? Once we looked at that timescale we knew that it was at least close to the two-year mark.

Alex Novarese: Could you expand on that?

Henry Gardener: That was in terms of looking at how long it would take us to set up a company from scratch. The obvious candidate is Ireland, where we already have a presence and a good relationship with the Irish regulator. If that did not work, how would [it] look in a couple of alternative countries where we have branches? It would be within that two-year framework, which we would be able to work within.

Alex Novarese: What are those early decisions or risks that GCs should be addressing?

Gavin Williams: The great uncertainty for financial institutions is around the passport and how long we will be able to continue to enjoy market access. In addition, assuming that we get to the end of the two years and there is not a new arrangement in place, will the other 27 countries unanimously agree to extend the two-year negotiating period so that we remain a member of the EU while we negotiate something else? All of the models that give full market access are predicated on free movement.

Alex Novarese: Have there been many messages from the FCA?

Sam Clark: They will not say anything.

Jeremy Barton, KPMG: This is an opportunity for legal functions to step up – organisations will not know what to do

Jeremy Barton: There is an amount of preparedness that involves sectors lobbying and being proactive in putting the priorities on the table at Number 10. Whether you think you can be successful, in certain situations you have to lobby. If you are there and you have thought about this proactively then if you are first at the door you may have a first-mover advantage in influence.

Gavin Williams: I am not sure if people have grasped the scale of the task. Switzerland’s deal involved something like 123 separate agreements.

Dorothy Livingston, HSF: And that was over 40 years. Canada’s agreement has taken seven years to negotiate and it is just starting the ratification process. It is 1,600 pages of closely-typed stuff, which starts off with a discussion of the duties which are not going to be paid on various types of alcohol, Canada’s reservations, the reservations of the UK, Slovakia and somewhere else and then it moves onto some other aspect of the common customs nomenclature. There is virtually nothing on services in there.

Alex Novarese: Rob, you mentioned that before you were looking at this issue with the Scottish referendum.

Rob Booth: For us as a team advising the board now, it is about validating the modelling assumptions they are making. If we are modelling two, three or five years ahead, there are a series of underlying legal assumptions, where you need to exercise that key GC skill to put your finger on the one or two key threads that impact the macro position and with that, the model.

We did the same thing for devolution and that serves a role. People are grateful for insightful validation. But you really earn your stripes post the result coming out. That is the point where you go from supporting your board in consideration of the potential scenarios, to being the person who is all over the detail and totally up to date.

‘There is talk about the EU as a source of annoying rules but people do not want to go back to 1972 levels of protection.’
Gavin Williams, HSF

Even if I had the resources, I would not be asking lots of lawyers to look at this for us now. What I am doing is reading briefings that are coming out of law firms. I am reading the press and using my own legal knowledge to apply that over the top of our business model and our investment strategy, in support of the board. It will then be roll your sleeves up on 24 June and really get into it.

Alex Novarese: Could you give us a little bit more detail on the analysis you are doing?

Rob Booth: We have done a sampling exercise to look at what people might try to come up with, by way of imaginative legal ideas about Brexit, to allow them to walk out of leases. That leaves you pretty confident, to be honest.

Pavel Klimov, Unisys: I remember some years ago when ironically there were plans for the UK to join [the euro]. We were put to the task of looking through contracts. At least it was a known issue that the pound would be abolished and the euro would come in. You also had some help with examples of how it happened in other countries in Europe.

It will interesting to see how references to ‘the EU’ in the existing contracts, for example when a licence or exclusive distributorship rights are granted throughout the EU, will be interpreted if the UK ceases to be part of the EU.

Gavin Williams: An interesting development that we have seen in the last week or so is that we are starting to get people saying: ‘Have we got drafting for a Brexit MAC [material adverse change clause]?’ What we might expect to see in the run up to 23 June is people are going to want to continue to do business in May and in June. However, they might want some more protection.

Dorothy Livingston: I do not [anticipate] general terms coming in. They are much more likely to be deal-specific.

Gavin Williams: Yes. People taking office space for example: if for whatever reason they need to sign a deal in the next ten weeks. You might not want to see it through in the event of Brexit but for the reasons of the way the market operates, people nonetheless want to book the business.

Sam Clark: Do you see jurisdiction clauses changing more to arbitration clauses? I do not know whether people are going to start using arbitration more.

Adam Johnson, HSF: There is no evidence to date of parties abandoning jurisdiction clauses in favour of arbitration clauses, but it may come.

Alex Novarese: How robust are contracts going to be in a Brexit vote?

Adam Johnson: They will be just as robust as now but people will have a motivation to say: ‘This is not working for me anymore. Is there some way out?’ But Brexit will have no effect at all on English contract law or English tort law. The basic structures of English commercial law have been largely uninfluenced by the EU intervention. Procedural aspects like jurisdictional judgments are different, but contract law, tort law and all the basic stuff is English common law. That will not change.

Kevin Dunn: If you are a UK consumer of a financial service and you purchased a product on the basis of a certain set of contractual and regulatory protections, some of which were derived from European law, might there be grounds to at least argue that Brexit has had the effect of changing the bargain? I can certainly see someone trying.

Adam Johnson: It seems very doubtful that in most cases a vote to exit the EU in and of itself will give anybody the entitlement to walk away from an English law contract.

‘We honestly don’t know what the tax regime would look like after Brexit.’
James McRobbie, CF Partners

Kevin Dunn: I am sure that people will be examining boilerplate provisions in their contracts or standard terms. For example, what does a contract expressed to be governed by English law really mean? Does it include EU laws or not? In most cases well-drafted clauses will say that English law means English law as amended from time to time. But if the contract assumed, for example, that certain EU protections were part of that English law contract, and those protections were effectively removed following Brexit, the parties might get a result that’s different from what they intended. You would hope that UK legislators would address these situations when crafting post-Brexit laws, but it’s easy to see the potential for it to become complicated.

James McRobbie: We have a bit of a peculiar situation in that we trade carbon as part of our commodities spectrum. EU carbon credits are a creature of EU law and so there will be some uncertainty and we will see some price volatility because of Brexit.

Dorothy Livingston: That is the sort of question you will need to have a view on how to answer quickly, if this happens. Assuming the two-year notice period, these things will still be binding on everybody for the two years.

James McRobbie: That is the conclusion we came to.

Henry Gardener: One of the things that we have been considering is the potential impact of Brexit from our clients’ point of view. On the management liability side, so insurance for the directors and officers, is there exposure to shareholders for not being sufficiently prepared for Brexit? It is difficult to know.

Nick Havers: What about duration of contracts? For procurement contracts where there are typically five-year terms or longer, there might be a pressure to reduce the term to mitigate the uncertainty of the impact of Brexit.

Gavin Williams: Your point on duration is a very good one, particularly for longer-term contracts where there is more Capex involved. It is going to play havoc with the economics of these arrangements because if people are basing their contractual arrangements on a 15-year commitment and whatever investment is required from one side is depreciated over the term of the contract. That is going to go straight to the economics of the deal and probably just push prices up in sectors where there is heavy investment required.

Sam Clark: There is an interesting point [on whether UK workers can fill gaps in the labour force if EU migrants leave] because there is a lot of talk about anyone from an EU country who is currently resident in the UK and if they will be allowed to stay. There is talk of some kind of amnesty and everyone who is in the UK now will be allowed to stay without the need to apply for visas. Potentially you have that kind of workforce still in the UK who will then become more sought after.

Dorothy Livingston: Yes. There is a European concept of acquired rights, but if we leave the EU the UK does not necessarily apply that concept. However, it might help our citizens within the EU where they do apply that concept. There is also an international law concept of acquired rights based on some UN conventions, which the UK would have to apply. It is uncertain what scope that has. It would mean that people who have been here for five years but have not done anything about it, or have not got permanent leave to remain because they did not need it as they were EU citizens, might have the right to get permanent leave to remain.

Gavin Williams: There is a technical point around acquired rights. This is where the politics lies and the rubber hits the road because this doctrine could make it very difficult to follow through on some of the rhetoric.

Rob Booth: The biggest challenge would not be one specific legal issue, it is the question of wider compliance. If you go through a period of unprecedented scale and rapidity of legal change in the UK that requires staying on top of that entire basket of change, looking holistically at your contracts and all of the risk that sits within it across the whole of a business. I am imagining a period of two to five years where there is significant potential for legal and compliance error because of that scale, which counterparties may be motivated to use to get out of their contracts. That is the danger.

Dorothy Livingston: There are areas which can be particularly difficult for compliance. In your field I guess it is environment because it is a devolved matter. If the UK starts making major changes it could end up with four different versions of environmental law instead of one with a few frills.

Pavel Klimov: The question is whether a UK vote to exit would give EU regulators some sort of encouragement and the opportunity to treat UK businesses less favourably. If the UK votes to exit with a set of protections, the mechanism for protection would probably be there but would probably be less robust and more prone to abuse to exclude you from competition.

Sam Clark: If you tender for clients against other EU companies you are going to have to comply with EU regulations.

Kevin Dunn: Leaving the EU could increase the burden for anyone selling financial services. On the other hand, you could argue the single passport is hardly seamless. Has anyone tried to market a product into France under AIFMD [the Alternative Investment Fund Managers Directive]? You think you are complying with EU laws and using a common passported approach, but then you find that you also have to address all of the French rules and the way that they apply them. But on balance the single passport notion, with all its flaws, has been hugely valuable, and I’m pretty sure that a Brexit will increase the regulatory burden of operating across borders. In a world where business is ever more global, this seems a counter-intuitive move to me.

Sam Clark: It would also mean we will no longer have any control over the people setting those regulations. At least in the EU Parliament you can start lobbying and have some say and impact.

Gavin Williams: People talk about Brussels as the source of all annoying rules. The reality is people do not want to go back to 1972 levels of regulation, whether it is in financial products or food safety, hygiene or the environment. We still want toasters that do not kill us. You end up with a different lot of red tape.

Dorothy Livingston: There is a whole range of things where you can just see regulation multiply, for example with mergers.

Kevin Dunn: M&A will become more difficult to do.

Alex Novarese: How nervous do people feel about Brexit in the finance sector?

Kevin Dunn: If the vote is ‘leave’ sterling might quickly take a significant hit. Most businesses are funded by debt in some form and debt documents often have ratings triggers. If your credit rating falls by a certain amount this might trigger bondholders’ ability to call your bonds or require changes to pricing. Based upon Brexit risk, S&P [Standard & Poor’s] put the UK on negative outlook last autumn. You can only imagine what it might do on 24 June if the UK votes to leave the EU. Contagion risk is significant. One practical step corporates could take is to look at their financing documents and work out if they have that risk.

‘The problem with considering Brexit is which of the two broad options for exit will come up.’
Henry Gardener, Markel International

Gavin Williams: We have been speaking to a lot of asset managers and capital and redemptions are a concern particularly in funds with a heavy UK-bias. There are only three things you can do now. You can analyse, ie do due diligence on business and figure out what your vulnerabilities are in the UK leaving. Decide what you are going to say to staff, suppliers and customers. And consider whether or not you are going to try to influence the outcome by campaigning. Beyond that, there is not a great deal you can do until 24 June.

James Wood: For a lot of cross-border work you will need to know what the tax and insolvency regimes would be. Is that something you have been able to address?

James McRobbie: No. We honestly do not know what that would look like. The concerns were first of all VAT in the EU and how we can benefit from that post-Brexit.

Dorothy Livingston: We know the position under the VAT laws for trading with a third country, so we could say that should be the model that would apply between us and the EU once we leave. There is some model you can use to assess what it would be like trading a VAT-able item into the EU or out of the EU on the assumption that the UK is not an EU state because you compare that with the same position with the US or Australia.

James McRobbie: The other point is with the insolvency regime. What does that look like post-Brexit and what additional uncertainty does that create relating to conflict of laws?

Dorothy Livingston: No national insolvency regime will change but insolvency regulation will presumably cease to apply except within the EU because it is an interim EU law. There is a considerable loss of benefit, not just there but all the financial services businesses, except the bits of it that have to be replaced because they come from Basel. You just do not have any cross-border insolvency regime for financial institutions.

Kevin Dunn: On Brexit, what will happen to something like the Financial Collateral Directive? Basically this directive allows financial institutions to take and enforce security over stock, shares and bonds and things like that in a simple and straightforward manner that is the same across the EU. If that Directive ceases to apply to the UK, it seems to me that you will have a lot of financiers with collateral that may not work as they had expected, as local laws around taking and enforcing these types of securities vary very materially.

‘If you tender for clients against other EU companies you are going to have to comply with EU regulations.’
Sam Clark, Lockton

Dorothy Livingston: Both the In and the Out campaigners say they would pass some piece of compendium legislation which would attempt to pick up all the EU law we wanted, ie most of it.

Kevin Dunn: A lot of EU laws are now part of UK law anyway. What I’m thinking of are those EU directives where our UK Parliament has taken the relevant principles and requirements and then expressly enacted them into an Act of Parliament, such as the 2015 Consumer Rights Act. Will those laws be repealed or altered post-Brexit? Consumers may assume that those protections are now acquired rights.

Adam Johnson: In areas like jurisdiction, choice of law and cross-border enforcement of judgments and cross-border insolvency, apart from the EU regime, we have well-developed rules of English common law which regulate the allocation of jurisdiction. On Brexit, we would probably fall back on that system. Common law works well but the price is a lack of predictability in certain spheres.

Dorothy Livingston: Patents are fascinating. There is a treaty between some EU states, which is due to come in soon, and would create a European patent for those states. You can only be party to the treaty if you are a member of the EU. The patent court in the UK would disappear [in the event of Brexit] and the UK would need to grandfather any patents that existed.

Pavel Klimov: What about things like data protection? The UK would want to be a part of these new regulations.

Dorothy Livingston: Can it afford not to be? If you have any business that wants to trade into the EU and keep their EU customer details outside the EU then you better lobby for our country to have the same data protection laws as the EU.

Pavel Klimov: It would hardly be difficult for the EU to say the UK does not have an adequate level of protection.

Alex Novarese: Let’s end on opportunities for GCs.

Jeremy Barton: The approach I would adopt is a mapping exercise where you facilitate within the businesses an exercise to prompt them to think about mapping their activities against headline issues of law, the four freedoms, regulation, maybe dispute issues and then the economic hit. With that you hope to be able to work with your ExCo to prioritise areas of focus, which may lead to these questions of lobbying or review of arrangement and business decisions. We see in the legal departments the business in a way an individual division or function will not see.

Sam Clark: I have written a similar kind of thing regarding trying to develop a risk framework which you could then apply consistently across all business, get them to look at their own businesses and then come up with a gap analysis to say: ‘This is where real problems could be.’ And then you can consolidate that to go to a macro level and a whole business situation or just in a single business so you can pinpoint those hot areas that need to be dealt with. Those are the only things you can honestly do. It needs to be the business that drives this rather than a legal or compliance-led exercise to ensure they have ownership of the problem and solutions.

Kevin Dunn: One thing you can consider now is what if immediately after the referendum there is a material market movement because of uncertainty? The law does not change on 24 June but that uncertainty is very significant. The advice I have given is that we need to start planning for: what if? LB

The panellists

  • Jeremy Barton General counsel,KPMG
  • Rob Booth General counsel,The Crown Estate
  • Sam Clark General counsel,Lockton Companies
  • Kevin Dunn General counsel and company secretary,3i
  • Henry Gardener Head of legal and regulatory affairs,Markel International
  • Nick Havers Senior counsel,Marsh & McLennan Companies
  • Pavel Klimov General counsel, EMEA,Unisys
  • James McRobbie General counsel,CF Partners
  • Alex Novarese Editor-in-chief, Legal Business
  • James Wood Research editor, Legal Business
  • Adam Johnson Partner,Herbert Smith Freehills
  • Dorothy Livingston Consultant,Herbert Smith Freehills
  • Gavin Williams Partner,Herbert Smith Freehills