Since late August 2018, against a backdrop of growing concern over the prospects for the Brexit negotiations as the clock ticks down, the UK has published batches of ‘Technical Notices’1 on the steps it is taking, and what steps organisations and individuals should consider taking, to prepare for the possibility of a ‘no deal’ Brexit. This article assesses the risk of ‘no deal’, when it will be clear whether it will materialise and what steps companies should consider taking to prepare.
What does ‘no deal’ mean?
In this article, we use the term to describe a position where no Withdrawal Agreement applies at the time of the UK’s departure from the EU and, as a result, the UK immediately becomes a ‘third country’ (ie, a non-EU member state) without a transition period.
How serious is the risk of ‘No Deal’?
In our view, this remains unlikely. The economic and political costs – made clearer by the notices – would likely be too high for the UK and other EU governments to accept. In particular:
- UK-EU trade would become subject to customs procedures, inspections and tariffs, leading to delays and increased prices, accentuated by a fall in sterling;
- UK-regulated products and services would no longer have automatic access to the EU market and many businesses would likely see their supply chains disrupted;
- the status of UK nationals in the EU would be in legal limbo.
Some 80% of the Withdrawal Agreement – which would establish a transition period effectively continuing the status quo for businesses until the end of 2020 – has already been agreed between negotiators. The pace of the negotiations has been stepped up and is now described as ‘continuous’ and both sides continue to assert confidence in the prospect of achieving a deal.
The preeminent outstanding issue is avoiding a hard border in Ireland. Other substantial outstanding issues include the status of Gibraltar, security co-operation, and the role of the European Court of Justice. Ireland is most pressing because the UK has already agreed that in the absence of a ‘new arrangement’, the status quo will continue being applied to Northern Ireland in order to avoid a hard border.
The ‘Chequers Proposal’2 represents the UK government’s longer term proposal for resolving the key issues including Ireland, but it faces serious challenges from all sides. However, subject to finding a legally-binding solution for Ireland, reaching agreement on most other issues relating to the long-term UK/EU relationship could in principle be addressed at this stage in only an aspirational political declaration. The main arguments over the future relationship – essentially still a choice between the Canadian (free trade agreement) model and the Norwegian (EEA) model – would remain to be resolved after Brexit.
The option of postponing key issues, particularly if the Chequers Proposal remains the main basis for future talks, also faces serious challenges:
- the EU opposes the Chequers Proposal on the grounds that it would unpick the single market; they may press for substantive UK concessions on key issues before agreeing to the Withdrawal Agreement;
- Leave and Remain supporters have common ground in seeing no logic in the UK leaving the EU if it will remain bound by many of the EU’s rules, as the Chequers Proposal implies. Brexit supporters may seek to block any agreement on the basis of the Chequers Proposal at the Conservative Party conference on 30 September- 3 October; and
- Remain supporters oppose leaving the EU on the basis of only a vague political declaration (labelled a ‘Blind Brexit’), giving little clarity on the terms of the future relationship and, increasingly, want a second referendum.
But despite these serious challenges, the costs of ‘no deal’ remain likely to prove too high for all concerned. The likelihood is that a deal will be reached that addresses Northern Ireland but leaves other aspects of the future relationship open for negotiation – and therefore an extended period of uncertainty – during the transition period, intended to be concluded at the end of 2020 (but likely in practice to take considerably longer).
When will it be clear if there will be a deal?
If agreement can be reached between the UK and EU negotiators, three bodies must approve the deal before it is adopted: the European Council; the UK Parliament; and the European Parliament.
The European Council
Approval by the Council (ie, the member state governments) requires a qualified majority of the remaining EU member states (ie, at least 20 of the 27 and representing at least 65% of their combined population). The timetable currently looks as follows:
- 18 October: a formal Council meeting long seen as the deadline for reaching an agreement although this looks increasingly unachievable;
- Mid-November: possibly, a special Council meeting convened to strike a deal;
- 13-14 December: the last formal Council meeting of the year, widely seen as the latest date to agree on a deal if it is to be ratified by both Parliaments and in place by 29 March 2019.
The UK Parliament then needs to take three, possibly four, steps:
- to vote on the Withdrawal Agreement and the future framework. (Some are reportedly concerned that the government may leverage the threat of ‘no deal’ to coerce MPs to vote for whatever deal is agreed);
- if by 21 January 2019 MPs have not approved the deal, or if no deal has been reached and put to Parliament for approval by that date, the government will have to present to Parliament its plans for next steps and MPs will vote on whether to endorse those plans. If Parliament does not endorse the plans, there is considerable uncertainty over how this may play out;
- after a deal has been approved, MPs then need to adopt an EU (Withdrawal Agreement) Bill to implement Brexit in line with that deal;
- finally, the Withdrawal Agreement has to be ratified as an international treaty by both Houses. If the deal has already been approved by Parliament, significant objection at this stage seems unlikely.
The ‘consent’ of the European Parliament (but not the parliaments of the 27 member states) is needed for the Withdrawal Agreement to bind the EU – consent is achieved if a simple majority of MEPs support it. Since the European Parliament has aimed to ensure that its views have been taken into account by the EU negotiators, it appears unlikely that it would ultimately block a deal, though its consent cannot be taken for granted.
Until these three processes have been completed, a no deal exit at 11pm GMT (12 midnight CET) on 29 March 2019 will remain a possibility. But the deadline could be extended if the UK and the European Council (acting unanimously) decide to do so. While all sides want to avoid this, it may be seen as preferable to a no-deal exit, at least to allow more time for a deal to be reached.
What steps should businesses be taking now?
Given the high degree of uncertainty over the shape of Brexit and the costs of contingency plans, many businesses have taken a ‘wait and see’ approach. But businesses would be well-advised to prepare for all eventualities, including ‘no deal’, until they can be certain of the outcome of the negotiations. With that in mind, both the UK and the EU have issued various notes on the detailed implications of Brexit.3
Purpose of the UK notices
The government’s guidance4 states that its aim is ‘to ensure the smooth operations of business, infrastructure and public services and to minimise any disruption to the economy.’ In a number of areas, the government would act unilaterally to provide continuity for a temporary period. The notices appear to be aimed, in part, at pressing the EU to reciprocate – which the EU has so far given no indication that it is prepared to do. But the notices also implicitly highlight the serious risks in the event of a combination of ‘no deal’ and no mitigations by the EU.
The notices are intended only as guidance ‘to allow businesses and citizens to understand what they would need to do in a “no deal” scenario, so they can make informed plans and preparations’. Businesses are invited to review their own contingency plans and consider whether they need separate professional advice to identify and make appropriate specific preparations.
To highlight five key areas that are addressed in the notices:
- Financial services: see our briefings on Brexit issues5. The UK is granting new powers to the FCA and Bank of England to allow them to take over EU regulatory functions and phase in post-exit regulatory requirements. It has also stated that if necessary it will take unilateral action to resolve any contractual continuity issues and introduce a temporary permissions regime that will allow EEA firms currently passporting into the UK to continue operating while they apply for full UK authorisation.
- Customs and tariffs: ‘no deal’ will result in a full third country regime between the UK and the UK, including requirements for customs declarations, duty payments at WTO ‘Most Favoured Nation’ rates (the UK’s rates may be different from the EU’s) and cargo inspections, posing a risk of new administrative burdens, costs and delays. It is unclear if there will be mutual recognition of AEO status eg to mitigate the costs of using customs special procedures (to delay or relieve the payment of customs duty until goods are ready to be released into free circulation). At least, the UK has applied to re-join to the Common Transit Convention when it leaves the EU, enabling any charges due on goods to be paid only in their country of destination.
- VAT: the UK would introduce postponed accounting to imports from the EU and from non-EU countries. This would avoid imposing a new cash flow burden on UK importers. But it is unclear whether this would be reciprocated by the EU for importers of UK products.
- Regulation: There are clear and worrying implications for all sectors subject to EU regulation. To take the example of medicines, medical devices and clinical trials, the UK’s participation in the European regulatory network would cease. While the UK regulator, the Medicines and Healthcare Products Regulatory Agency, will take a wide range of steps to ensure continuity for products and services imported into the UK, the range and complexity of those steps highlights the risks of UK products and services losing access to the EU market unless the EU fully reciprocates.
- Data Protection: there would be no immediate change in the UK’s own data protection standards – the GDPR would be incorporated into UK law and the UK would unilaterally allow the free flow of personal data from the UK to the EU. For the same also to apply to data from the EU to the UK, the EU would need to grant an ‘adequacy decision’. But the Commission has already stated that this cannot be done until after the UK is a third country. Unless and until the Commission does so, UK companies will need to adopt ‘appropriate safeguards’, such as standard contractual clauses, to ensure the handling of the data meets EU standards. Companies are recommended to consider now what action they need to take.
Although ostensibly intended to reassure businesses that the government has planning well in-hand, the notices highlight the significant negative impact of ‘no deal’ despite the UK’s unilateral mitigations and particularly if the EU fails to reciprocate. While the scale of the impact would appear to render it highly unlikely that the UK or other EU governments would be prepared to oversee such an outcome, businesses should nonetheless consider how severely their operations would be affected and, in the light of that analysis, take decisions on what actions are and are not justified by the risks.
To assist businesses in making this analysis, we have developed a free online questionnaire to enable companies to obtain a rapid, practical overview of their risks particularly in the event of ‘no deal’: this is available here: extranet.dechert.com/Brexit.
- UK Government: How to prepare if the UK leaves the EU with
- UK White Paper: The future relationship between the United Kingdom and the European Union
- The full set of European Commission preparedness notices can be found here
- UK government’s preparations for a no deal scenario
- World Compass and World Passport Alert – UK FCA announces temporary permissions regime for inbound passporting EEA firms and funds in the event of a ‘no deal’ Brexit
Brexit Manoeuvres: Potential Implications of a ‘Hard Brexit’ for Fund Managers: A UK Perspective