Brexit’s regulatory revolution spells a less open Britain

02 Apr 2020 12:42 pm

Will leaving the EU’s single market turn the UK into a light-touch entrepôt or a protectionist backwater? For more than three years, the rhetorical debate has raged, but now the thesis that Brexit will herald an experiment in deregulation can be tested against a body of evidence.

No one disputes that once the UK is a no longer an EU member, companies in dozens of sectors will need to obtain licenses, registrations or legal footprints to continue to do business in the bloc.

But what does the UK do in response? Prime Minister Boris Johnson sends mixed signals. Some days, he foresees a state with a featherlight regulatory touch, “a seedbed for the most exciting and most dynamic business investments on the planet.” A speech on Friday indicated a more protectionist turn, calling for a “Buy British” procurement policy. 

For a more coherent picture of the environment immediately after Brexit, though, ignore the campaign trail and turn to the newly-amended statute book. The task of splitting the UK from the EU’s regulatory ecosystem has led the government to erect significant new requirements on doing business in Britain.

Factory reset

The moment the UK exits the EU’s single market, either under a no-deal exit or a negotiated trade agreement, a new regulatory landscape comes into force.

The transformation has been delivered through around 600 pieces of secondary legislation made under the EU (Withdrawal) Act 2018, totalling thousands of amendments to 40 years of domestic law.

The act preserves existing EU law in the UK and grants ministers broad discretion over how to address “deficiencies” that will arise in the wake of Brexit. The resulting body of law will subsist alongside any subsequent trade agreements with the EU, US or Japan — the UK’s new factory settings.

But it wasn’t immediately obvious to ministers in 2017 how to repurpose legislation governing participation in a market of 500 million people to fit a standalone state of 66 million.

A basic principle of the EU’s single market is that regulated goods or services can be sold without discrimination across the bloc, provided a company has a legal presence in one member state. The size of this footprint — just an officer, some assets or a fully-staffed headquarters — and the obligations on it varies by sector.

The government had three options.

The UK might have opted to peel back such obligations altogether, under a rapid and unilateral liberalization.

Or, as many officials favored, it could have chosen to act as a “shadow” member of the single market. Registrations and licences issued by regulators in the 27 remaining states could be recognized in UK law, despite this not being reciprocated by the EU. This would limit the disruption of trade flows into the UK.

Ministers backed a third option, which created what we might call the “single market in one country”. The EU’s regulatory architecture was replicated, with UK agencies taking on the supervisory functions of European bodies. The EU is rendered a “third country” in UK law, and European companies are obliged to set up shop under UK regulators, under a principle of strict reciprocity.

There were good reasons for this approach. One was regulatory coherence: outside the single market, UK bodies could no longer blindly trust the decisions of their counterparts within it. 

Unilaterally maintaining preferential access to EU companies would also risk a challenge claiming a breach of the World Trade Organization’s “most favored nation” rules, the government believed. Those rules prohibit discrimination between parties outside a formal agreement.

Theresa May’s administration also believed curtailing the EU’s access to the UK market would serve as leverage in the coming trade negotiation, in which it hoped to retain partial membership of the single market for the UK under May's “Chequers” proposal.

Boots on the ground

That plan was rejected by both the EU and later by Johnson's administration, leaving the parties on course for a free-trade agreement. This will have a significant impact for European businesses seeking to maintain their current market access to the UK.

In chemicals, the UK will mimic the EU’s system of mandatory registration — known as UK REACH — via a single statutory instrument. Companies trading in the UK will within two years need to resubmit the testing data given to the EU’s regulator in Helsinki to the UK’s Health and Safety Executive in Liverpool — an exercise the industry expects may cost 350 million pounds ($440 million). Foreign manufacturers will need to appoint a legal representative on UK soil, just as UK manufacturers will need to do in the EU.

Similarly, manufacturers of diving gear, safety equipment, cosmetics and other goods subject to conformity assessment under EU law will need to appoint an “authorized representative” to trade in the UK, mirroring the requirement in EU law.

A similar approach is taken in services. 

The directly effective treaty rights of freedom of establishment and non-discrimination, which underpin the EU’s single market in services, will be struck from domestic law.

The Lawyers’ Services Directive will be repealed on exit day, ending EU lawyers’ ability to work in the UK on a “fly in, fly out” basis, or under their home-state titles, bringing them into line with the rest of the world.

In aviation, the EU restricts the right to fly any route within the bloc to “community air carriers” headquartered in a member state. Correspondingly, in the UK, the Operation of Air Services (EU Exit) Regulations restricts cabotage rights to the newly-created entity of “UK air carriers”.

And so it goes on. Under Article 27 of the General Data Protection Regulation, foreign data processors — such as online retailers — need to appoint a legal representative in an EU state who can be accountable to privacy regulators. The UK has replicated this provision, requiring a presence on British soil.

And since the EU will no longer recognize licenses held by UK-based broadcasters for the purposes of the Audiovisual Media Services Directive, the UK will reciprocate and require European television stations to establish a UK presence.

There is one significant exception. EU-based banks, insurers and asset managers have been given a three-year grace period under the Bank of England’s “temporary permissions regime,” despite there being no reciprocal scheme for UK-based operators. The authorization requirements in the UK at the end of the period are still to be seen.

Unquantified

It’s hard to predict the impact on crossborder trade of these new obligations, since the government has not published impact assessments for many of the statutory instruments. Academic work is at an early stage. The government’s long-term economic analysis, from November 2018, put the cost of swapping EU membership for a free-trade agreement at a five per cent hit to potential growth over 15 years, mostly driven by new regulatory barriers.

The new landscape may prove to be temporary: the obligations may be unwound under a post-Brexit liberalization, or they may tightened, digging a deeper moat around the UK market. Large companies with an established presence in the UK may find them easily navigable. Smaller ones probably won’t.

What’s indisputable is that the operating environment after Brexit is no longer a matter of campaign-trail conjecture, but a legal reality in black and white that’s likely to come into force in just over 12 months.

Any claims on the potential dividend from post-Brexit deregulation must take account of this new, more restrictive terrain.

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