European Union: BReg-xit? Will 'Brexit' Lead Us To The Promised Land And Cut Down On Competition And Regulatory Law Red Tape?

Following Friday's 'Leave' vote on UK membership of the EU, we look at how an exit by the UK from the EU could affect the legal landscape around the application of competition and economic regulation.

Much of the attraction of leaving the EU appears to have stemmed from the widely held view that - as an economically fully independent entity - the UK will be free to reduce regulation and jettison Brussels-inspired red tape in a wide range of industries. How far is this argument justified?

In the first part of this newsletter, we will look at the likely legal changes which will now be needed following the 'out' vote in the referendum - and the range of possible constitutional outcomes which the vote implies. In the second part of the newsletter, we consider what impact those outcomes may have on the UK 'regulatory state'.

The 'post-no' frenzy?

The immediate legal action is for the UK to begin the process of withdrawing from the EU Treaties. Until 2009, the Treaties did not contain any express provisions setting out how a Member State could leave the EU - once joined, EU membership was assumed to be eternal. The amendments to the EU Treaties imported by the Treaty of Lisbon included (at the UK's insistence) express provision for Member States wishing to leave the Union.

Article 50 of the Treaty on European Union (TEU) allows a Member State to give notice to the EU Council that it wishes to withdraw from the EU. The notifying state (i.e. the UK) and the EU must then negotiate the terms of the withdrawal from the Union and also the terms of any ongoing relationship between the EU and the UK. Article 50 provides a period of up to two years for these negotiations: if on the second anniversary of giving notice, the EU and UK have not reached agreement (or agreed to extend the negotiations), the EU Treaties automatically cease to apply to the UK.

When the UK joined the EU (in January 1973) EU law, which had already been in existence for 15 years and was by that time already expanding quite significantly, was imported into the laws of England, Wales, Scotland and Northern Ireland by the European Communities Act 1972. The main thrust of the Act is in section 2. This required all existing 'directly effective' EU law to be implemented immediately in the UK, gives the government the power by secondary legislation to implement any future EU law which needs national implementation (e.g. Directives) and provides that EU law overrides later national laws (including Acts of Parliament) which conflict with EU rules.

Although the 'Leave' campaign took the position that the European Communities Act 1972 would need to be repealed entirely, this is not a necessary consequence of an 'out' vote in the referendum. The 1972 Act applies to implement the 'Treaties' (and EU legislation made under them). 'Treaties' are defined in the Act, so it would be quite possible for Parliament simply to amend the list of EU Treaties in the 1972 Act and to include any post-withdrawal convention reached between the UK and the EU as a result of the negotiations required by Article 50 TEU. This might also have the technical advantage of making it easier to legislate for any transitional provisions needed.

So in fact the 'frenzy', if there is one, will be played out in the negotiation rooms in the EU Council buildings in Brussels and not on the floor of the House of Commons.

What are the likely outcomes following the 'Leave' vote?

The UK as Norway or Switzerland? Or 'Brexceptionalism'?

The 'baseline' outcome - that the EU and UK fail to agree on any post-Brexit co-operation in the two years provided -would leave the UK out in the cold. Realistically, since both the EU and the UK are members of the World Trade Organisation (WTO), the baseline is not isolation, but the UK would revert to being part of the WTO worldwide trade area. This covers almost all goods and some services, and has successfully progressively reduced international trade tariffs quite substantially.

As well as the multi-lateral WTO framework, the UK would be free to renew its bi-lateral links with non-EU trade partners - currently external trade agreements have to be negotiated (exclusively) by the European Commission. As indicated by Barack Obama on his recent trip to the UK, it is by no means a 'shoe-in' that the US would extend to the UK the bilateral free trade deals with the EU which are at an advanced stage (US) as part of the transatlantic trade and investment partnership (TTRIPs) initiatives. This may also be the case with respect to the trade agreement concluded in late 2014 on a 'Comprehensive Economic and Trade Agreement' (CETA).

So, a failure to agree anything at all is most likely to affect those areas of EU law traditionally outside the international trade sphere: the EU right of establishment and free movement of persons, and the free movement of capital. British pensioners on the Algarve and financial services firms in the City may now find themselves on the front line in Brexit.

More likely an agreement will be reached. There are two current models for non-EU states to enjoy a close economic relationship with the EU. The first is the European Economic Area (EEA) agreement and the second is the bilateral EU -Switzerland treaty. Although using one or other of these models is (unfortunately) unlikely to change the UK economy into Norway's or Switzerland's, they do offer interesting insights into the advantages and pitfalls of a close but clear relationship with the EU.

The EEA was originally set up in the early 1990s as a free trade area (single market) between the EU and those European states which did not at that time wish to join the EU fully. Since then a number of the original EEA members have become EU Member States so that now (apart from the EU states) the only members remaining are Norway, Liechtenstein and Iceland. The EEA states participate in the EU single market on equivalent terms to EU Member States and this includes rights which go beyond those traditionally included in a free trade area, such as the right of EEA nationals to move to EU countries to work.

As a necessary corollary of the extension of equivalent rights to EEA countries and their firms and citizens, the EU has insisted that they adopt all EU single market legislation (excluding agriculture and fisheries) without amendment. Although there are provisions allowing for EEA governments to be consulted in the law making process, and also some 'safety valves' if EU legislation has an especially adverse impact on an EEA state, in essence those states have to accept whatever the EU does.

Given that the emphasis in the referendum debate has been on the impact of “uncontrolled” EU immigration on the UK - which would not be affected if the UK adhered to the EEA - and that the prospect of having to accept Brussels legislation with little influence over its content is unlikely to be politically acceptable, UK membership appears currently to be unlikely.

A bilateral UK-EU treaty could perhaps look a little like the set of agreements between the EU and Switzerland. However, the Swiss arrangements have features which the Brexit proponents might find to also be unacceptable. In particular, the Swiss-EU free movement of persons provisions, although less extensive than those currently in force across the EU (there is no right to claim welfare benefits for example), would still not deal fully with perceived over-immigration from the EU.

A further model which could be adapted to a new UK-EU relationship is the TTRIPs agreement, based largely on mutual recognition of each party's existing comparable legislation to form the basis of a broad scope free trade area. However, given the controversy which the draft TTRIPs agreement with the US is currently generating in continental Europe, it is far from certain that the rest of the EU would be willing to offer this to the secessionist UK.

For the discussion in the rest of this update, we'll assume that the UK and EU manage to reach a bilateral post-Brexit agreement (albeit some two to four years hence), but that it is not as far-reaching as the EEA agreement, nor the Swiss bilateral accords.

UK 'independence' and competition law enforcement

The enforcement of competition law in Europe has been transformed over the last 15 years or so - notably by a complete revision of EU competition law procedure in 2004 at the time of the enlargement of the EU from 15 to 25 Member States. Indeed, until then it was not required in EU law for Member States to have domestic competition rules at all. The Netherlands did not introduce competition rules in Dutch law until its law of May 1997, and the UK's competition rules were very different from (and less effective than) EU rules until the Competition Act 1998 came into force in March 2000.

As well as requiring Member States to apply EU competition law alongside their own national rules, the 2004 reforms also mandated a network of national competition authorities. Through working together for the last 10 years or so - and as a result of guidance from the European Commission's competition Directorate - national competition procedures have steadily converged. Importantly, however, there is no requirement to have the same procedure as the EU when enforcing domestic competition rules - many Member States retain procedural quirks which fit better than a 'vanilla' EU procedural approach with their own court and administrative systems.

The 1998 Act in the UK introduced a copy of the EU 'prohibition' system for cartels and other restrictive agreements and abuses of market dominance. The wording of the UK legislation was deliberately identical to the EU prohibitions so that UK business would not be faced with different - and possibly conflicting - competition rules in the EU and UK contexts.

This policy of a 'single' substantive competition regime is reinforced by section 60 of the 1998 Act. It provides that, where a question of substantive competition law is raised in domestic UK law, it is to be decided in the same way as it would be if it were raised in an EU process. This (domestic) UK provision means that UK business knows that it will not be subject to different competition compliance standards according to which legal system is being used - remembering that the UK competition authority (the CMA) is required to apply both EU and UK competition law in some circumstances.

The demarcation line for applying EU or UK law is whether the agreement or practice complained of has an appreciable actual or potential effect on trade between Member States. Clearly - and despite Commission guidance on how to interpret this - it is far from being a bright line.

Of course, EU competition law will not stop applying to UK businesses once the UK leaves the EU. Wherever trade between the (remaining) EU Member States is potentially affected by an anti-competitive practice - even if it is carried on in the UK between UK businesses - the EU Commission will still have the power to take enforcement action against the participating UK firms. Fines can still be levied - bearing in mind that the EU Commission's fining power is formally defined not by EU turnover, but by worldwide turnover. It will be more difficult for the Commission to collect the cash if there are no assets to be attached in the smaller EU: but most UK firms which trade in Europe will nevertheless still be subject to the European Commission's competition enforcement rules.

What could the post-Brexit UK government do in the competition field? Much depends on the political composition of the government, but here are some suggestions developing from the current policy position:

  • repeal section 60: requiring courts and the CMA in the UK to apply its competition rules in exactly the same way as the EU does would clearly not be necessary once the UK is not part of the EU. But it is likely that the CMA and the courts would still have regard to EU practice when applying UK law;
  • enter into a co-operation agreement between the EU Commission and the CMA to allow them to exchange information etc. when applying competition law in EU-UK trans-border cases. This could be similar in form to the international memoranda of understanding which the EU already has with anti-trust bodies in a number of third countries - for example Australia, Japan, Korea, the US and Canada;
  • increase the emphasis in UK competition law on pursuing individuals rather than just firms who break the competition rules. At present, the interplay between the UK criminal cartel offence (for individuals) and EU competition law is complex and has led to some procedural difficulties. Not being required to apply EU law could allow UK procedures to be flexed to make prosecutions - and even civil action - against directors and employees who have breached competition rules even more effective;
  • (possibly) expressly allow the courts and CMA not to apply 'single market' considerations when enforcing UK competition law. One of the main aims of EU competition law has been to underpin the creation of an EU-wide single market by making sure that firms in different Member States don't enter into agreements to divide up the EU (in distribution systems for example) along national lines. As the UK is already a 'single market', this market integration purpose could be dropped. This would mean (in particular) that - unless either the supplier or the distributor has substantial market power - distribution (“vertical”) agreements could fall outside the scope of competition law altogether. This was the case in the UK until 2005 - so the change in law needed would not be great.

If these policy positions were adopted, the shift in focus in competition enforcement away from the firm - in particular smaller firms' distribution and licensing arrangements - towards individuals and companies with market power would lighten the competition compliance burden for the large majority of companies.

But it would increase the risks for individuals of engaging in cartel behaviour. And for those firms which trade regularly with the rest of Europe, the need to comply with two different sets of rules could end up making compliance more difficult. Of course, competition enforcement would not be the only area where this will be true after Brexit - increased detachment from EU norms in a wide range of fields will increase compliance costs in cross border trade.

Economic regulation post-Brexit

For those sectors where regulation of economic activity is more detailed than the general competition law regime - usually network industries such as energy and communications - the impact of Brexit will be greater.

For telecommunications, the technical standards needed to use devices and access services across domestic and foreign networks (e.g. for mobile phones or data) are largely set at an international level. At present, UK industry participates fully in EU bodies (for example ETSI) set up to co-ordinate the EU position in these areas and guide EU legislation needed to implement changes. Although it is unclear how fully the UK would continue to participate in these technical bodies after Brexit, its input would still be needed to ensure that any changes could be sensibly implemented in what would still be an important market for telcos.

The most immediate impact would be that the UK would no longer be bound by EU law capping the cost of 'roaming' on foreign networks - it is possible that the cost of using a British mobile in continental Europe could increase quite significantly, particularly for data downloads.

In the energy sector, the impact could be much more significant. A combination of shortage of generating/production capacity coupled with a rising population (and growing economy) - not characteristics shared by most EU Member States - may mean that a future UK government would have to take a markedly different energy policy position from the rest of the EU , simply to keep the lights on.

As noted by the CMA panel investigating the UK energy market, the UK's non-renewable energy imports do not (in the main) come from the rest of the EU - Norway, the US and the Gulf being the main foreign suppliers. This would give the UK government a freer hand to develop further bilateral relations with these main suppliers and to pursue a greater emphasis on renewable sources of energy (nuclear power currently being the favoured option) at home. Although the UK would remain bound by its international obligations on climate change, it would have a freer hand on how to meet those targets.

Leaving the EU would also give governments in the UK a much freer hand over how to invest public funds in UK infrastructure projects. The EU rules, which control state aid to industry to ensure a level playing field across the EU 'single market', would no longer apply, and nor would UK governments require prior approval from the European Commission for major infrastructure spending. And the rules on public procurement - requiring EU-wide advertising of practically every public supply contract - could similarly be replaced with something more 'light touch' and better suited to the UK's increasingly flexible public sector procurement landscape.

Of course, the UK would not have a free hand to subsidise industry as it likes, nor to procure for public services without allowing non-UK companies to compete. It is very likely that any post-Brexit agreement with the EU would contain residual controls in these areas. And the model would likely be the arrangements in the draft TTRIPs agreement (which are already in place in a very similar form in the EU-Canada agreement) allowing firms from the parties to those conventions to bid for all public contracts on a non-discriminatory basis. Even if there is no agreement with the EU post-Brexit, the WTO treaties contain effective trade defence mechanisms, which would limit the UK's freedom to use public funds to underpin UK industry alone.

There is clearly the potential for significant change in the economic landscape post-Brexit, but this potential is much greater in some sectors than in others. And perhaps the most substantial effect (at least in the short term) is the uncertainty the Brexit debate is now generating.

While it is in everyone's interest that this uncertainty be resolved sooner rather than later, such uncertainty may become a feature of the UK regulatory landscape for some time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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