UK: The Great Brexit Debate

Last Updated: 27 April 2016
Article by Jeremy Cohen, Brandon Ransley and Stuart Hopper



The UK is now counting down to the 23 June 2016 referendum on whether to stay in or leave the European Union. Dentons summarises the background to this momentous choice, and takes a deeper look at some of the legal issues involved in some key areas that would be impacted by a vote to leave the EU.


On 17 December 2015, the European Union Referendum Act 2015 (the Referendum Act), came into force, providing for a referendum—to be held before the end of 2017—on the question: "Should the United Kingdom remain a member of the European Union or leave the European Union?". The Referendum Act explicitly requires the government to publish information to help voters make an informed choice in the referendum. This information must include:

  • details of the terms of any revised agreement with the EU, together with the government's opinion on what has been agreed; and
  • information about the rights and obligations accompanying EU membership, with examples of how non-EU countries manage a relationship with the EU.

The UK government entered into negotiations with the other EU Member States to address concerns over its existing EU membership. It sought a package of reforms in the four key areas of economic governance; competitiveness; sovereignty; and immigration. Its demands were set out in a letter of 10 November 2015 from the British Prime Minister to the President of the European Council (" A New Settlement for the United Kingdom in a Reformed European Union").

At the European Council meeting in Brussels on 18–19 February, the terms of a "new settlement" for Britain were finally agreed by all Member States. On 19 February, the Prime Minister issued a statement outlining the reforms that had been agreed. On 20 February, the agreement was put to the full UK Cabinet; the referendum date was set for 23 June; and the campaigning—on both sides of the debate—began.

In accordance with the provisions of the Referendum Act, the government published the terms of the new EU settlement on 22 February.

In the report—entitled " The Best of Both Worlds: The United Kingdom's Special Status in a Reformed European Union"—the government also made a clear recommendation that Britain remains in a reformed European Union.

Legal procedure for withdrawal

On 29 February, the Cabinet Office published " The Process for Withdrawing from the European Union", a document setting out the process that would follow a vote to leave the European Union, and the subsequent negotiations. It is helpful to consider the two elements of any withdrawal process, which can be summarised as:

EU process: Article 50 of the Treaty of the European Union1 states: "Any Member State may decide to withdraw in accordance with its own constitutional requirements." Briefly, the process is triggered by a notification from a Member State to the European Council of its intention to leave. Following a withdrawal notification, there is a two-year time period for negotiations to be carried out in accordance with guidelines issued by the European Council.

UK process: There is no formal procedure under UK law for a withdrawal from the EU, so specific legislation would be required to make the necessary amendments to existing UK law. The starting point is likely to be the repeal of relevant provisions of the European Communities Act 1972, which makes obligations under EU Treaties binding in the UK and gives the UK government the power to make payments in line with its EU obligations. A large number of savings provisions and transitional arrangements are likely to be required, to preserve those parts of EU law—or the domestic legislation made under it—that are needed to avoid a legal vacuum in some areas.

On 2 March, the Cabinet Office released a further policy paper as part of the government's information obligations under the Referendum Act. " Alternatives to Membership: Possible Models for the United Kingdom Outside the European Union" looks at potential models for the UK's relationship with the EU, were it to vote to leave. Further information about the rights and obligations of the UK's membership of the EU will be published later.

The "Alternatives to Membership" paper discusses the options for the UK to have an ongoing relationship with the EU, in the event of a vote to leave. It provides examples of countries that are not members of the EU but have other arrangements with it: specifically Norway, Switzerland, Canada and Turkey. It also looks at a possible relation-ship based only on World Trade Organization membership. It sets out the main features and implications of each of the key existing models for the relationship, and assesses their suitability for the UK.

The paper concludes with the unequivocal repetition of the government's belief that no existing models outside the EU can provide the UK with the same advantages and influence that it has from its current status inside the EU.

Wider issues raised by the campaign

In the run up to the referendum, there is the potential for the reform debate to discuss some of the fundamental problems with the UK's relationship with Europe and to provide a roadmap for "better"— meaning less—EU regulation in future, in the event of a vote to stay in Europe. Whether this opportunity will be actually grasped is unclear. However, it is the case that the UK's problematic relationship with Europe has multiple causes:

  • The UK currently doesn't get (enough of) its own way because it devotes too little resource to EU negotiations. Most of the time, these negotiations are fairly low down ministers' lists of priorities—negotiations are largely conducted by officials and they don't involve ministers having to face tough questions in parliament.
  • It is true that the Commission has an in-built bias towards legislation as the answer to any problem. This is because legislation is often the easiest way for officials—and the Commission as a whole—to show that they are "doing something".
  • A significant part of the "burden" of EU legislation arises from uncertainty over the meaning of key provisions. In part, this may be inevitable in a system that requires compromise; where some conscious "fudging", to achieve agreement between Member States or between Council and Parliament, allows the different parties to the legislative process to be able to interpret a provision in a way that suits their different priorities. At other times, however, this uncertainty may be just the result of laws being drafted in committee, by non-lawyers. Either way, the Court of Justice of the EU may then be called on to identify the "true" meaning hidden in the tangled verbiage— a responsibility that, contrary to popular belief, the Court does not relish or undertake lightly.

A Brexit vote

With so much in flux at the moment, providing anything more than rather academic guidance on the impact of a UK vote to leave the EU is challenging.2 This uncertainty has already led to significant economic impact on markets, business and investor confidence3, and will most certainly continue to do so after a vote, whichever way it goes.

In reality, should the UK vote to leave, little will actually change at a legal level immediately after the decision. It is likely to take months, if not years, to conclude the process, which includes:

  • Negotiating the terms of departure with the rest of the EU
  • Enacting domestic legislation to implement the Brexit
  • However, businesses are advised to review their positions now in light of a potential UK exit from the EU. Brexit would have significant impact on a wide range of relationships, commercial agreements and contracts, as well as the regulatory environment that may apply post-Brexit.

Some of these potential impacts are looked at in more detail below. In the run up to the referendum, parties entering into contractual relations also need to consider whether such agreements should in any way be conditional on the result, or should include mechanisms to deal with any issues that might arise in the event of a Brexit vote.


It is clear that Brexit would have significant implications for the current UK legal and regulatory framework. The issues of EU regulation, red tape and a perceived ceding of sovereignty from Britain to Europe are central themes in the Brexit debate. Brexit campaigners often raise examples of "mad" EU regulation— such as how far bananas can bend and the power of vacuum cleaners— that Britain needs to move away from. However, EU regulation is not limited to obscure areas like this. It touches almost every aspect of business life and operations in the UK.

As with a great many issues concerning Brexit, it is difficult to predict what changes would actually flow from exiting the EU, but it is possible to state that Brexit would have three immediate impacts on regulation in the UK:

  1. Any European regulations that are directly binding on the UK and on British citizens and companies would no longer apply. This means the UK government would need to decide whether to implement UK legislation to continue those regulatory regimes, amend any aspects of those regimes that have been transposed into UK law or dispense with them altogether. Examples of this would be the European Market Infrastructure Regulation, the Market Abuse Regulation—which will be directly applicable across the EU from 3 July—or the forthcoming Data Protection Regulations (see below).
  2. Any European directives would also no longer be binding on the UK. However, as these have in most instances been transposed into UK law through UK legislation, unwinding this aspect of the EU regulatory regime would require the UK to repeal those enabling UK regulations. For example, the third Money Laundering Directive has been implemented in the UK through the Money Laundering Regulations 2007 and various industry regulations and guidance. Much of the financial services "single market" has also been established by domestic laws that implement EU measures. For any of these regimes to change substantively, the UK government would need to repeal or amend these regulations.
  3. Perhaps most importantly, following Brexit the UK would no longer be part of EU foreign policy and regulation decision-making. This means that, for instance, the UK would no longer have a role in shaping and implementing EU sanctions and would need to consider its own foreign policy and international financial sanctions positions. On the other hand, it would still, of course, remain a member of the United Nations; and the UK already has its own autonomous financial sanctions regime, alongside the EU regime.

However, all of this must be considered in the context of the free trade agreement Britain would need to negotiate with the EU following a Brexit vote. Access to the single market is likely to require voluntary compliance with most, if not all, of the EU's regulations and directives. In many areas—from money laundering to MiFID, from market abuse to data protection, and many others— access to EU markets may mean the regulatory position for UK citizens and businesses does not actually change a great deal, depending on what could be negotiated. In any case, it is not possible to ascertain the appetite of all affected parties for alternative models before the referendum.

The impact of Brexit on some specific areas of law, with examples of key industry sectors potentially affected, is considered below.


Finance agreements

Although the UK is not within the eurozone, perhaps the most useful parallel in terms of finance agreements is that of the "Grexit" debate. In 2012, Greece's precarious economic position made the likelihood of a Grexit—i.e., Greece lurching out of the eurozone (and potentially the EU) overnight—a real possibility. Speculation over Grexit also resurfaced for a time in 2015. The prospect of Greece leaving the currency union and reverting to the drachma raised many legitimate questions about the potential legal effects on finance documents, such as: If a Greek borrower had taken a loan denominated in euro, what would be the currency of payment following any redenomination? Could currency redenomination trigger an event of default under a loan agreement? While the parallels are not exact—the UK is not within the eurozone and a Brexit would not be a distressed exit from the EU but a voluntary process—there would still be potential impacts in relation to finance agreements:

a. Conflicts of laws

EU legislation currently sets out the rules that a court within the EU applies to decide what law governs contractual or non-contractual obligations, or which court has jurisdiction to hear a dispute between parties. EU legislation also sets out a framework for mutual recognition of judgments across the courts of the EU. In the case of a Brexit, there would be some uncertainty as to how the courts within the EU should treat the UK. For example, the courts of an EU Member State might refuse to accept the parties' choice of English jurisdiction following Brexit.

However, in practice, it is unlikely that Brexit would spell complete uncertainty for parties in dispute. First of all, it is in the interests of all parties to agree a sensible way forward—particularly for matters of jurisdiction and enforcement of judgments. Secondly, the Recast Brussels Regulation (the EU regulation that currently governs which courts of EU Member States have jurisdiction in disputes) is not the only option. Switzerland, Norway, Iceland and the EU are currently party to the 2007 Lugano Convention, which also deals with jurisdiction issues.

b. Increased costs

Brexit is almost certain to herald the introduction of new laws or regulations. These could, in turn, result in a lender incurring increased costs, which it might want to recover using the increased costs provisions in its loan agreements.

c. Definition of EU and references to EU legislation in contractual terms

It is not uncommon for agreements to contain a definition of "EU" as the members of the European Union from time to time. This would need to be addressed where the UK was obviously intended to be included in the definition. Any provisions in transaction and security documents referring to EU legislation would also need to be considered, depending on the UK's approach to EU-derived legislation.

Loss of the financial services and products passports?

A key concern across the City of London will be the potential loss of the ability for UK-based financial institutions to sell products and services into other EEA Member States4, and set up branches there without the need to seek local authorisation. A plethora of single market directives give these "passporting" rights to, among others: banks and building societies, insurers and reinsurers, insurance and mortgage intermediaries, alternative investment fund and UCITS managers, wholesale and retail investment firms (including market operators, broker/dealers, wealth and portfolio managers and advisers) and payment services providers. Many of the largest European financial institutions are headquartered in London, as are the major subsidiaries of US and other third-country institutions—and all of these make significant use of passporting rights.

Following a Brexit, there would be no single passport. The "Alternatives to Membership" Cabinet Office paper discusses potential options, including: bilateral agreements; agreements with the EU for certain reciprocal arrangements on the Swiss model; or the possibility that the UK could, like Norway, be part of the EEA rather than the full EU, which would still enable it, in theory, to benefit from passporting.

With this uncertainty it seems likely that many businesses are already carrying out feasibility studies on potential alternative headquarter venues.

Download the Briefing Paper.


1 Consolidated version of the Treaty on European Union—TITLE VI: FINAL PROVISIONS—Article 50

2 However, for some intellectually rigorous speculation on the difficulties of negotiating Brexit, see the evidence of two of the UK's most distinguished EU lawyers to the House of Lords EU Select Committee (8 March 2016)

3 Sterling fell by its biggest single session loss since October 2009 after London Mayor Boris Johnson declared that he would be supporting the "Out" campaign; while Moody's warned that Brexit would threaten the UK's strong credit score, potentially pushing up the cost of government borrowing (see "Pound hits seven-year low on Brexit fears", Financial Times, 22 February 2016; "Moody's warns Brexit would risk UK's credit rating", Guardian, 22 February 2016)

4 The EEA was established by the EEA Agreement, which entered into force on 1 January 1994. It provides for the free movement of persons, goods, services and capital within the internal market of the EU, as well as three of the four Member States of the European Free Trade Association (EFTA): i.e., Iceland, Liechtenstein and Norway. All relevant EU legislation in the field of the single market is integrated into the EEA Agreement so that it applies throughout the whole of the EEA.

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