Written by Bartlomiej Kulpa, paralegal
As agreed on 19 March 2018, a Brexit transitional period will last from ‘Brexit day’ on 29 March 2019 to 31 December 2020. The Brexit transitional period (also termed a Brexit implementation phase) is an interim solution that will amount to a bridge somewhere between full membership of the EU and the entry into force of a future trade agreement between the UK and the EU. From a legal point of view, the Brexit transitional period could be based on either (i) a bespoke transitional arrangement enshrined in a withdrawal agreement or (ii) a decision on an extension of a two-year negotiation period laid down in Article 50(3) TEU. This blog post focuses on the first scenario.
In the absence of any Brexit transitional period, businesses, banks and regulators would most likely face serious disruption on ‘Brexit day’. A Brexit transitional period will not only reduce the risk of an economic downturn and financial instability but also help to maintain the principle of legal certainty and give firms time to adopt practical solutions.
A crucial question is whether the UK would be bound by EU law during a Brexit transitional period. One of the UK government’s red lines is the exclusion of the jurisdiction of the Court of Justice of the European Union (CJEU) over the UK during this period. However, according to the Guidelines of the European Council of 15 December 2017, the UK is expected to remain fully committed to the internal market and the customs union during the Brexit transitional period. As a consequence, the UK would be required to apply EU legislation, as well as be bound by case law of the CJEU and EU trade policy.
Article 50 TEU appears to be silent on what a withdrawing member state's obligations are when they leave the EU. However, on closer inspection, the issue of fulfilment of the UK’s obligations is subject to withdrawal negotiations. Although the aim of the withdrawal negotiations is to conclude a withdrawal agreement, this is not obligatory before ‘Brexit day’. If the UK does not reach a withdrawal agreement with the EU and the two-year negotiation period is not extended, the UK will leave the EU unilaterally with no transitional period. Since Article 50 TEU does not specify how far-reaching the withdrawal agreement ought to be, the scope of the withdrawal negotiations can be as narrow or as wide as negotiators decide. The withdrawal agreement would need to set out the interim position on a range of issues, including the status of EU citizens in the UK and vice versa, trade arrangements with the EU, transitional arrangements for an exit from EU free trade agreements with third countries, and recognition of judgements of the CJEU.
It is highly likely that EU competition law would continue to apply to UK-based businesses in the period between ‘Brexit day’ and the entry into force of a future trade agreement between the UK and the EU. Since EU competition law and policy are of crucial importance to the construction and application of UK competition law and policy, EU competition case law would also remain highly influential. Moreover, from the perspective of companies in a number of sectors, such as hotel, leisure and retail, a key point to watch out for will be a decision on a post-Brexit approach to the EU free movement of persons.
As far as banks are concerned, Brexit creates challenges in relation to so-called passporting rights, which allow UK-headquartered banks to do business in any other EU member state without the need for further authorisation in each country. If the UK is required to apply EU law during a Brexit transitional period, passporting rights would continue to apply to UK-headquartered banks. Thus, setting up new hubs elsewhere in the EU and transferring client contractual relationships might not be necessary.
A Brexit transitional period would provide regulators with time to adjust to new regulatory regimes, such as licence approvals and information sharing arrangements. In light of this, it would be advisable for regulators not only to reconsider their initiatives that are currently underway but also to prepare plans dealing with wide-ranging post-Brexit scenarios.