Post-election Brexit… The Fog begins to lift
At the time of publishing our previous article “Possible Models for UK – EU Trade” (27 May), and prior to the 2017 UK general election, the key negotiating areas laid out by the UK government, were:
- Take control of our own laws – End the jurisdiction of the European Court of Justice (ECJ)
- Control immigration
- A new customs arrangement – Prioritising trade in goods and services
- Being able to secure new trade agreements with other countries (outside of the EU)
- No more UK contributions to the EU Budget
- No deal for the UK is better than a bad deal
Keeping these negotiating objectives in mind (and also those of the EU), it was clear that the most likely UK-EU trading relationship would either be a bespoke FTA (Free Trade Agreement), or the ‘no deal’ option of trading under W.T.O rules.
Now the general election has now concluded, the Conservative government has updated their Brexit negotiating objectives in light of lacklustre polling results, meaning several aspects have now changed.
How have negotiating priorities changed post-election?
Deal or no deal
The UK government appears to have slightly softened their position, since Theresa May’s Lancaster House speech in January 2017, where she said “no deal for Britain would be better than a bad deal”.
While both the EU and the UK understand that the negotiations could collapse, and appear to have contingency plans ready should this be the case (including operating under W.T.O rules). At the same time, both acknowledge the importance of an orderly withdrawal and a framework for a future relationship based on a withdrawal agreement.
The Chancellor, Philip Hammond, confirmed this approach in an interview with Andrew Marr on 18 June, when he had said that no deal at the end of the Brexit negotiations would be a:
“very, very bad outcome for Britain, but there is a possible worse outcome and that is a deal that is deliberately structured to suck the lifeblood out of our economy over a period of time”
Mr Hammond later re-affirmed this during the annual Mansion House speech on June 20th, about the state of the UK economy, when he said transitional arrangements would be needed to “avoid unnecessary disruption and dangerous cliff edges”.
The full transcript of the speech can be found here: Speech Transcript
Both parties agree that the outcome of the negotiations must be mutually beneficial, but while David Davis speaks of a “deep and special partnership between the UK and the EU” and a “deal like no other in history”, the EU has made clear that it will not offer the UK a deal in which it enjoys similar benefits to EU membership. Indeed, Michel Barnier has insisted that EU membership must remain the most advantageous status. This is mainly because were the EU to offer anything else, it could have the potential to threaten the whole European project, as other countries might follow the UK in leaving the EU to secure more preferential terms.
In summary, both sides appear to be showing encouraging signs that they are approaching the negotiations in a more positive and constructive manner. At the same time, both have made it clear they won’t make a deal on terms that will disadvantage either side significantly.
Overall, there is a softening in tone here, whereby the UK is indicating a no deal outcome will be strongly avoided, and would be viewed as a last resort.
Transitional Arrangements…impact on EU Budget contributions & ECJ Jurisdiction
In more recent developments both the UK and the EU have acknowledged the need for period of adjustment, to allow the UK to implement new arrangements and for the EU to minimise disruption until a trade agreement is concluded. Such a transitional arrangement would mean the UK not severing all ties with the EU after the two-year negotiating period is up. The European Parliament has indicated this should be a limited transition period, that does not exceed three years.
The EU has also made clear that if the UK has a gradual transition out of EU, it will have to make payments to the EU. This may mean that the government will have to have a more phased approach in reducing EU budget contributions gradually over time.
The EU has stated during any transition period, the “existing regulatory, budgetary, supervisory and enforcement instruments and structures” (e.g. the jurisdiction of the CJEU) would apply. This may prove challenging for UK negotiators given the UK has made it clear they wish to take control of their own laws, and end the ECJ’s jurisdiction in the UK.
Customs arrangements & securing new trade agreements
Generally speaking the position has not changed significantly here, just re-affirmed.
The UK government has made it clear they no longer wish to be in the Customs Union, and they wish to pursue new trade agreements outside the EU.
In his Mansion House speech the Chancellor spoke of a “frictionless customs arrangement to facilitate trade across our borders”, and he was optimistic that jobs and trade could benefit from Brexit:
“I am confident we can do a Brexit deal that puts jobs and prosperity first, that reassures employers that they will still be able to access the talent they need, that keeps our markets for goods and services and capital open, that achieves early agreement on transitional arrangements, so that trade can carry on flowing smoothly, and businesses up and down the country can move on with investment decisions that they want to make, but that have been on hold since the Referendum.”
However, this could still prove somewhat challenging give the EU’s position that the UK should not benefit from not being in the EU. On 19 June after the first meeting between Michel Barnier and David Davis, Mr Barnier thought a “fair deal” was possible for both the EU and the UK, “and far better than no deal”. He reiterated the pledge that the EU would “work all the time with the UK and never against the UK. There will be no hostility on my side. I will display a constructive attitude firmly based on the interests and support of the 27”. He also said he was “not in a frame of mind to make concessions, or ask for concessions. It’s not about punishment, it is not about revenge”.
It remains to be seen how or if these two positions can be reconciled.
Controlling immigration & citizens rights
The Government has stated it seeks to “manage migration”, not to “to shut it down”. Although the position has not changed here, there has been more information released regarding what UK and EU can expect on their residency and immigration status.
Both parties agree on the need to settle the issue of EU citizens’ rights as a priority. Earlier UK suggestions about restricting the residency rights of recently arrived EU citizens as soon as Article 50 was invoked were abandoned, under EU pressure to allow the current status of EU citizens in the UK to continue. The Government is reported to have plans for a “very generous” offer on rights for the estimated three million EU citizens living in the UK.
On 12 June the EU Commission Task Force preparing for the negotiations published a position paper, “Essential Principles on Citizens’ Rights”, which include the detailed requirements of the principles set out in the negotiating directives. After the first Brexit meeting on 19 June, David Davis stated that on this issue “there is much common ground”.
Download the full paper here:
On 26th June the UK government has published a detailed paper outlining the UK’s offer, “Safeguarding the Position of EU Citizens Living in the UK and UK Nationals Living in the EU”. Initial reactions have been that the UK paper is too vague, and does not match the rights promised by the EU.
Download the full paper here:
More specifically, the EU’s position states that the rights of EU citizens in the UK, and British citizens elsewhere in the EU, should not change as a result of Brexit. Meanwhile, the British proposal, would mean the loss of some of those rights such as the legal protection of the European Court of Justice (ECJ), for example, or the unconditional right to bring family members into the UK from third countries.
The cut-off date for eligibility for settled status also needs to be clarified. The UK proposal suggests that the cut-off could be as early as 29 March 2017 (the day when Article 50 was triggered), which would be contentious as it would mean EU citizens technically losing rights before the UK has actually left the EU at the end of negotiations.
The UK paper also outlines details of a number of other elements, including child benefit payments, health insurance, transitional arrangements, rights of retired people abroad, rights of economically inactive (e.g. students), and simplification of bureaucracy for people applying for settled status.
As the negotiation and details on this topic progress, lookout for our upcoming detailed analysis piece on immigration and visa changes, and how this might impact management of staff across financial services companies.
What new information has been shared?
The ‘divorce’ bill
The ‘divorce’ bill financial settlement formula is a negotiating priority and both the UK and EU agree that there will be costs. Reports on the UK ‘bill’ for Brexit range from €15 billion to €100 billion (£84bn). The figure has not yet been officially calculated, but on 12 June the Commission published a position paper “Essential Principles on Financial Settlement”, setting out its methodology for the calculation. The figures relate to outstanding EU Budget commitments, pension liabilities, loan guarantees and other spending commitments. The EU has stated the final settlement is not an exit bill, but is about “settling the accounts” – paying for commitments the UK has already made as an EU Member State for years to come.
The Conservative and Unionist Party Manifesto 2017 spoke of determining “a fair settlement of the UK’s rights and obligations as a departing member state, in accordance with the law and in the spirit of the UK’s continuing partnership with the EU”. But the ‘divorce bill’ estimates currently being reported are much higher than the UK believe the settlement should be.
Download the full EU position paper here:
David Davis has said the UK will take its responsibilities seriously and discuss “in detail what the rights and obligations are”; that the UK would meet its international obligations, but that there would be “international obligations including assets and liabilities and there will be the ones that are correct in law, not just the ones the Commission want”.
Agreement on the final bill could be difficult, and could also prove a sticking point in the sequential negotiations approach.
Parallel vs Sequenced negotiations
At the start of the negotiations, both the EU and the UK sides have already compromised on their positions on Brexit talks.
The EU is no longer insisting on a hard sequencing, in which there is no discussion of a future relationship until the ‘divorce’ bill is settled. Although it should be noted, the EU’s position is still conditional: “preliminary and preparatory discussions” on a future relationship with the UK can be made if “sufficient progress” is achieved on the withdrawal agreement.
Meanwhile the UK government originally wanted a withdrawal agreement and a future relations agreement to be discussed in parallel. The Brexit Secretary, David Davis, told Robert Peston on 14 May 2017, that the government found “wholly illogical” the EU insistence that the financial settlement and the Irish border should be in the first phase of talks. However, now the government has since acquiesced in the EU’s conditional, phased approach.
Perhaps this compromise by both sides to meet in the middle, is a positive sign that future more difficult issues may be possible to overcome by both sides.
What does all this mean for the likely UK-EU trading model?
Overall the UK government’s objectives have not changed significantly, although the picture has is now somewhat more clear, and there appears to be a more conciliatory tone from both sides.
In terms of trading models, it is more certain that the UK will not be seeking a relationship with the EU via the Single Market, the EEA, the EUCU (EU Customs Union), the EFTA, or the Swiss bi-lateral model. Instead the government is primarily aiming for a bespoke FTA, with the less preferred “no-deal” option of trading under W.T.O rules.
Initial challenges of a bespoke free trade agreement
The phased approach raises issues of timing and, depending on the type of agreement, procedures for adoption, ratification and entry into force.
Given that the Government wants a “bold and ambitious free trade agreement” with the EU, it seems likely that the future trading relationship agreement will turn out to be “mixed”. A mixed agreement is one that covers both trade tariffs, plus other areas such as intellectual property rights, labour and environmental standards for example.
In this case it is necessary for the Member States as well as the EU to be parties to the agreement, since the mixed agreement includes provisions on policies that are in the EU’s competence and others that are within Member States’ competence. The word “competence” here has the French legal meaning of the legal power to do something.
The Article 50 withdrawal agreement requires a strong, or ‘super’, Qualified Majority Vote (QMV) in the EU Council (20 out of 27 Member States) and not necessarily national ratification. However, if the future trading relations agreement is indeed a more complex ‘mixed’ agreement, it is likely to need national ratification as well. Due to this added complexity, it could take years for all Member States to ratify such an agreement. Notably, there are recent examples of mixed agreements in other parts of the world making very slow progress or being stalled, such as the EU-US Transatlantic Trade and Investment Partnership (TTIP) agreement.
In addition to this, a bespoke free-trade mixed agreement would also require unanimity in the Council (Article 218 TFEU), European Parliament consent, and national ratification. All of which could further delay or stall a successful deal.
Both parties acknowledge that a future trade deal will require a dispute settlement mechanism to enforce trade rules, but this may be another difficult area for the UK negotiators. David Davis has rejected any suggestion that the European Court of Justice should adjudicate over the rights of EU citizens in the UK after Brexit. While the EU has indicated they will be look for the European Court of Justice to do just that.
So far these issues have not yet been resolved.
What does this mean for Financial Services?
In his Mansion House speech, the Chancellor outlined three aspects regarding financial services priorities for the UK:
“First, we will need a new process for establishing regulatory requirements for cross-border business between the UK and EU. It must be evidence-based, symmetrical, and transparent. And it must reflect international standards.
Second, cooperation arrangements must be reciprocal, reliable, and prioritise financial stability. Crucially they must enable timely and coordinated risk management on both sides.
Third, these arrangements must be permanent and reliable for the businesses regulated under these regimes”.
These comments appear to indicate that the UK government is looking to negotiate an alternative to the current financial passporting regime UK firms currently operate under as part of the Single Market. Although so far, no substantive details have been released as to how this might work.
Watch this space.
Primary source for this article is the updated version of the UK government briefing paper: “Brexit: red lines and starting principles”
Feel free to download the original report:
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