What is Brexit and What are its Legal Ramifications for the UK?
The 28 nation “single market” received a stunning blow when the UK voted, in a referendum on June 23, 2016, to terminate its membership and, subsequently, its passport-free, duty-free, trade and other advantages.
From a legal perspective, under the January 2017 Miller decision by UK’s Supreme Court, Parliament has the right to thwart Brexit by the court’s affirmation that the Brexit referendum is not legally binding until Parliament ratifies the outcome of the negotiations by virtue of Section 20 of the Constitutional Reform and Governance Act of 2010 (the Act). The rejection of a prospective UK-EU withdrawal agreement can only happen if a majority of MPs vote against the ratification of such an agreement since the Act enables the House of Commons to block any international agreement negotiated by the Government.
As to the question whether the ‘Brexit bomb’ can be stopped once it is detonated, the answer is resoundingly ‘No’ because Article 50 of the Treaty of Lisbon that established the EU as of December 13, 2007 provides so. Under Article 50 of the Lisbon Treaty, notice leads to the immediate cessation of EU membership, with or without a deal on the terms of withdrawal, within two years from withdrawal notification. The two-year period allows is not designed for the UK and the EU to negotiate whether the UK should withdraw, but for the two parties to negotiate the terms of withdrawal.
Clearly, the UK benefits from the EU, since more UK imports originate from other EU nations by a wide margin (almost as much as the other EU nations combined). The EU has accounted for the largest portion of UK trade for over a decade, from 2005-2015.
The effects that the loss of passporting rights on UK insurers with policyholders in the EEA
If a post-Brexit world means the UK loses passport rights:
- Insurance companies in the UK would be required to establish subsidiaries or branches in EU, thereby increasing funding costs.
- Exports of insurance from the UK to the EU could fall.
- There would also likely be an indirect effect associated with lower exports, e.g. reduction in legal advice services
- Migration of insurers away from the UK, leading to a loss of domestic jobs
Writing business through local branches would require local authorization, and capital being deposited to support the branch in certain cases. In advance of full regulatory clarity, some major insurers with UK operations may establish a greater presence on the continent, in order to operate more easily under a single license. Insurers (both UK and EU domiciled) may be required to establish new, additional operations or headquarters elsewhere, with revenues migrating accordingly.
By providing specific instructions to insurers and seeking to avoid inefficiencies in the authorization process, UK authorities have the opportunity to minimize disruption in the UK’s domestic and international insurance markets due to Brexit and to reinforce the reputation of the UK and the London insurance market as a business-friendly venue.
Solvency II, a directive designed to protect policy holders by aligning insurance and re-insurance company’s regulatory capital requirements and their true risk profile, is fast becoming an international regulatory standard.
Brexit negotiations started as soon as notice was given under the Lisbon Treaty; however, however, it is still unclear what the ultimate UK-EU relationship will look like in a year’s time. Ideally, UK insurance firms will want to retain their ability to sell insurance products across borders through so-called passporting rights, which would be possible if the UK were to negotiate to stay within the European Economic Area (EEA), like Norway. Staying within the EEA, however, would also require UK insurers to comply with Solvency II as part of that deal, at least as it is required currently for Norway and other EEA nations that are not part of the EU currently. However, practically speaking, Brexit or no Brexit, the wholesale roll-back of Solvency II in the UK seems unlikely since the UK was one of the principal architects of Solvency II and should readily agree to continue to be bound by it as part of the Brexit withdrawal.
Potential Economic Impact of Brexit on the UK
Once the UK leaves, there will be numerous challenges to its economy. This includes challenges to London as city of choice to locate a foreign branch or subsidiary, which may not follow, given the strong decrease in value in the British Pound in the London stock market average after the referendum votes were counted. As a further analogous omen, a severe recession hit the UK economy once it entered the Common Market, the precursor to the EU, in 1973.
Not only is future trade with the EU at risk. Obtaining authorization for a UK branch or subsidiary is a substantial process and would have to be largely completed before the outcome of Brexit negotiations is known.
Economists for Brexit, a group of UK and other economists, recently asserted that the UK should not bother striking new trade deals but instead unilaterally abolish all its import tariffs (let’s call this policy ‘Britain Alone’). The UK would simply pay the tariffs imposed by other countries on UK exports. This is usually the worst-case scenario that other economists have examined. Nevertheless, Brexiteers adhere to their positions like die-hard Trump supporters adhere to his every tweet.
Economists at the London School of Economics maintain that under the ‘Britain Alone’ scenario of unilateral liberalization after Brexit, UK real incomes still fall by 2.3 percent. In other words, there is a gain of only 0.3 percent from eliminating tariffs compared to just trading under WTO rules and the British people are still considerably worse off as a result of Brexit.
In fact, according to a survey by the Chartered Institute of Procurement and Supply, published in Reuters on March 19, 2018, one in seven (or 14 percent of) businesses from EU countries with hard assets in Great Britain (e.g., offices, warehouses and factories), have relocated parts of their business out of the country because of concerns about disruption after Brexit.
The UK’s Position in the Negotiations
The European Commission has been pressuring London for months to proffer its ideas for new relations with the EU after the UK exits in March 2019 and after an agreed transition period of less than two years ends.
In early March, PM Theresa May was understood to be trying to convince her divided Tory colleagues to back a “three point” plan, under which the UK would examine all existing regulations and decide whether it may desire to keep them the same, whether it may prefer to modify its regulations while achieving the same goals, or whether its goal is a complete break with the EU in certain areas of business relations.
The UK vehemently opposes reintroducing border controls between Northern Ireland and the Republic of Ireland and vigorously advocates maintaining the status quo during a transition period following Brexit. Most of the major points necessary for a Brexit agreement are still unresolved but the UK is pushing hard to cease allowing free entry by non-UK citizens or residents on the Brexit effective date.
As expected, the EC negotiators confirmed the EU’s position that the proposal breaks several of the nonnegotiable conditions set by the remaining EU nations: (i) preserving the autonomy of EU decision-making; (ii) preserving the role of the European Court of Justice; and (iii) preserving the integrity of the single market.. The EC’s President, Donald Tusk, has repeatedly stated that the UK cannot “cherry pick” which aspects of the EU it agrees to retain. In other words, certain UK demands are “non-starters.”
Until now, it appeared likely that the UK government will pursue a policy putting the UK outside a customs union with the EU but accepting EC rules in certain sectors in an attempt to achieve frictionless trade.
Finally, the United Kingdom and the European Union (EU) announced on March 19 that they have agreed on several key terms of an agreement that would result in Britain leaving the EU. The tentative deal, which remains subject to formal bilateral ratification, establishes a “transition period” from the effective date of March 29, 2019 (when the UK will formally leave the EU) until December 2020.
For those in support of a so-called “hard Brexit”, the UK has limited leverage in its negotiations with the EC, as its acceptance of the continued application of the four freedoms of the single market — goods, capital, services, and labor, at least until December 2020,demonstrates. There also seems no hope for Brexit supporters to apply a “divide-and-conquer” strategy to exploit the different positions of the other 27 EU member nations in the talks, as some in London have been advocating from the beginning of negotiations. Most importantly, the UK will remain within the EU’s single market throughout the transition, avoiding a disruptive “hard Brexit” in case no final deal has been agreed by then. Thus, the transition deal ensures that no major disruptions of business activities will take place, bolstering the chances of an orderly UK exit from the EU.
However, extraneous issues have been introduced recently by foreign secretary Boris Johnson, a leading “Vote Leave” advocate during the referendum campaign. In an attempt to smooth over the clearly negative economic implications of Brexit Johnson and other Conservative Brexit supporters including Jeremy Hunt, the UK Health Secretary, claim that the money saved by not having to help support the EU through membership contributions can be the basis of a “Brexit dividend” that can be applied instead to sustain Britain’s National Health Service. This position responds as well to growing bipartisan concerns that key health services are being overwhelmed by rising demand, a categorization Prime Minister May categorically rejects.