Brexit in 2020
By Rachel Kent, Partner and Head of Financial Services Regulation, Hogan Lovells
At 11pm (UK time) on 31 January 2020, the UK will formally leave the EU. The UK's relationship with the EU will no longer be governed by the EU Treaties, but instead by the terms of the Withdrawal Agreement agreed between the UK and the EU. Under that agreement, the UK will enter a transition period, which is set to end on 31 December 2020.
What does the transition period mean for you?
During the transition period:
- almost all EU law continues to apply as it did before Brexit;
- most new EU law that is to be implemented before the end of the transitional period will also apply in the UK, but the UK will no longer have input into the law-making process;
- the UK is still treated as a Member State – and is not a third country – for the purposes of most EU regulatory regimes;
- free movement of people and passporting rights provided pursuant to EU law and/or by EU bodies continue to be valid in the EU and the UK;
- EU institutions, such as the Court of Justice of the EU, continue to have jurisdiction in the UK during the transition period; and
- the UK is permitted to negotiate the terms of trade agreements between it and the EU and also with the rest of the world.
Will the transition period be extended?
The Withdrawal Agreement provides an option to extend the transition period by either one or two years (until 31 December 2021 or 2022, respectively). However, the UK Government has ruled out extending the transition period. The option to extend the transition period provided under the Withdrawal Agreement lapses at 11pm on 30 June 2020. Therefore, after 30 June 2020, if the option is not exercised, there will be no legal mechanism available to extend the transition period. It is nevertheless possible that the UK and EU could agree to do so outside the currently available mechanisms.
What happens on 31 December 2020?
The Government intends to negotiate a new free trade agreement with the EU during the transition period that will come into effect on 1 January 2021. However, it is unclear how extensive this agreement will be and whether financial services will be addressed, particularly in the limited time available for negotiation. Even if financial services are included in a trade agreement, it may not extend beyond what is available to third countries under existing EU equivalence regimes.
If there is no agreement before 31 December 2020 and no extension of the transition period is agreed, the transition period will end and the UK will have no international agreement governing its ongoing relationship with the EU. The UK will no longer be treated as a Member State and will be treated as a third country by the EU. Passporting rights will cease to apply.
Even though EU law will no longer apply in the UK after this transition period, the approach of the UK Government is to "onshore" EU legislation by largely adopting EU law as it applies immediately before the end of the transition period. In practical terms, therefore, there is unlikely to be any change in law unless the Government decides to make changes to UK law or if UK courts interpret onshored EU law differently.
For EU employees to stay in the UK beyond 31 December 2020, they will need to apply by 30 June 2021 to remain in the UK under the EU Settlement Scheme, or for leave to remain under the UK's new skills-based future immigration system, the details of which are still to be finalised.
In addition, unless the UK can negotiate "adequacy" status under the General Data Protection Regulation prior to 31 December 2020, EU law will require additional measures to be put in place where personal data is transferred from the EEA to the UK. The Commission has said it will start the adequacy assessment "as soon as possible after the UK's withdrawal, endeavouring to adopt decisions by the end of 2020, if the applicable conditions are met".
Can we benefit from passporting after the transition period?
If you are exercising a passporting right at the moment, it may be that there is a temporary national regime set up with Brexit in mind, such as the UK temporary permissions regime. However, the availability and scope of application of such regimes is patchy and of limited duration.
Under EU and UK law, there are "third country (or equivalence) regimes" under which each party may grant access to their markets under certain circumstances. One of the key requirements is that the EU and the UK must determine each other to have equivalent regulatory frameworks.
John Glen MP, Economic Secretary to the Treasury, confirmed recently that the Government intends to seek equivalence across all of the EU equivalence regimes (approximately 40). However, positive equivalence assessments are not guaranteed and can become politicised. It may be that access to the EU for UK financial services is caught up in "trade-offs" in negotiations. Phil Hogan, European Commissioner for Trade, has recently suggested a trade-off between the EU seeking fishing access and the UK seeking concessions for financial services. For now, this is a case of watch and wait.
If the UK achieves positive equivalence assessments, passporting rights will be available under the regimes deemed equivalent (and the decisions may differ as between them). However, the scope of equivalence is limited and does not include deposit-taking, lending, payment services, mortgage lending and insurance mediation and distribution.