Brexit: Options For And Impact Of The Possible Alternatives To EU Membership

The UK is holding a referendum on 23 June 2016 to decide whether or not to remain a member of the European Union. There seems to be a disconnect between some aspects of public discourse on the vote and the actual effect of an in or out vote. A vote to leave would have numerous possible legal consequences but, if the UK rejoins the EEA, the passporting regime for financial institutions and "free movement of persons" would continue. A vote to remain would also kick off a process to change the UK's relationship with the rest of the EU. This note discusses potential legal issues arising from a Brexit.

Introduction

As a member of the EU, the UK has access to the Single Market. The Single Market was created to remove barriers and constraints between EU countries and to create a single economic area1. The Single Market has largely abolished trade barriers and physical customs requirements within the EU, reducing costs associated with the cross-border trade of goods. In addition to removing internal tariff barriers, the EU has also implemented a common external tariff which is applied to goods imported from non-EU countries. The abolition of internal tariffs combined with common external tariffs cements the EU as a Customs Union. It provides, amongst other things, for the free movement of individuals, goods and services and a right of establishment within the EU. The model which the UK negotiates with the EU will determine its access to the Single Market.

The UK's new settlement with the EU will take effect if the UK decides to stay in the EU. The settlement is in the form of a Decision of the Heads of State or Government meeting within the European Council (the "Settlement")2. The UK government has confirmed that in its view the Settlement is legally binding under international law. However, the extent and pace of implementation of all aspects of the Settlement is not certain. Those aspects requiring the implementation or repeal of EU directives and regulations will need to be endorsed by the European Commission, European Parliament and Council of the European Union.

Briefly, the Settlement provides for the UK: (i) not to further its political integration with the EU, which is an attempt to secure the degree of sovereignty that the UK currently holds; (ii) not to participate in the Euro in the future and not be discriminated against for not participating; (iii) to be able to push for the EU to adopt better regulation and pursue an ambitious trade policy; and (iv) to have greater control over immigrants coming to the UK and their access to the benefits system.

According to the Bank of England, the Settlement does not alter the powers of the EU bodies, but will guide how the powers are used. The revised EU financial services framework, as agreed under the Settlement, would enable the Bank to meet its financial stability objectives.3

Brexit Mechanism

Should there be a "leave" vote, the Settlement will fall away and the UK will need to negotiate its exit from the EU. There are several legal models that the UK government could negotiate following a vote to leave.4 These may include:

1. Complete withdrawal from the EU, with new bespoke bilateral agreements that retain freedom of trade and/or establishment, without membership of an existing European bloc.

2. Joining the European Free Trade Association ("EFTA") and re-joining the European Economic Area ("EEA") (i.e. like Norway, Liechtenstein and Iceland).

3. Joining EFTA and relinquishing membership of the EEA whilst gaining access to the European markets through bilateral agreements (i.e. like Switzerland).

4. Entering into a customs union with the EU (i.e. like Turkey, although the Turkish-EU customs union is limited to trade in goods).

5. Entering into a free trade agreement with the EU within the World Trade Organisation framework (i.e. like Canada).

The map below depicts the countries that are currently in the EEA as well as the candidate EU member states.

Current Legal Framework: Background

The UK legal framework for its EU membership and the manner in which it fulfils its current EU obligations is found in the European Communities Act 1972 ("ECA"). The ECA provides for all pre-existing EU texts to apply in formal UK law, although the method of transposition varies depending on the nature of the EU legislative instrument. All "directly effective" EU legislation (i.e. EU regulations and certain articles of the EU treaties)5 is automatically incorporated into national law without the need for further enactment through an Act of Parliament.6 In practice, some UK legislative changes are often needed to eliminate any inconsistencies with a particular EU regulation. In contrast, EU directives are binding on EU member states but require national implementation measures, often done in the UK by statutory instrument under authority of the ECA. In addition, in sectors which are subject to regulation, such as financial services, rules and guidance are often issued by the regulators to implement or further detail the requirements. It is unclear what would replace the ECA on a Brexit or whether previous EU legislation would need to be grandfathered.

EU law includes the principle of direct effect. EU law may be of vertical direct effect, which means that individuals can invoke an EU provision in relation to a country, or of horizontal direct effect which means that an individual can invoke an EU provision in relation to another individual. The EU treaties are of direct effect, both vertically and horizontally, provided that the obligations are precise, clear, unconditional, do not require additional measures at either national or European level and do not give member states any discretion. EU regulations are always of direct effect, both horizontally and vertically. EU directives are of vertical direct effect when the provisions are unconditional, clear, precise and have not been transposed by the relevant member state by the required deadline.7

Another key EU principle is the precedence principle which provides that European law is superior to the national laws of member states and that member states may not apply a national law that is contrary to European law. If a member state law is contradictory to EU law, then the member state law is invalid. The precedence principle applies to all EU laws of binding force—the treaties, regulations, directives, decisions and international agreements. The Court of Justice of the European Union ("CJEU") is responsible for ensuring compliance with both the precedence principle and the principle of direct effect.8

Brexit Negotiation Process

The process for exiting the EU is established under the Treaty on European Union.9 The provisions were inserted into the Treaty after Greenland exited the EU and for which there was no mechanism at the time. An exit under the Treaty provisions has not occurred before and so the practical application of the relevant provisions is inherently uncertain. The Treaty provides that a member state may withdraw from the EU following the negotiation and conclusion of an agreement with the EU, outlining the exiting member state's arrangements for withdrawal from the EU and its future relationship with the EU. EU Treaties would cease to apply to the UK upon an agreement taking effect or the expiry of two years from the date of the UK's notification to exit from the EU. The UK could apply to the European Council for an extension of the two-year period. However, approval of any such extension requires unanimous consent.

The UK would be faced with a period of uncertainty once the exit process is triggered—although in theory the exit process could be triggered by the UK only after the new arrangement had been negotiated. It would no longer have a presence in European Parliament after notice is given and the exit negotiations would be led within the EU by representatives of the remaining EU member states in the relevant institutions. If no agreement is settled within the prescribed two-year period, and no extension of time is granted, the UK would be deemed to have exited the EU and all associated trade and other arrangements would largely cease to apply, unless other steps were taken.

Transitional arrangements necessary for the two-year period to be observed will add a layer of complexity concerning: (i) the validity of existing EU legislation; (ii) the nature of the legislation, in particular, whether it is directly effective or not; and (iii) the terms of the exit.

Complete Exit from EU

The most extreme option is complete withdrawal from the EU. All EU legislation, including treaties, would cease to form part of UK law.

Effect of Brexit on Existing EU Regulatory Framework

Legal Implications

On any Brexit situation, the ECA would need to be repealed or substantially amended. Any amendment to, or removal of, the entire legislative framework for implemented EU law would have several constitutional, administrative and practical implications relevant to a broad field of laws implemented under the ECA. In addition...