What effect will Brexit have on lawyers and law firms? We look into this issue which is a likely commercial awareness interview question this year.
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First up, a disclaimer: there's tons of information out there on the possible effects of Brexit – far too much for us to cover comprehensively here. So instead we've outlined the broad issues in a few areas below to get you thinking. Treat this article as a jumping off point for your own research and always remember to consider which areas of law are most relevant to the firm you're shooting for.
What matters to who?
The UK's exit from the European Union would affect lawyers in two ways. The first affects the law directly: changes in legislation which will either remove areas of work from a lawyers' range of activities or (more likely) create work for lawyers who need to explain the changes to businesses and other clients. The other set of changes will affect (commercial) lawyers indirectly, through the consequences of Brexit for UK business – external investment, trade and all that jazz. When thinking about the effects Brexit could have on a practice area or law firm, be sure to distinguish these two types of effect.
Where's the exit?
What are the main options are for a post-EU Britain? Predictions for future landscapes often come down to which of three models we'd follow:
1. Fjording a new relationship. Like non-EU member Norway, the UK could join the European Economic Area (EEA). The EEA grants members access to the EU's single market even if they're not part of the EU. Sounds alright so far, but non-EU members in the EEA still have to follow EU rules and regs without the advantage of having a say when the rules are made.
2. Swiss please. Britain could try to emulate the Swiss model and gain access to the European single market through bilateral treaties, without being a member of either the EU or EEA. But the Swiss are still carving out this relationship after seven decades and it's hardly been plain sailing – just think of all the controversy about money hidden in Swiss bank accounts.
3. We're the UK get us out of here! A complete exit from the European Union would leave Britain in control of all its legislation but would see us having to establish separate trade arrangements with the EU. We could establish a customs union with them (like Turkey), rely on normal World Trade Organisation rules, or negotiate our own Free Trade Agreement (FTA). The killer question is whether Britain has enough clout to establish beneficial deals with both the EU and the rest of the world.
The legal changes: plus ça change?
A considerable amount of legislation governing the UK is tied to EU law. And if parts of the UK's legislation are no longer constrained by EU directives, then the British parliament can effectively scrap EU law and impose its own variant. Ensuing legal upheaval? Well, it depends on the area.
Take employment law, for example. Much of Britain's employment law comes from European directives. “If the UK leaves Europe completely there is scope for it to wipe the slate clean of all EU legislation, or to keep the parts it wants to and get rid of those it doesn't,” says Chambers-ranked employment barrister Charlotte Davies of Littleton Chambers. “However, if it were to join the EEA instead there is less scope for making changes and it would still have to accept the majority of EU law.” But Davies is doubtful there'll be a complete rewriting of the law for two reasons: “Lots of employment laws which have derived from Europe are now ingrained into UK culture and business practices. Therefore the government would have to be aware of the political sensitivities of making any big changes.” So while areas like discrimination rights are probably safe, other less popular measures like agency worker regulations could be for the chop. The second reason there is unlikely to be big change is a practical one, says Davies: “Businesses and individuals have got used to arranging themselves around the existing laws. If those were to change dramatically and quickly it could cause huge uncertainty. However, the strong consensus among experts is that some unpopular areas of EU-related employment law like the Working Time Directive may be tweaked but there are unlikely to be big changes.”
“Businesses and individuals have got used to arranging themselves around the existing laws. If those were to change dramatically and quickly it could cause huge uncertainty.”
Whether changes to employment law mean international businesses will be rapidly scurrying to or out of Britain depends on what any new legislation looks like. Davies explains: “Whether employing someone in the UK creates greater or lesser burdens than doing the same in another country may affect where businesses want to base themselves.”
Elsewhere it gets a little more complicated. The UK's competition law is closely linked to that of the EU. The UK does have its own competition legislation and a national competition agency, the Competition and Markets Authority (CMA), but we also enforce the competition provisions of the Treaty on the Functioning of the European Union (TFEU), and the European Commission (EC) enforces competition rules across member states. Withdrawing from the EU would give the UK greater freedom to frame its own competition laws, which may not be modelled so closely on the provision of the TFEU (as they is now). The EC would also lose its legal jurisdiction over the UK – so, for example, businesses involved in a cross-border cartel covering both EU countries and the UK would face separate investigations from the EC and UK, rather than just from the former.
Current provisions also mean that the EC or a member state's national competition authority can grant EU-wide merger clearances. Without access to the EU's one-stop shop procedure “one of two things could happen,” explains Paul Gilbert, a competition law specialist at Cleary Gottlieb. “We could consider a separate agreement with the EU, under which the UK allows the EC to decide on the permissibility of mergers – that's what Norway and others have done. Alternatively we could look separately at every merger under UK law. Companies may have to undergo an additional merger review by the UK authorities – as they do in Switzerland, for example – as well as making a filing in Brussels. That would create additional burdens of cost, time and administration on merging parties.” In addition, Brexit could lead to a decrease in the volume of competition-related litigation – when companies get sued over uncompetitive behaviour – going through the UK's courts.
"Companies would have to submit an additional merger proposal to the UK authorities. That would create additional burdens of cost, time and administration on merger parties.”
A similar situation arises when looking at intellectual property law. Current UK and European patent law originates from the European Patent Convention, which isn't tied to the EU and covers non-members like Switzerland. At the moment pan-European patents are granted through the European Patent Office (EPO) in Munich and then essentially converted into national patents. UK-only patents can be obtained through the UK Intellectual Property Office (UKIPO).
EU member states are in the process of trying to harmonise EU patent law and infringement procedures with the launch of the Unified Patent Court (UPC). A Brexit would leave the EPO and UKIPO in place, but could leave the UK out in the cold when it comes to the UPC. “We wouldn't be able to participate in a scheme allowing businesses and individuals to obtain a single patent covering pretty much everywhere in Europe,” says Bristows partner and IP specialist Andrew Bowler. “We'd also be stuck with the existing way of enforcing patents by going through each national court rather than just using one venue. The aim of the UPC is to make patent law more streamlined and harmonised. Leaving the EU would cut us out of that plan. It might would make things more difficult for international companies operating in the UK; they'd have to make allowance for our different approach, which would increase costs.” Brexit also removes from companies the option of applying for EU-wide registered design and community trade marks, as these are currently governed by EU regulations.
Andrew Bowler highlights a further eventuality which could result in the wake of a split: if the UK's IP law began to significantly diverge from EU law “it could make it difficult for businesses to import and export products and processes from and to the EU without having to make some changes to those products/processes. That's a point which applies to the law generally, not just IP.”
The effect on business: schadenfreude?
In all three practice areas dealt with above – employment, competition and IP – it's clear that as well as legal changes a Brexit could result in increased costs and administrative hassle for multinational companies. The effects of Brexit on business will affect lawyers active in areas like trade, foreign investment, property and finance.
Customs duties, declarations of goods at borders, tariffs... these are all things EU member states don't have to contend with when trading with one another. Being part of the EU also allows member states access to EU-negotiated Free Trade Agreements (FTAs) with other countries. The big ones you may have heard of are the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada and the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US. Exiting the EU would require the UK to renegotiate its trade deals and FTAs across the board. Advocates of Brexit claim this will put Britain in a strong position for negotiating beneficial trade deals, but this argument rests upon whether we're seen as a desirable trading partner. US trade representative Michael Froman recently told the press: “I think it's absolutely clear that Britain has a greater voice at the trade table being part of the EU, being part of a larger economic entity.” Froman went on to point out the US is “not particularly in the market for FTAs with individual countries.” So attempting to negotiate our own deals with the US could lead to British companies facing tariffs on goods exported to the States – China currently pays 80% tariffs on some of its products.
Advocates of Brexit claim this will put Britain in a strong position for negotiating beneficial trade deals, but this argument rests upon whether we're seen as a desirable trading partner.
Closer to home, the UK could join the EEA or forge bilateral treaties in order to trade with EU members. But UK companies trading with EU countries by dint of these treaties would still have to abide by manufacturing standards and conditions imposed by the EU. The only companies to gain from doing away with the EU rules would be British companies selling to the domestic market.
Access to the EU free trade area would undoubtedly be one of the factors influencing how attractive the UK remains as a business location post-Brexit. For example, Britain – and London in particular – currently attracts the highest level of commercial property investment in Europe. The recent Global Cities report by property consultants Knight Frank put commercial property investment in London at £31.7 billion during the year up to the second quarter of 2015 – and a significant proportion of that comes from overseas investors. A KPMG survey of real estate experts found that 66% of respondents thought a Brexit would negatively affect foreign property investment in the UK.
More broadly, if multinational companies – especially financial institutions – view a post-Brexit Britain as too isolated from the EU, they may decide to wave goodbye to their UK operations. The UK is effectively the EU's finance, banking and insurance capital. A recent report by the City of London Corporation predicts that the City's economic output could grow by a third over the next decade if Britain stays in the EU. And if it leaves? There have already been hints from the likes of HSBC and Deutsche Bank that they could consider moving operations out of Britain in the wake of a Brexit.
If multinational companies – especially financial institutions – view a post-Brexit Britain as too isolated from the EU, they may decide to wave goodbye to their UK operations.
What explains these threats by financial institutions to quit the City and the gloomy headlines that go with them? At the moment the EU operates a 'passport system', which means that if a financial services firm is authorised to carry out activities by one member state, it can freely trade with and commence business in another. If you're an international business – EU-based or otherwise – that's pretty handy. Foreign financial services institutions like to use the UK as a gateway to the EU's single market. So if Britain loses its ability to hand out EU 'passports' to companies, institutions may decide to set up their European HQ in Frankfurt or Paris rather than London. If the UK became a member of the EEA it would retain the right to assign 'passports' to companies, but that would leave the UK having to comply with EU laws with no say in the decision-making process. Another option would be to follow the Swiss model and negotiate treaties for each market we want to gain access to; but the UK would still be following EU rules with no influence over them.
Two years' notice
The lead-up to the EU referendum itself is likely to be rocky for both domestic and international businesses. Ratings agency Standard & Poor's has even indicated it may cut the UK's credit rating if Britain's departure starts looking likely.
And if the UK votes to leave, the markets won't settle down straight away. Uncertainty will remain as exiting the EU can't happen overnight: a two-year notice period needs to be given before withdrawal, and the renegotiation of the relationship between the UK and EU could by some estimates take up to a decade. This limbo could deter potential investors, reduce M&A activity, cast doubt over the future nature of cross-border business activity and investment, and lead to low confidence in UK markets.
Ultimately the UK's post-Brexit business and legal landscape would largely depend on the nature of our continued relationship with the EU, and the scope and type of changes we decide to make to our legislation.
This feature was first published in December 2015.