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Scenario planning the EU and Brexit

Brexit

On June 23, 2016, United Kingdom, Flag, Brexit, Unitedthe United Kingdom public voted to leave the European Union in a process known as Brexit. The European Union – known as the EU – is an economic and political partnership involving 28 European countries. Article 50 of the Lisbon Treaty must be invoked in order to withdraw from the Union.

The Lisbon Treaty was signed by the heads of state and government of the 27 EU Member States on 13 December 2007. It reformed the functioning of the European Union following two waves of enlargement which increased the number of EU Member States from 15 to 27. It gives the European Parliament, by virtue of section 49 of the Lisbon Treaty, permission to act by an absolute majority of its component members.  For any agreement to enter into force it needs to be approved by at least 72 percent of the continuing member states representing at least 65 percent of their population, with the consent of the European Parliament. There is disparity in the size, wealth and political system of member states, but all have equal rights in terms of the EU.

Article 50 of the Lisbon Treaty states:

  1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.A qualified majority shall be defined in accordance with Article 238(3) (b) of the Treaty on the Functioning of the European Union.

    5. If a State which has withdrawn from the Union asks to re-join, its request shall be subject to the procedure referred to in Article 49.

Section 50 was included since any EU law is agreed upon, that is not to the liking of a state, means the state would have to withdraw from the EU to avoid  the implementation of such a law.

Why the UK wanted  a Brexit

The British population have been increasingly annoyed by the continued dictation of Europe which reached down to the level of determining how the traditional English pork Banger (sausage) should look (straight, not curved). Immigration and required bail outs to other countries were amongst the requirements that received negative population response.

The United Kingdom used a public referendum resulting in more than 30 million people or 71.8% of the voting public. Leaving the EU received 52.5% of the vote with remain votes at 47.5%. Scotland and Northern Ireland backed staying in the EU, both these areas have historically wished to leave the United Kingdom and will no doubt now revisit that desire.

A result of the vote was an urgent petition that was delivered to the UK Parliament for a second referendum, this petition received more than 100,000 signatures. In terms of the existing law, an excess of 100 000 signatures, requires a government response and must be considered for a parliamentary debate. The process is confused and delayed further by the resignation of the prime minister.

Due to the required notice period, the actual exit date form the EU will not be before 2018. The European Council can extend the two years deadline, but that requires unanimity of votes.

What will be the outcome of this Brexit referendum?

As Governance Risk and compliance professionals, our risk analysis requires scenarios. As an example of how we can approach this subject look at the following four scenarios on how this departure affects business in the UK. Scenario 3 will look at the legislation effected in the most detail. Please remember these are scenarios and not a statement of what will happen.

Scenario 1

The impacts of a Brexit lead to reforms within the EU itself aimed at bringing countries and the region’s economies closer and the UK does not leave the EU. The EU will remain but with more opt out policies for countries that do not wish to comply with the EU laws. Reforms create a banking union aimed at better supervising commercial banks, and ultimately a fiscal union, that would see the creation of a central budget. Migration and the refugee crisis is addressed though strict action against governments such as Syria. The UK becomes the spearhead for stronger sanction policies resulting in the Antimoney Laundering, anti-terrorist regime augmented with stronger Foreign Account Tax controls.

Scenario 2

The UK decides they shall remain in the European Economic Area (EEA) as a European Free Trade Association (EFTA) member.

Membership of the EEA remains at 31 states, which as of 2016 included the 28 EU member states, as well as Iceland, Liechtenstein and Norway. The European Economic Area (EEA) Agreement provides for the free movement of persons, goods, services and capital within the internal market of the European Union (EU). Most EU legislation concerning the single market would remain except that regarding agriculture and fisheries. The free movement of goods, persons, services, and capital among the EEA countries is based on the same rules as the EU.

The EEA does not bear the financial burdens associated with EU membership which will be acceptable to the UK population. Third country goods are excluded for these states on rules of origin, which may give new opportunities to such countries.

Scenario 3

The UK tries to emulate Switzerland. It is a member of the European Free Trade Association seeking to negotiate bilateral and multilateral terms with a series of interdependent sectoral agreements for a bespoke relationship with individual European countries. The EU frowns on this model as unwieldy.

Companies relook at their position in  the UK post Brexit

International companies will most likely take a decision not to have a base in the UK due to problems in moving workers from and to other EU countries. This decision could lead to a reduction in the UK’s economy. There may additionally be bank borrowing restrictions.

The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies. Parts of the Companies Act 2006 have been derived from EU Directives. These include provisions relating to accounts, disclosure of information and shareholder rights. The most significant provisions apply to UK companies with shares listed on a regulated market such as the Main Market of the London Stock Exchange, this results in little change in this area. Businesses will need to set aside time and resources for further analysing how they will be impacted as the picture becomes clearer.

Intellectual Property (IP)

Intellectual Property (IP) laws are harmonised to a large extent across Europe, and much of the UK legislative framework in this field is currently composed of directly effective EU Regulations and transposed EU Directives. In order to avoid a regulatory vacuum, many of those EU Regulations relevant to IP and life sciences (especially pharmaceuticals) will have to be transposed into English or Scottish law, and those national laws which are based on EU Directives may also need to be reviewed to ensure they can still operate properly. Most industries cannot afford that their products are only marketed in the UK and not in the other 24 UPC countries. To pay for both UPC and UK litigation, will make enforcement quite expensive. A result is the UK ratifies the Unified Patient Court Agreement on intellectual property. The Unified Patent Court will offer a single, specialised patent jurisdiction across EU countries on a one-stop-shop basis, providing huge cost advantages and reducing administrative burdens.

Data protection and cyber security

UK organisations are likely to face a data protection and cyber security law landscape heavily influenced by EU laws for the foreseeable future. The UK economy, in particular its financial services sector, relies on an ability for data to be freely transferred to and from the UK. There is a real risk that the UK will be shut off from operating in the European Digital Single Market is they do not comply. The UK is no longer automatically considered to be a safe destination for transfers of personal data and needs to be separately approved by the European Commission. Further scenarios need to be generated on what an additional administrative layers organisations may need to consider.

UK employment law

The National Minimum Wage and the law relating to (unfair) dismissal will not be affected by Brexit. Unlawful discrimination, certain family-friendly rights, working time, collective redundancy consultation and business transfers  will be affected but the  UK will remain subject to EU law and applicable EU decisions during the notice period there are unlikely to be any significant (if any) changes. Laws that govern agency worker rights, collective consultation and working time rights – are most likely to be subject to change.

EU citizens will no longer have the automatic right to reside and work in the UK, and vice versa unless they have already obtained permanent residency. There has been significant press coverage about the prospect of extending the current Points-Based System to apply to EU nationals but this is not a foregone conclusion. Freedom of movement is likely to be an integral part of the negotiations around the post-Brexit relationship between the UK and EU and the UK is unlikely to take any immediate steps to curtail EU nationals’ freedom of movement rights. There will also be restrictions being placed by other EU countries on the ability of UK citizens to work outside the UK.

Tax

A departure from the EU will restore the UK power to change the tax system and this would be expected to become subject to additional taxes, such as duties on importing into the EU. The burden of direct tax for companies doing business across the single market can be expected to increase. Taxation will inevitably become more complex and burdensome for multinational Enterprises that have group companies in both the UK and EU.

The UK I membership of the G20, Organisation for Economic Co-operation and Development (OECD) and World Trade Organization (WTO)  will not be affected and it will continue to be a party to double tax treaties and other agreements that have their basis in these international organisations.

Money Laundering

UK access to cross-border civil judicial co-operation measures through Eurojust and operational links to Europol, with access to existing AML networks,  may require to be renegotiated.

Environment

The UK government has its own legally-binding climate change (emission reduction) targets, such as the Climate Change Act 2008.  UK’s commitment to the UN Framework Convention on Climate Change and recent Paris Agreement is caught within the EU’s commitment will be impacted negatively.

Withdrawal from the EU would potentially mean the UK is not legally obliged to adhere to the Classification, Labelling and Packaging Regulations’  and there is a push from business and industry to remove a number of the EU based regulatory measures in order to reduce the “regulatory and compliance” burden.

Competition

EU competition rules (Articles 101 and 102 Treaty on the Functioning of the European Union) will continue to apply post-Brexit to agreements or conduct of UK businesses that have an effect within the EU, and continue to face investigation and fines by the European Commission. There will likely be a result of parallel investigations by UK and EU authorities. The UK outside the EU will be able (subject to World Trade Organisation rules) to provide more aid to businesses in the UK without fear of EU action.

Cross border Elements

Parties who are negotiating contracts  begin to think carefully about their dispute resolution and governing law clauses; making clear which courts are to have jurisdiction in the event of a dispute and which law is to govern the contract.

Technology, Digital and telecommunication services

UK consumers will no longer be able to benefit from the Roaming Regulation in respect of their use of international roaming services, when travelling within the EU and UK operators will no longer be subject to regulated roaming tariffs at the wholesale level. The UK  no longer complies with the Digital Agenda for Europe. The UK Parliament will be free to legislate for the regulation (or de-regulation) of the national telecommunications markets as it wishes. EU companies will no longer have the virtually automatic right under EU law to provide electronic communications services in the UK, once Britain leaves the EU.

The costs of providing technology services would be increased by custom tariffs or Visa requirements on staff coming to the UK to work on technology projects, impacting the pricing of such services, as well as the time required to deliver services or projects.

The UK will have less opportunity to influence future policy direction (and eventual regulation).EU projects would have to proceed without the valuable contribution and insight of UK companies

Energy

UK has led the way in the EU in terms of energy market liberalisation, and it is very unlikely that it will reverse the separation of transmission from generation interests, for example, or the principle that energy prices should be set by the market rather than by regulators. The Electricity Regulation will no longer apply in the UK and the UK may return to the “merchant” approach to interconnector regulation. If the government decides  not to implement the EU market design in Northern Ireland energy requirements will need to  be put in place creating separate NI electricity markets, or integrating Northern Ireland and Irish electricity markets.

Scenario 4

Brexit takes place and other countries follow the UK in leaving the union. Gold price rises as a safe haven for investors. Radical nationalism, fascism and racism returns to Europe. The Continent becomes a fragmented geography such as that which existed before World War 1 and 2. Anti-immigrant policies lead the way to a possible erosion of human rights. Low growth results as the Euro becomes contested and border control become the norm.

South Africa and Brexit.

The quick fall of the Rand in response to the announcement proved that the world is of the opinion that Brexit does not bode well for South Africa.

The United Kingdom itself accounts for over 25% of South Africa’s total trade and is the biggest single investor in the SA economy. With the massive uncertainty about the actual impact of the UK leaving the EU, we can expect severe volatility in the markets and quite possibly a further slowdown in the economy. Trade, investment and, indirectly, even development aid are likely to be affected negatively.

Trade deals with Africa probably need to be re-negotiated with Britain. South Africa is likely to feel the shock more than other African economies because of the many major South African companies dual-listed on the London Stock Exchange. Capital will flow out of emerging markets, seeking safer destinations. South Africa’s wide current account deficit – which is in the region of 5% of gross domestic product – it is very reliant on foreign capital inflows to finance this shortfall.

An economic slowdown will adversely affect consumers most of whom, are already heavily in debt. We can expect further recessionary pressures rising prices and possible layoffs. Imports such as crude oil and maize meal, which is in short supply from local growers will increase.

The six members of the Southern African Development Community (SADC) have signed an EU-SADC Economic partnership agreement (EPA). This EPA may result in South Africa getting greater access to the EU market than Britain in the long term.

Conclusion

In this chapter, we looked at the possible impact of Brexit as an example of scenario analysis. The various outcomes were analysed in detail in Scenario 3 and with regard to South Africa. None of the scenarios should be considered to be guaranteed outcomes or even comprehensive indicators of the changes expected from Brexit. The aim of this chapter is to give an example of how the GRC professional could give an indication of the possible changes and hopefully help you to create your own full scenario analysis.

Brexit is an historical event that will impact on us all, including those of us in South Africa. It remains to be seen how the post Brexit environment will pan out.  With this vote from the UK our world has changed. If the UK remains with the EEA then many EU directives apply automatically which make the process easier.  However the GRC professional will have to be on high alert for de-harmonization of regulations. Change coming in two years means boardrooms now need to start evaluate their compliance practices to know what changes they need to implement going forward.

 

 

2 Comments

  1. June 28, 2016    

    Britain has lost its AAA status

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