The UK electorate has voted to leave the European Union by a narrow margin (51.9% / 48.1%). For the moment, it seems that #Brexit is almost certain to follow.
The UK can “cancel” its membership of the EU by giving two years’ written notice to the European Council at anytime. But UK law doesn’t tell us who’s entitled to give this notice, or when. For now, the working assumption is that the UK’s new prime minister will give our “notice to quit” after he or she has been elected by the Conservative Party, invited to form a government by the Queen, and had an opportunity to do so. If that’s right, the notice will not be given until at least October 2016.
- the UK’s referendum result is advisory, not binding; and
- there’s a decent constitutional argument that lawful notice cannot be given until Parliament has debated and endorsed the referendum result, and invited the prime minister to act on it.
If that argument is run and succeeds, it will delay the giving of notice, however briefly, and increase the opportunity for slips between cups and lips. Slips aside, that isn’t necessarily a bad thing. It will be extremely difficult for the UK and EU to negotiate sensible #Brexit withdrawal terms during the 2 year notice period. If the UK delays giving notice, it will (or may*) have a little more time to get things right – although, at least in my view, that will not be nearly enough. The only other way of getting more time is with the agreement of all 28 EU Member States; and EU-wide agreements are hard to come by at the best of times … and this is not exactly the best of times.
That aside, an early UK general election is at least possible … if unlikely, for now. This is because, since the Fixed Term Parliaments Act 2011 came into force, the UK’s Parliamentary terms have been fixed at 5 years a piece. The next UK parliamentary general election will therefore take place on or (in exceptional circumstances) after Thursday 7 May 2020, unless the House of Commons passes:
- a motion “that there shall be an early parliamentary general election” and, if the motion is passed on a division, the number of MPs voting in favor is equal to at least two thirds of the number of seats in the house, including vacant seats; or
- a “no confidence in her Majesty’s Government” motion is passed by a simple majority of those voting, and that result is not undone by the passing of a “confidence in Her Majesty’s Government motion“, within a fortnight.
This may be regarded as constitutionally wrong for our times. The UK now has two immediate, distinct, but closely connected, constitutional challenges to meet in very short order: (i) negotiate a set of reasonable exit terms with the EU; and (ii) decide what sort of relationship it wants to have with Europe (in the generic sense), before negotiating the terms of its new relationship. Leaving the EU is one enormous and complex challenge in commercial, legal and constitutional terms. Working out whether the UK should take the Norway option, the Swiss option, the Turkish option, the Canadian option, or something more bespoke, and then negotiating the terms of the new relationship are quite another. Without an early general election, no UK government will have a clear mandate on which to decide or negotiate any of these things. We should therefore expect calls for an early general election, and for the volume of those calls to increase, if the Labour party chooses to appoint a new leader as well. If these calls are heeded, an early general election may come into view, and the giving of notice could be delayed still further.
In the meantime, of course, nothing has changed from a purely legal point of view. The UK is still a Member of the European Union, and it will still be obliged to comply with European law until the end of the 2 year notice period, at least. It will therefore still be required to implement and comply with developing European Directives, including, for example, the amended 4th Anti-Money Laundering Directive, MiFID II, the Insurance Distribution Directive and so on. The UK’s MEPs and ministers will still be entitled to attend and vote in the European Parliament and Council (unless the Parliament and Council are debating and making decisions about #Brexit terms). However, the UK’s negotiating position will be severely weakened. It may therefore now be true to say that European law is being developed and will effectively be imposed on the UK in circumstances where its opportunity to shape or influence those laws has been heavily diminished; and (perhaps) in spite of UK objections. That won’t matter in the long term, because the UK will be able to make its own replacement laws … if (but only if) it becomes a third-country – but it could matter (a lot) in the short and medium term. (The EU is facing an existential threat; and it has a fresh opportunity to take business from the City of London. So its response is difficult to predict, and could be nasty.) It will also matter over the longer term, if the UK takes the Norway option and joins the EEA … because, in those circumstances, the EU’s laws would still apply, and there’d be nothing the UK could do to change that fact.
This creates some interesting opportunities from a PRA and FCA perspective. If the UK takes the EEA / Norway option, they will lose their (formal) ability to influence and shape emerging financial services law; and they won’t be able change what we already have. If the UK becomes a third-country things might be very different. For one thing, their hands would be untied. They regard Solvency II, for example, as too complex, and insufficiently prudent. If the UK was a third-country, they could – with enough time – simplify it, raise capital standards, and secure third-country equivalence … something akin to PRA regulatory nirvana, if it’s possible to go that far. The AIFMD could also be both retained (for UK fund managers that want or need equivalence, and the opportunity to use the third-country passport … if the EU / ESMA ever switch it on) and abolished (for other third-country fund managers, and UK fund managers who aren’t interested in raising capital from Europe). FCA regulatory nirvana may also be in reach.
When the UK gives its 2 year notice to the European Council, the European Commission will make recommendations to the Council about the conduct of the UK / EU #Brexit negotiations that must follow. The Council will then nominate a European negotiator, agree a set of negotiation guidelines, and authorize the start of negotiations. If the negotiation generates a settlement before the end of the 2 year notice period, the terms of that settlement will have to be adopted by a qualified majority (72%) of the remaining 27 EU Member States and approved by a simple majority of the European Parliament. They will probably have to be approved by the UK’s Parliament too. If the 2 year negotiation period expires without a UK /EU agreement, either to extend the notice and negotiation period, or on the UK’s withdrawal terms, the UK’s membership of the EU will automatically lapse. At that point, the UK will no longer be entitled to exercise the rights conferred on it under the European Treaties; but it won’t be bound to comply with European law either.
The EU is already calling on the UK to give its 2 year notice. But that doesn’t necessarily mean the EU will do anything other than continue to make these calls – especially now that it’s apparent that a new UK government will have to be formed, and a general election may have to be called.
We can probably therefore expect the EU to wait for a reasonable period, before taking any action against the UK. But that is probably all. If the UK seems to be dragging its heels in the hope of securing an advantage of some kind, the EU might decide to take today (the announcement of the UK’s referendum result) as the notice required to trigger the start of the two year negotiation / notice period. And, if the UK begins to breach European law by (for example) restricting the free movement of people from the EU into the UK, the EU might suspend the UK’s rights under the European Treaties, and invite the Commission to take infraction proceedings against the UK as well.
Interesting times are therefore certainly ahead.
I’ll be giving the issues more thought over the weekend, and other posts will follow. In the meantime, I’m happy to answer questions and/or discuss the wider issues over the weekend, and beyond. So why not drop me a line: firstname.lastname@example.org ?
(* May, because the European Union may not be willing to engage in formal or informal negotiations until the notice has been given.)