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The Brexit process: how the UK would withdraw
from the European Union
No European Union (“EU”) Member State has left the EU so the process of withdrawal is untested and
inherently uncertain. Achieving “Brexit” would involve disentangling the UK from complex politico-legal,
financial and other relationships and obligations. According to the UK government: “a vote to leave the EU
would be the start, not the end, of a process. It could lead up to a decade or more of uncertainty”1.
This report is one of a series based on our recent webinar/seminar series ‘Helping financial institutions deal
with the risks from a changing EU and Brexit’. You can access a recording of one of these events here. If
the UK votes to leave the UK on 23rd June, we will hold a further seminar on 29th June (at Cannon Place,
London) and a CMS-wide webinar on 5th July.
Key issues and risks
Withdrawal from the EU requires the UK to secure many new international agreements and arrangements
in a variety of different areas. These include –
•
a Withdrawal Agreement with the EU
•
an agreement on a new relationship with the EU
•
new trade agreements with a large number of non-EU states (because the current EU agreements
with third countries will cease to apply to the UK).
There are potential risks and benefits for business in replacing EU membership. There are additional risks
and uncertainties posed by the transition process during the period whilst negotiations continue until the
new agreements are in operation •
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There will be a period of years after a referendum vote to leave, when the UK remains a member of
the EU and subject to EU law, whilst it negotiates its exit. The referendum itself has no legal effect,
and even the giving of notice under Article 50 does not change the UK’s legal position within the
EU. UK MEPS and Commissioners will remain in place and the UK will continue to be bound by EU
law and the decisions of the ECJ (see below). This period of ‘purgatory’ - between a vote to leave
and the date when Brexit takes effect legally (the Brexit date) - will be a difficult time2 – the
parties will be committed to a separation but still bound together. There may be frustration
domestically that the ‘vote to leave’ is not implemented more quickly.
HM Government, “The process for withdrawing from the European Union”, February 2016
See further, “HM Treasury analysis: the long-term economic impact of EU membership and the alternatives”, first
published 18 April 2016, citing the views of the Bank of England’s Monetary Policy Committee at its meeting ending on 13
April 2016 that a Leave vote might “result in an extended period of uncertainty about the economic outlook, including
about the prospects for export growth”.
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•
There will be uncertainty about the outcome of all the different negotiations. Each of these will
involve complex issues. At the outset it may well be unclear what terms each party is proposing, let
alone what would eventually be agreed.
•
There are risks that the UK may not be able to agree all of these new agreements before the
UK exit takes effect (e.g. under the Article 50 procedure). There could then be periods where
companies have to operate without either the benefit of current arrangements deriving from the
UK’s membership of the EU or the replacement arrangements above. This might result for example
in UK trading with the EU and other countries reverting to WTO (on UK exit) until the negotiations
had resulted in a new trade agreement.
•
There are concerns that the terms of Article 50 pose a further risk to the UK. If the UK found that
more time was needed to complete negotiations, it could not delay the exit taking effect unless it
obtained agreement of each and every of the 27 remaining EU states. This places the UK at a
considerable disadvantage in that each/any state might well extract a considerable price for
agreeing to an extension.
Exiting the EU: the legal process and implications at EU and
international levels
The rules for exiting the EU are set out in Article 50 of the Treaty on European Union (“TEU”). The UK
Government has made clear that this is the only lawful route available to the UK to withdraw from the EU
and is the one which the UK Government would follow3. The Prime Minister has also indicated that he
would start the process immediately if the UK votes to leave the EU in the June referendum4. (Sir Jon
Cunliffe (Deputy Governor, Financial Stability, Bank of England) was questioned by the Treasury Select
Committee about the merits of the UK delaying the giving of formal notice under Article 505).
The TEU affords the Member State a two year notice period to negotiate and conclude an agreement with
the 27 EU Member States. Article 50 provides that within that two year period, that exiting Member State
shall conclude an agreement on the arrangements on the withdrawal from the EU. This would need to
cover a range of issues and detail arrangements required to sort out the break-up. This includes budget
contributions/financial matters and other loose ends.
One particular area of complexity will be the treatment of EU derived rights exercised by individuals and
companies – both UK and from other member states (e.g. where a UK bank is exercising passporting rights
via an existing branch in an EU country or in relation to EU citizens, without UK nationality, living in the UK).
The principle of Article 50 appears to recognise that these rights are not permanent and would cease upon
exit, so the question of transitional arrangements and/or grandfathering might be addressed under the
withdrawal agreement.
Article 50 makes reference to ‘taking into account the framework’ for the future relationship [of the UK]
with the EU6 but agreement on that issue is not a pre-condition for exit. Indeed, Article 50 suffers from all
the problems of an ‘agreement to agree’.
If at the end of the two years, no agreement has been reached as to special withdrawal terms and/or a new
relationship, Brexit still takes effect. If that happened, the UK/EU relationship7 would then, presumably, be
no more than the basic terms of pre-existing international arrangements such as WTO and Basel.
In terms of process, before negotiations commence, the European Commission would need to seek a
mandate from the European Council (without the UK present). The withdrawal agreement would also
3
Supra, note 1, paragraph 5.3.
Supra, note 1, paragraph 3.1.
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8 March 2016 – oral evidence to the TSC enquiry into ‘The economic and financial costs and benefits of UK membership
of the EU’ – questions 1125 and 1126.
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Although Article 50 TEU does not identify any specific areas to be dealt with in the withdrawal agreement.
7
Supra, note 1, paragraph 2.6.
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require the consent of the European Parliament. The final agreement would have to be agreed by the UK
and the enhanced qualified majority among the remaining Member States.
Any extension to the two year notice period would require the agreement of all 27 remaining EU Member
States. The UK Government is of the view that it is probable that it would take an extended period (beyond
the two year period) to negotiate its exit arrangements from the EU, and also future relationship with the
EU. The fact that any extension of the two year notice period would require all 27 remaining EU Member
States to agree would mean that any one Member State can veto any request for extension.
The threshold for agreeing a new UK/EU relationship is even higher than for the withdrawal agreement –
all 27 EU states must agree and some national parliaments of EU states including, in Belgium, no less than
7 Parliamentary Chambers.
The UK currently operates under EU free trade agreements with 53 non-EU states (or third countries)
which would cease to be applicable on Brexit. The UK would need to negotiate replacement agreements
with each country and potentially to negotiate updated terms for its WTO membership (which involves 161
countries in total).
Exiting the EU: the legal process and implications at the UK
level
The UK government has not published any detailed plans8 as to how it would implement Brexit domestically
(the domestic transition). Indeed there are concerns that the UK law-making institutions and the broader
legal system are not well prepared to implement a complete break with EU law.
The amount of law and regulation applicable in the UK and derived from EU law has built up over 40 years
and is now very large – perhaps 15% or 40% of all UK legislation. The scale of the legal project to bring
about this domestic transition is very considerable and has been described as one of the largest legal
projects ever undertaken.
Ultimately Brexit would give the UK the freedom to adjust, change or replace completely the rules and
requirements which had derived from EU law, but in the short term, at least, it is assumed that the priority
will be to move EU derived law/regulation onto a purely domestic basis.
The legislative changes to effect the domestic transition would be passed during the purgatory period but
would presumably only take effect on the Brexit date (when the UK ceases to be subject to EU law). The
UK government may, however, be under pressure to give some more immediate recognition to the
referendum result. This might perhaps involve the European Communities Act 1972 (the ECA) which is the
cornerstone domestic legislation for EU law implementation and which introduced the principle of the
supremacy of EU law over domestic legislation.
UK legislation to deal with the domestic transition at the Brexit date would need to address many complex
legal issues including –
•
Replacing EU law which is currently directly applicable in the UK (for example regulations such as
EMIR and level 2 material such as technical standards in the form of Commission Regulations).
•
Putting UK law which implements EU requirements (for example statutory instruments under the
ECA and PRA/FCA rules implementing directives such as MiFID and Solvency II) onto a domestic
footing.
•
Amending current legislation which reflects EU arrangements that will no longer be applicable at
Brexit – such as passporting, mutual recognition or EU wide schemes such as European patents.
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Supra, note 1 - Para 4.9: “Withdrawal would involve considerable implications for UK domestic legislation. The UK Parliament and the
devolved administrations would need to consider how to replace EU laws, including how to maintain a robust legal and regulatory
framework where that had previously depended on EU laws……Many financial regulations, such as those governing prudential
requirements, for banks and investment firms, have direct effect from EU law.”
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•
Giving new powers and responsibilities to UK bodies where these are currently exercised by EU
institutions such as EBA, EIOPA, ESMA and the European Commission’s role under Competition
and state aid rules.
•
Dealing with the post Brexit interpretation of EU derived legislation. This relates to the principles of
interpretation and specifically to judgements of the ECJ – covering judgments pre-dating the
referendum, those during the period of purgatory and those after the Brexit date.
The domestic transition project will be challenging partly because of the sheer quantity of UK and EU
legislation, delegated instruments, rules and guidance which would need to be reviewed and ‘transitioned’.
Contact
Paul Edmondson
Simon Morris
Partner (UK)
+44 (0)20 7367 2877
[email protected]
Partner (UK)
+44 (0)20 7367 2702
[email protected]
Ash Saluja
Aidan Campbell
Partner (UK)
+44 (0)20 7367 2734
[email protected]
Partner (UK)
+44 (0) 141 304 6112
[email protected]
May 2016
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of a potential withdrawal of the United Kingdom from the European Union. It should not be construed as professional advice or recommendation
on United Kingdom European Union membership nor is it to be relied on. It does not constitute legal or tax advice
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