What is needed for UK firms to stop EU relocation plans?

One of the key uncertainties around Brexit is what happens to UK-based businesses that currently, through EU law, rely on a single authorisation to access the single market’s 500 million customers. Banks, pharma, chemicals, airlines are all examples of sectors relying on this model. These are also sectors where we currently see firms thinking about re-locating some functions to the EU.

To be able to continue to access the EU market from the UK in this way – through an association agreement with EU agencies or mutual recognition/equivalence – there needs to be a way to reconcile the UK and EU operating autonomous legal systems post-Brexit. This most fundamental part of any market access deal, in my view, is a credible mechanism for the EU and UK to solve their differences, in case their respective rules and approaches diverge in future. At the moment, for example, EU market access for a non-EU bank can be withdrawn on a month’s notice, if the EU considers the bank’s home countries’ rules no longer equivalent to the EU’s. Far from all businesses would be willing to operate a model relying on such uncertain market access terms.

This is why today’s Brexit position paper from the UK Government, setting out ideas for how the new EU-UK deal should be governed, is so important.

So how far does it get us? There are three parts to the paper:

Enforcement: As expected, the UK Government categorically says UK courts will solely be in charge of the enforcement of any agreement. The Government is right to point out that no other EU trade and cooperation deal involves the ECJ directly enforcing the terms in a non-EU state. If the EU continues to insist on the ECJ being able to enforce the agreement in the UK, for example over EU citizens’ rights, we have a problem.

Resolution: How disagreements over diverging regulations or laws are being settled – i.e., what happens if the EU considers EU financial regulation (like bankers bonuses) or privacy law incompatible and therefore wants to restrict UK market access in future? The paper sets out a number of options – such as the NAFTA or EEA joint committees or the arbitration panel in the EU-Canada FTA. The point is that there are a number of existing binding arbitration models compatible with EU law and which involves trying to accommodate each other’s case law but without direct jurisdiction. The government seems set of pursuing a mixed approach i.e., an arbitration panel for business rules; a joint committee for security cooperation.

Remedy: The EU has extraordinary enforcement powers, including imposing huge fees. The Government suggests something more akin to remedies in deep FTAs like restricting market access.

The paper is a welcome attempt to move us beyond the all-or-nothing approach to this issue – often driven by ideology - that both Remainers and Brexiteers are guilty of. All trade and cooperation deals involve some sort of trade-off between national control and ability to drive and lock in market access. Different countries have different views of where on that sliding scale it is willing to be. Just like you can think income tax is too high, without arguing for a 0% income tax rate, it’s possible to be in favour of ending ECJ jurisdiction but still be in favour of some sort of cross-border arbitration.

However, in terms of a signal to business, few will read this and halt any re-location plans if they have any – the paper is still too much of a brainstorm. There's still way too much uncertainty. The paper also leaves room for improvement on ideas for how the UK can avoid gradually becoming a “rule-taker”, like several countries cited in the paper are to varying degrees, like Norway or the EU accession countries. Clearly the ideal outcome is a “living agreement” where the EU and UK are equally yoked, both with the ability to notify regulatory changes with the view to continue to operate in lock-step. We’re still some way off from a convincing solution. 

Learn more about how EY’s International Trade, Economics and Policy unit (ITEP) is helping businesses navigate Brexit uncertainty or read our latest Brexit analysis.