The United Kingdom government wants to change the UK’s relationship with the European Union. It will do this by negotiating with the EU, and then holding an in/out referendum.
David Cameron, the UK prime minister, began the negotiations by holding a series of bi-lateral discussions with the leaders of the other 27 EU member states in June 2015, and making a presentation to the European Council on 25 June 2015.
If the negotiations are successful, the UK will probably be able to restrict immigration from the rest of the EU to the UK and make it harder for EU migrants to claim benefits and free medical treatment in the UK. The UK will probably also have a clear exemption from the EU Treaty commitment to “ever closer union,” a longer and clearer opt-out from the EU’s Working Time Directive, and greater freedom to decide whether to accept other EU legislation that might restrict UK labour market flexibility in the future. Either way, the UK government has said that it hopes and expects to negotiate a settlement that is in the UK’s national interest and, if it does, that the government will campaign for the UK to stay in the EU when the in/out referendum is held.
In the meantime, the government’s European Union Referendum Bill has been introduced into the House of Commons and is expected to become law in 2016. The current draft of the Bill itself is quite straightforward: “A referendum is to be held on whether the United Kingdom should remain a member of the European Union”; the Foreign Secretary must “appoint the day on which the referendum is to be held”; that day “must be no later than 31 December 2017”; and the referendum question must be: “Should the United Kingdom remain a member of the European Union?”
The basic legal position – staying in the EU
If the UK chooses to stay in the EU, some EU and UK legislation will need to change.
This might be because the EU agrees to accept some changes that will affect every EU member state. For example, the EU might agree that every member state can restrict immigration from every other member state. If it did, EU Treaty change would probably be required.
The EU might also agree to give the UK an opt-out or exemption from a number of very specific EU laws. If it did, from an EU perspective, this outcome could probably be achieved by using an EU Omnibus Regulation and an EU Omnibus Directive to change every reference to “the member states of the European Union” in the relevant Regulations and Directives to “the member states of the European Union, excluding the United Kingdom”.
At the same time, the UK will probably need some “grandfathering” or “saving” legislation, so that all relevant EU law remains part of UK law until the government and the ng processes to bring those changes about.
If this is right, it suggests a period of material relevant rule-making bodies have had an opportunity to consider what they will change, and have completed the UK law maki uncertainty while we wait to see whether the UK will remain in the EU; and, if it does, when and how the UK’s law will change in those particular areas that have been governed by EU law, but where EU law will no longer apply.
The basic legal position – withdrawing from the EU
If the UK decides to leave the EU, it will be required to give notice to the European Council and withdrawal negotiations will follow.
If notice is given, the European Commission will make recommendations to the Council for the conduct of negotiations with the UK; and the Council will consider these recommendations, before nominating an EU negotiator, agreeing negotiating guidelines, and authorising the opening of EU/UK negotiations.
If the EU and UK Government reach an agreement, that agreement will be subject to adoption by a qualified majority of the Council, acting on behalf of the EU, after it has obtained the consent of the European Parliament. This agreement may also be subject to ratification by the UK’s Parliament, although the details are from clear.
At least from an EU perspective, the purpose of the EU/UK negotiations would be to seek to agree the terms of the UK’s withdrawal from the EU. These negotiations will take into account the nature of the relationship the UK will have with the EU, and the extent to which EU legal rights and obligations will continue to apply to the UK, as well as to and between the legal and natural persons of the UK and EU, after the withdrawal takes effect.
If an agreement is reached, the European Treaties will cease to apply to the UK when the EU/UK agreement comes into force. If there is no agreement, the Treaties will cease to apply to the UK two years after the UK gives notice of its intention to withdraw. It is therefore at least possible that, if the UK chooses to leave the EU, the UK’s law will remain stable until (at least) 2019, even if the UK’s international relationships, economy and political environment begin to change before the end of 2017.
The range of legal options, if the UK chooses to leave
The UK might choose to withdraw from the EU absolutely. If this happens, then it is at least possible that the EU’s Treaties and Regulations will immediately cease to form part of UK law, unless the UK uses “saving” or “grandfathering” legislation to give itself the time it needs to consider, and then vary or revoke them, without “gaps” suddenly appearing in the UK’s legal system. It is also possible that the UK’s Directive implementing laws, and those parts of UK law that rest on the jurisprudence of the EU Courts, will remain valid and effective, unless and until they are repealed, or a UK Court finds they no longer have legal effect, generating significant uncertainty about what is valid, and what is not; as well as about how law that was previously European should be interpreted now that it is not. At the same time, the UK will no longer be obliged to implement the EU’s Directives, or comply with the jurisprudence of the EU Courts, although it might still choose to do so.
Instead of withdrawing altogether, the UK might seek to become a non-EU member of the European Economic Area. If this happens, EU law will probably continue to apply in and to the UK, in materially the same way that it applies today, but the UK’s EU membership levies will fall or cease; the grants paid by the EU to parts of the UK will fall or cease; and the UK will no longer have a right to negotiate, or seek to influence, the terms of EU law and policy.
What legal and practical risks does this generate for UK (re)insurers, banks, fund managers and other regulated firms?
Anecdotal evidence suggests that UK Plc is already devoting a significant amount of time and resource to the identification and possible mitigation of the risks associated with a Brexit (both independently, and at the behest of the regulators, which are contingency planning in materially the same way).
The result is that UK Plc is beginning to delay material investment and other decisions, because management time and attention is focused, and resources are being spent, on contingency planning and related issues; and/or because business is gradually becoming concerned that a decision taken ahead of the referendum may be regretted afterwards.
As the date of the in/out referendum approaches, the amount of time and resource being devoted to contingency planning is likely to increase (at least up to the point where the planning is substantially done); and more investment and other decisions are likely to delayed. Some of this may continue after the referendum result has been published, even if the UK decides to stay in the EU, given the uncertainties described above.
Each of these risks generates risks of its own. For example, the risk that individual business, macro-economic, security and other risks will begin to emerge, unnoticed and unmitigated, whilst the UK contingency plans against the risk of a Brexit. This may sound fanciful, but it is widely thought that the Royal Bank of Scotland failed, at least in part because, although the Bank and its Regulators had correctly identified the problems that would eventually cause its downfall, and they had started to address them, they stopped working on these issues to focus on the implementation of and compliance with Basel II, instead, and never went back. Other possible risks include the risk that product and market innovation will slow; and the level of M&A and other corporate activity will fall, as time and resources are devoted to other things; and the risk that financial markets will falter as the referendum approaches and investors worry about the result, adversely affecting the value of their assets.
If the UK votes to leave the EU, the uncertainty generated by Brexit negotiations may be complicated by a second Scottish Independence referendum, and Scotland’s subsequent attempts to remain in the EU (if Scotland votes for independence on this occasion), whilst the rest of the UK negotiates the terms of its exit.
Losing the passport
One of the biggest risks to UK domiciled (re)insurers, banks and other regulated firms is likely to be the possible loss of the European passport, and the single European market in financial services, (in each case) if the UK leaves the EU and does not remain within the EEA on terms which secure the future of the passport.
The passport and single European market give EEA domiciled regulated financial services firms the right to trade freely, on a cross-border services basis, across the EEA, (often) without having to register in or comply with the laws of the other EEA member states, and without having to establish a physical presence there either. The passport also gives these businesses the right to establish one or more branches in any or all of the other EEA countries; and a broadly level playing field on which to compete.
The passport, and the right of UK domiciled financial services firms to access to the EEA market on level playing field terms, could be lost in the event of a Brexit. Even if these rights are not entirely lost, they may be restricted, and that might mean that some UK businesses and/or their counterparties will choose to relocate into the EEA, or establish a business on each side of the (new) border, rather than lose some or all of the regulatory and competitive benefits associated with the passport. If this happens, it could make it more difficult, or more expensive, for those that stay in the UK to do business, when compared with things as they are.
Each of these things generates a second layer of risk. Many of the UK’s prudential rules are generated in Europe. At the moment, the UK is in a position to influence these rules, and it often “holds the pen”, so European Regulations and Directives often suit the UK, to a material degree. However, the EU sometimes makes rules which the UK regards as insufficiently prudent or too harsh. The result is that, if there is a Brexit, the UK may take the opportunity to relax some rules (for example, the cap on bankers’ annual bonuses), and tighten others (for example, Solvency II’s capital requirements, and the senior insurance managers regime)
The impact on contractual relationships
Those who are negotiating and drafting contracts between now and the date of the UK’s referendum (at least) should consider whether a UK vote to leave the EU; the beginning of EU/UK exit negotiations; and the success or failure of these negotiations, will or should be enough to trigger the “force majeur”, “material adverse change” and termination clauses they include in the contract. They should probably also consider (for example): whether it is still appropriate to require the parties to comply with “all applicable law”; how the costs associated with a change or law should be shared; how long the parties should be given to adjust to these changes; and what effect they want the contract to have if it depends on, or refers to, EU law or UK law with EU roots, when so much might change, in so many ways.
Other risks, issues and opportunities
A Brexit could also lead to a short or medium-term decline in the UK’s economy and the health of the public finances, if banks, insurers, brokers, PE/VC find managers and others choose to relocate to stay inside the EU; and make it more difficult, in the longer term, for those who remain to recruit and retain appropriately qualified and experienced staff. At the same time, it is at least possible that a Brexit will generate opportunities for those insurers that are willing and able to insure other businesses against some of the most clearly identifiable risks associated with a possible Brexit; and/or push some (re)insurers and some books of business into run-off, to the possible benefit of run-off (re)insurance consolidators, as live carriers adjust their target market(s) to suit their new circumstances; or relocate to stay inside the EU, rather than lose the passport and other benefits that EU membership seems to bring.
Seven lessons from 2020
Rebeca Ehrnrooth, Equilibrium Capital and CEMS Alumni Association President
Attending a New Year’s luncheon on 31 December 2019, we played a game that involved predicting the world in 2020. Some of the questions included: would Uber become profitable? Would the three-decade bond rally finally come to an end? Would the US hit a recession?
Unlike any of our predictions based on a traditional approach to business and predicting, we now know that 2020 became the year where business, professional and personal plans were turned upside down, reshaped and put-on hold. The proverbial black swan had arrived.
As revealed in a new CEMS Guide to Leadership in a Post-COVID-19 World, to which I contributed, the COVID-19 pandemic has exposed deficiencies in the 20th Century vision of leadership, giving a rare opportunity to question the status quo.
So, what are the main lessons from 2020?
- Humans are enormously adaptive. This is not an extinction scenario. The world is getting used to dealing with global human disaster which may become a recurring event. Life continues guided by new parameters.
- No sector or country is immune to rapid change. Just as the leveraged finance and equity markets ground to a halt during the Global Financial Crisis, we have seen a disruption in the financial markets (including M&A) in 2020, including a significant redistribution of wealth between sectors; think tech vs airlines and the hospitality industry. When a market is disrupted it has secondary and tertiary effects such as less work for accountants, lawyers, financiers etc.
- Location is not as important anymore. The belief that finance staff need to be based in one of the financial capitals to be effective has been forever altered. Pursuing a career in finance from anywhere is becoming possible. However, it’s likely that over time, financial controls and human interaction will move the work model back towards the traditional office approach, as work is a critical sanctuary for people. While working from home may allow more time for family, chores and sports, it is mainly effective for people who already have their internal and external networks. For junior employees it presents a notable challenge as they may be forced to spend their formative years without a chance to really build their networks.
- Change is likely to be lasting. The opportunity for alternative finance and tech focused providers is enormous and 2020 will accelerate this shift. For example, many retail banks are providing rather poor customer service, blaming the pandemic. Even the most loyal customers will be heading elsewhere. For recent graduates and current students this is a major shift; future winners and key employers may not be names we are used to seeing in the headlines.
- There will be a spotlight on leaders with visionary strategy and understanding of the operations. 2020 showed many politicians and business leaders behaving like they were playing a game of snakes and ladders, rather than executing a thought-out strategy. The next wave of thoughtful leadership is urgently required.
- Collaboration leads to success. The definition of a pandemic is an infectious disease prevalent worldwide. A global problem requires a collaborative solution rather than each country and industry on their own. Quoting Steven Riley, professor of infectious disease dynamics at Imperial College London: “Once you have the knowledge and you share the knowledge, then you are able to take measures to push transmission much lower”. This principle is transferable to management education. In a world more complex than ever, investing in a degree is hard currency. Combined with the full global alumni network, corporate partners and schools, CEMS is capital that doesn’t depreciate.
- Resilience has become a watch word. Saint-Exupéry’s quote resonates with me: “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” We are in a new paradigm – so prepare for the next change. For COVID-19, while we hope that the vaccine will soon upon us, the broader long-term positive challenge remains.
Data after Brexit: How does the end of the transition affect GDPR?
By John Flynn, Principal Security Consultant at Conosco
The UK has officially left the European Union now that the transition period has ended on January 1st 2021. But this could raise issues with one of the biggest bugbears for many companies – the international transfer of personal data.
Businesses can relax, somewhat – GDPR, which took businesses months to get their heads around, is not being replaced. It will continue as the UK GDPR 2018, and will still be based on the criteria of the Data Protection Act of 2018. However, the UK will retain the right to change the UK GDPR as it sees fit in the future.
The main changes apply to those who receive data coming into the UK from Europe. Transfers from the UK to other countries can continue under existing arrangements.
We know it can be difficult to cut through the legal jargon, so we have simplified what you need to know to protect yourself and your data:
1 – Update your privacy notice
Most businesses do not have the correct clauses in place ahead of January 1st, potentially exposing their liability, should something happen to their data. All company privacy notices online will need to be updated to specifically state ‘UK GDPR’, as opposed to ‘EU GDPR’. You will also need standard contractual clauses in place, which cover both parties – those transferring and those receiving the data.
The Information Commissioner’s Office (ICO) has a list of what needs to be included in the standard contractual clause here. The ICO will remain the UK regulator for data protection, regularly liaising with each EU member state.
This also applies to Multi Corporate Groups who operate in multiple countries, who need to update their documentation and privacy notice to expressly cover the data transfers. The UK has applied for an adequacy assessment, which would negate the need for contractual clauses, however this has not yet been approved by the EU.
2 – Data privacy assessments
Any company which runs applications and software should always perform a Data Privacy Impact Assessment. This was also in the guidelines before, but these assessments are now more important for those who outsource their IT operations internationally.
For example, when using a service such as a cloud-based system, the company must be sure that its service provider adheres to UK GDPR and stores the data within the European Economic Area (EEA), or has a binding corporate agreement with the company, where data is stored outside of the EEA. You should also, as mentioned above, make sure that a contractual clause is in place.
3 – Review local legislation
Contracts should now have contractual clauses that specify the responsibilities of the data controller and the data processor. If you are receiving personal data from a country territory or sector covered by a European Commission adequacy decision, the sender of the data will need to consider how to comply with its local laws on international transfers. You should check local legislation and guidance in this case.
4 – Cyber Security health check
The ICO is increasing its capacity and efforts to crack down on data breaches, post-Brexit. Now is a great time for all companies to have a health check to understand their Information Security posture and GDPR compliance. Nobody wants to be caught handling data improperly and fined when it could have been prevented with education and training.
A gap analysis performed by an expert is money well-spent. It’s also a fact that companies that have cybersecurity and Information Security controls are not only able to better defend against attacks but are also far better placed to recover from an attack.
It’s important that all businesses – large and small – are properly preparing their data storage and transferring for the 1st January. ICO has been busy setting examples by fining large, high-profile companies for failing to keep millions of customers’ personal data safe.
It will continue to come down hard on the data breaches of personal identifiable information and special categories of data. The saying ‘prevention is better than a cure’ rings truer than ever this year, and you will thank yourself if you make the efforts to properly store your data now, and not when it’s too late.
2020 reflections and 2021 outlook
By John Hunter, Head of Banking and Fiduciaries, Finance Isle of Man
Reflections on the most surreal year
The Covid-19 pandemic has completely changed the world as we knew it, resulting in catastrophic loss of life and fears of a downturn hang over global economies like a sword of Damocles. In the UK, the new strain has further exacerbated the situation. As I am sure many have already said we are living in what could be called the most surreal times. People have been trying to cope with this “new normal”, by changing their lifestyles and evolving behaviours.
The Isle of Man responded swiftly to the pandemic by closing its borders and enforcing social restrictions which everyone respected and adhered to. Socially and culturally the Island demonstrated all the good things that come from living on a relatively small Island where community still means so much.
The Isle of Man’s financial services sector adapted quickly, seamlessly transitioning to working from home. The banks too adopted flexible remote working practices and continued to support clients around the world helping them navigate the challenging situation and making the most of any opportunities that arose.
Although there is no substitute for face-to-face interactions, we all embraced web-conferencing platforms like Microsoft Teams and Zoom to stay connected with contacts around the world and build and nurture business relationships, whether it was with financial services firms or high net worth individuals looking to relocate to the Island.
Furthermore, a priority for the Isle of Man has been to reinvigorate the business and cultural ties with South Africa. In a normal world, we would have travelled to the country, held in-person meetings with businesses and industry representatives and talked about building on our wonderful historic ties. However, because of the scale and breadth of disruption we had to change all our plans! We hosted a virtual roadshow which comprised a series of webinars exploring why it has never been more important for South African businesses and individuals to choose the right jurisdiction for long term financial planning.
Looking ahead to the future
We are all hoping that the global rollout of vaccines will provide the pathway to some form of return to normality and all the things people are missing will be back. Like amidst all periods of immense turmoil, interesting, new possibilities have emerged such as the revolution in work culture and a renewed importance of being close to nature and green spaces is. And these possibilities can help reshape society for the better.
The global economic recovery and rebuild might seem further away in the current environment especially amidst the new lockdowns. But we are confident in the resilience of economies and are hopeful that different industrial sectors and governments working together would result in green shoots.
The financial services industry has an important role to play in getting the world economy back on its feet. It is a core component of the solution to continue facilitating the financing of corporates, as well as to develop sustainable finance and nurture digital technologies which have proven to be vital during the pandemic. The sector should continue its cooperation and collaboration with governments and regulators to ensure efficient capital flows and financial stability for businesses and individuals.
Banks too have a crucial role to play as they are instrumental to the effective transmission of monetary policies and stimulus packages. As mentioned in a report by EY: “Financial insecurity in the wake of COVID-19 will require banks to boost consumer confidence and help build a more resilient working world.”
We expect the Isle of Man’s financial services sector and banks to continue navigating the situation with resilience as they have been doing thus far and contributing to the global recovery process. Also, we truly hope this will be our busiest year ever (subject to our ability to travel), with an extensive global schedule of planned activity to promote the Island as an international financial centre of excellence and innovation. Personally, I had planned to be in South Africa for the British & Irish Lions tour, but regrettably, it might not take place and as such we will look forward to catching up with friends there as and when we can.
No doubt, there are significant challenges for the world ahead but as Albert Einstein said: “in the midst of every crisis lies great opportunity”. And it is this opportunity that we all need to work together to identify and make the most of. We are confident that in 2021 the Isle of Man will continue to support financial services businesses help their clients, employees, and the wider society through these surreal times. We are all in this together.
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