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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.

finneycDavid 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.