Exclusive opinion from Paul Hardy, DLA Piper’s recently appointed Brexit Director
Brexit will happen. My concern is that businesses and public sector organisations that are exposed to Brexit are not doing enough to prepare for it - either because they are not sure that it will ever take place, or because they think it is impossible to prepare for it without greater clarity. In this article I explain the main direction of travel in the negotiations, the consequences that can already be drawn, and what companies and organisations can already be doing to prepare.
Does the outcome of the UK General Election make Brexit less likely?
The clock that is ticking is set by EU law, rather than national law. Come 29th March 2019 the UK leaves the EU unless the two-year period is extended by unanimous agreement of the 27 remaining EU Member States. To stop the clock ticking would require a number of steps: a further general election, the Labour Party to win, the Labour Party to reverse its position on holding a second referendum, national legislation authorising a second referendum, the second referendum to result in a majority vote to remain, and the UK application to stop Brexit being accepted by all the EU Member States, and possibly the Court of Justice.
In all, an unlikely series of events would have to unfold for the 2016 referendum result to be reversed.
What does Brexit mean for business and the public sector?
In a word, change. The UK is set to leave the EU’s Single Market and Customs Union of frictionless trade and regulatory cooperation between 28 States, unless a temporary transitional agreement allows the UK to remain in both while a Free Trade Agreement is negotiated. UK-based companies that do business with the EU, or with the 50 or so countries with which the EU has free trade agreements, will be significantly affected by this change, including the many multinationals that use the UK as a gateway to the EU. EU companies that do business with the UK will be similarly affected.
It goes without saying that Brexit brings significant risk: in short, the loss of barrier-free, uniform terms of business across the EU, the legal uncertainty of what will follow, and loss of EU funding programmes.
Opportunities tend to be more overlooked, but they too will arise. For example, from sterling exchange rate fluctuations, changes in UK business regulation as it diverges from EU regulation, a greater focus on domestic supply chains, and the opening of new trade routes under UK trade agreements.
Being able to read the negotiations early, and draw the right conclusions, will be critical to mitigating the risks and seizing the opportunities that arise from Brexit.
Is it too early to start to prepare?
I think the opposite is not just true, but vital. The timeframe for the negotiations is short; should contingency measures need to be activated, they will require lead-in time. It is sensible to prepare for Brexit on a worst-case-scenario basis; one cannot rule out that the negotiations will fail.
Brexit negotiations - commercial consequences
Despite the noise and confusion coming from the negotiations, the main contours of the UK’s future relationship with the EU are now in focus, and important commercial consequences can already be identified.
• The UK Government wants to leave the Single Market, which means no free movement of goods, services, people and money between the UK and the EU, but more limited access.
• The EU considers that the Single Market is indivisible, so being out of it means being out of every sector of cooperation within it. Separate deals for financial services, the education sector, the automotive industry, life sciences or manufacturing, for example, are highly unlikely.
• The UK Government wants to leave the Customs Union, which means it can have separate trade deals with non-EU countries. As a consequence, the UK could face customs procedures and tariffs on exports to the EU, and will apply the same to imports from the EU.
• The UK Government and the EU want a comprehensive free trade agreement, to be negotiated and ratified after the UK leaves the EU. This will not, however, provide the same level of access to the Single Market.
• Both the UK Government and the EU are contemplating a transitional arrangement being put in place until the trade agreement enters into force (the UK Government's position on this has evolved since the election). But a transitional arrangement will help business only if it avoids abrupt regulatory changes on Brexit Day. The most effective transitional arrangement would be the continuation of the status quo - membership of the Single Market and Customs Union - to be maintained on a temporary basis. To date, however, there is no sign the UK will accept a temporary continuation of all EU rules, known as the EU acquis, during a transitional period.
• The UK Government will, through the EU Withdrawal Bill, seek to replicate EU law in national law after Brexit, but will be able to diverge from it in the years after. There are over 20,000 pieces of EU legislation, so this will change the way much of UK business is regulated.
What can businesses and public sector organisations do to prepare?
With the direction of travel known, businesses and public sector organisations should take steps now to assess their exposure to Brexit, and, if necessary, to put in place contingency plans.
In my view, there are four main elements to preparing for Brexit.
Businesses and public sector organisations should have procedures in place to ensure they are sufficiently well-informed about the Brexit process—timelines, developments in negotiations, early warning of likely outcomes—to be able to assess its impact. Relying on press reports is unlikely to be enough.
Preparing - exposure to Brexit
The most effective way to assess an organisation's exposure to Brexit is to carry out an audit which identifies how much of its operations rely on EU rules. This is not always clear, as EU law is often contained in national law. Once the results are known, an organisation should then ask itself how it will be able to operate in the absence of those EU rules.
Based on this audit, organisations should decide whether to put in place contingency plans and when they should be activated. There is no one-size-fits-all solution. Some companies will be marginally impacted, others significantly.
The best way to avoid a Brexit that damages your organisation is to influence the outcome yourself. Brexit provides an opportunity to do that, which businesses should exploit more.
The UK's withdrawal from the EU will take place in a little under 18 months. Now is the time to work out how exposed to Brexit your organisation might be.