The 2020 European financial services outlook
For all financial services practitioners, 2020 will be a year of dynamic developments.
Following, the referendum of June, 2016 in which the UK voted to leave the EU, the UK Government has been formulating a Brexit strategy. As part of that, it proposed, in the Queen’s Speech of 20th June, 2017, a “Repeal Bill” which has three primary aims:
The superficial simplicity of this approach – that nothing will change after Brexit unless the Parliament or, more probably, the Government so decides – betrays the fact that such a unilateral approach will not allow many existing laws to function sensibly or at all.
In particular, the use of secondary legislation will be politically and legally controversial. Secondary legislation is made by the Government (i.e. Ministers or officials on their behalf) in accordance with a power granted by primary legislation. Parliament has limited scope to amend or reject such legislation. However, it may be struck down by the Courts in certain circumstances. The Government has not stated precisely when secondary legislation may be used. It has said that it may be used “to enable corrections to be made to the laws that would otherwise no longer operate appropriately once the UK has left the EU” but that “the power will not be available where Government wishes to make a policy change which is not designed to deal with deficiencies in preserved EU derived law arising out of Brexit”.1
The distinction between laws operating “appropriately” and policy changes is one that is not particularly clear when applied to practical examples.
This article looks at the inherent problems of the Repeal Bill and its surrounding legal environment and gives examples of how those problems specifically affect the aviation industry.
The principal of reciprocity is that rights granted by one state to nationals of another are returned in kind. It is an underlying and fundamental principle of any club (such as the EU) and therefore many laws are based on it.
In the aviation sphere, the most obvious example of a law relying on reciprocity is EU Regulation 1008/2008 on common rules for the operation of air services in the EU, which set up the Single European Sky. This permits EU airlines to operate to and within the EU at will. But even if the Repeal Bill preserves this unilaterally within the UK so, for example, allowing an Irish airline to fly from London to Belfast, that does not guarantee that UK airlines will continue to have equivalent rights, for example, to fly from Italy to Spain, guaranteed. Indeed, absent a new air services agreement between the UK and the EU, UK airlines will have no right to fly even between the UK and the EU. However extreme such a result might seem, it remains a real possibility if, for any reason, the UK does not conclude, or rejects, a trade agreement covering air services at the end of the permitted negotiating period.
Regulation 1008/2008 also provides for citizens of one Member State to have the right to own and substantially control airlines with operating licenses issued by the aviation authorities of other Member States. The Repeal Bill can only guarantee the continuance of one side of this equation as it relates to UK CAA-licensed airlines. As discussed below, however, the issue of Acquired Rights might be a relevant consideration here.
Whether the Government will be able to use secondary legislation to amend these laws because they create problems which need to be rectified as a consequence of Brexit, or whether those changes are matters of policy which require primary legislation, is a difficult question to answer – and one that could easily be challenged in the courts if the occasion arises.
Many EU-derived laws are expressed to apply in Member States of the EU or to nationals of the EU and, therefore, by their terms alone, will no longer apply to the UK following Brexit. If they are to continue to apply, then the Repeal Bill will need to amend these laws to extend their scope to the UK. But, even if the laws are so amended, the issues of reciprocity referred to above will continue to cause difficulty.
In aviation, one key example of the importance of territoriality is the EU-USA Open Skies Agreement which allows any airline of the EU to fly between any point in the EU and any point in the USA (and vice versa). The Repeal Bill will be unable, by itself, to maintain this arrangement as regards UK airlines as this would need the consent of the US Government. For the same reason, secondary legislation alone will not solve the problem. The UK would need either (a) to be able to rely on the historic air services agreement that existed between the US and the UK (Bermuda II) coming back into force or (b) to enter into a new bilateral air services agreement with the USA. Failure to affect either of these would result in no UK airline being able to fly to the USA.
UK airlines will also need to consider the extent to which they can continue to rely on “horizontal agreements” concluded by other Member States. Under a horizontal agreement, a Member State which secures flying rights with a third party state for its national airlines under an air services agreement extends those rights to airlines which are nationals of other Member States.
Airlines will also need to consider their wet leasing needs: at present EU airlines may freely wet lease aircraft registered within the EU. Following Brexit, this will not include CAA-registered aircraft so, if a British airline wishes to wet lease an aircraft to EU counterparty, that counterparty’s regulator will need to approve that wet lease.
Mixed agreements are international treaties, parts of which are within EU competence and parts within the competence of Member States and which, accordingly, require ratification by both. There are several hundred such agreements, ranging from free trade agreements to the UN Convention on the Rights of Persons with Disabilities and the Hague Convention on the Protection of Children. The question of whether the UK will remain bound by such agreements following Brexit without having ratified, on its own behalf, the provisions which were outside its own competence as a Member State is complex and one for which there is no precedent.
Most free trade agreements (FTAs) are mixed. Companies relying on EU FTAs, for example, when considering their supply chains, will need to consider their continued applicability in the UK post-Brexit.
Another example of a mixed agreement is the Cape Town Convention, where, for example, the provisions dealing with the International Registry fall within Member States' competence but those relating to the insolvency regime within the EU's. It has been ratified both by the EU and the UK. Following Brexit, will the UK need to agree expressly to be bound by those parts that the EU ratified? There is no clear answer but the House of Commons library has suggested that such a re-ratification will be necessary, at least in part.
“Opinions differ on the effects of Brexit on external agreements. On balance, most analysts believe that both exclusive and mixed agreements will fall on Brexit day, and will have to be renegotiated after Brexit, or possibly in parallel with negotiations on the withdrawal agreement (could this be achieved within the two-year negotiating period?). There is a view, however, that where the UK has ratified a mixed agreement in its own right, aspects of the mixed agreement will remain in force.”2
The EU Council has reached a more definitive conclusion. It has stated explicitly that “the UK will no longer be covered by agreements concluded by the Union or by Member States acting on its behalf or by both acting jointly”.3
However, the UK Government has taken a contrary position stating that its view is that, as a matter of international law, the UK is a contracting state under the Cape Town Convention and Aircraft Protocol, and that this will not be affected by the UK leaving the EU. Therefore, it believes that there will be no question of the UK ratifying these agreements again.
It is true that the Cape Town Convention is substantively different to other mixed agreements and that the EU Council probably did not have this treaty in mind when it issued its negotiating guidelines. But is also true that there is no established international law governing this situation: nothing like Brexit has happened before. The question will need to be resolved during the Brexit negotiations in a way which permits the UK to remain a contracting state.
There are certain categories of rights, so-called Acquired Rights, which might have arisen for British nationals in the EU and vice versa which are protected by international law and which might therefore be protected following Brexit. Such rights might be provided for by international conventions such as the Vienna Convention on the Law of Treaties or the European Convention on Human Rights or by customary international law. The treatment of Acquired Rights may also be specifically addressed in the withdrawal agreement between the UK and the EU.
The extent of Acquired Rights, and the degree to which they might be relied on by individuals, is unclear. Ownership rights including of shares are thought to be acquired as are certain contractual rights – however the right of establishment in a foreign country is not. An example given is that of a British-owned shop in France. The right to the shares in the business, the premises in which the business operates, its inventory and goodwill will be protected as Acquired Rights: however, the right to carry on that business will not.
In practice, the separation of these rights might be quite difficult. For example, will UK citizens continue to have the right, as Acquired Rights, to own and substantially control airlines with operating licenses issued by the aviation authorities of other EU Member States?
This is a difficult topic, easier to understand in theory than to apply in practice. It is also not clear what legal recourse, if any, individuals and companies may have if their Acquired Rights are breached. Any case that is brought before the International Court of Justice would need to be brought by the UK Government on their behalf. However, it is safe to say that substantial disputes on this are foreseeable at a commercial, legal and political level.
In certain areas, the preservation of EU-derived law within the UK by means of the Repeal Bill may work if the EU deems the UK’s legal, regulatory and/or supervisory regime to be equivalent to the corresponding EU framework. It should be noted that the granting of equivalence status is a political and not a legal process. There is no right to such a status.
Will UK financial institutions be allowed to continue to provide financial services to customers (including in the aviation sector) in the EU after Brexit? One possibility that would allow them to do so is if the UK’s regulatory regime is granted equivalence status. But preserving the existing laws under the Repeal Bill may be insufficient since future developments may also need to be addressed. In addition the issues addressed above may mean that the Repeal Bill will not by itself be sufficient to achieve equivalence. For example, even if the UK agrees to recognise resolution procedures for failing banks in other EU jurisdictions, the converse may not be true.
The recognition by the European Air Safety Agency (EASA) of type certificates issued by the UK CAA for equipment manufactured in the UK will also be based on equivalence. How EASA and the UK CAA interact in the future is one of the key issues which will need to be addressed in the context of Brexit.
There are numerous agencies, courts and regulators which are either part of the EU, or agencies of the EU, or independent of the EU but inextricably linked to it. The legal model of these entities varies, and their continued relationship with the UK post-Brexit will be subject to different considerations. For example:
Perhaps the most important institution which casts a long shadow over the Repeal Bill is the Court of Justice of the European Union (CJEU). The withdrawal by the UK from the CJEU’s jurisdiction has been highlighted by the Government as a red line issue which cannot be negotiated (although it has accepted that the decisions of the CJEU prior to Brexit will set a powerful precedent). However, it is fundamental to all EU laws that the CJEU is their ultimate arbitrator: that all disputes under them, or questions as to their interpretation, are ultimately for the CJEU to determine. To try to preserve all EU-derived laws within the UK statute book under the Repeal Bill, whilst removing them from the jurisdiction of the CJEU, will entail such a radical change to their nature as to make it challenging for the Government to be able to persuade the EU to progress on matters such as equivalence and reciprocity. It is a very large circle it will need to square.
Government White Paper: The Repeal Bill. 30th March, 2017
House of Commons Library: Legislating for Brexit: EU external agreements. 5th January, 2017
Draft Guidelines following the United Kingdom’s notification under Article 50 TEU. 31st March, 2017
For all financial services practitioners, 2020 will be a year of dynamic developments.
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