Brexit: preparing for uncertainty

Given the uncertainty surrounding the United Kingdom’s planned exit from the European Union in autumn 2019, what should in-house lawyers be doing now to prepare for all possible eventualities? Lucy Trevelyan reports.

As things stand, the UK is set to leave the EU on 31 October 2019.

Uncertainty still reigns, with much yet to be decided. However, Boris Johnson – the UK’s Prime Minister since July 2019 – has committed to the UK’s departure taking place on 31 October, with or without a deal with the EU. There is much, therefore, to consider for in-house lawyers at this stage.

Adding to the uncertainty is that the UK Parliament will have the final say on the matter – unless the Prime Minister briefly suspends Parliament in the autumn, as he is reported to have taken legal advice on doing. The UK’s Members of Parliament (MPs) have thus far rejected any deal put before them.

Hina Belitz, an employment lawyer at Excello Law, says the passage of a withdrawal deal has become totemic, but it is often forgotten that it is merely a stepping stone to open negotiations on a future, substantive UK-EU trade deal. ‘That is when the real horse-trading will begin’, she says.

Even if a withdrawal deal is passed by Parliament, uncertainty will not end for businesses, says Belitz – the current withdrawal agreement merely stipulates a transition period during which the current trading arrangements would continue.

‘Much will depend on what sort of trade deal is eventually agreed between the UK and the EU’, adds Belitz. ‘Many expect free trade in goods to be granted by the eventual trade deal, but for services to be significantly curtailed. This could have a significant impact on the UK’s financial services sector, in particular.’

If the UK leaves the EU with no deal, she says, all UK businesses will be affected – including those that do not directly trade with the EU. ‘In a no-deal scenario, the International Monetary Fund (IMF) estimates that the UK will lose 3.5 per cent of GDP [gross domestic product] by the end of 2021 when compared to an exit with a deal. Therefore, a two-year UK recession is highly likely.’

Belitz explains that tariffs and non-tariff barriers, such as customs checks, will come into force, disrupting supply lines and overseas trade. The pound is likely to fall in value. Business and investor confidence will be hit, and investment plans are likely to be shelved. Major businesses may begin to move overseas.

On the other hand, she adds, opportunities may also begin to open up elsewhere if the UK does manage to rapidly secure trade deals with the likes of Canada, China, the United States and other major economies – as proponents of Brexit have promised.

Laura Devine is Communications Officer of the IBA Senior Lawyers’ Committee and Managing Partner of boutique immigration firm Laura Devine Solicitors. Although she says many businesses will be negatively impacted by Brexit – particularly in the finance, agriculture, hospitality, medical services and automotive sectors – there could be some upside.

‘For example, a continued weak sterling could increase tourism and investment in the UK, as foreign nationals take advantage of favourable exchange rates’, says Devine. ‘Additionally, the UK’s current plans for its future domestic skills-based immigration system will, in some instances, make hiring non-EU nationals easier by reducing minimum skills thresholds for Tier 2, abolishing the Resident Labour Market Test and ending the recurrently oversubscribed cap on skilled workers.’

Corrado Scivoletto, Vice Chair of the IBA Immigration and Nationality Law Committee and a partner at Studio Legale Associato Simonetti Persico Scivoletto in Rome, predicts that a no-deal Brexit is now the most likely scenario.

The main fallout of this, he says, is that the UK will lose the main ‘assets’ of being an EU Member State. ‘UK businesses producing goods or providing services will have to meet EU standards and requirements to do business in any EU country, without enjoying the freedom of establishment and the freedom to provide services.’

Additionally, he says, UK businesses – especially in regulated sectors – will also be without the benefit of the ‘home country control’ rule (the principle that, where an action or service is performed in one country but received in another, the applicable law is the law of the country where the action or service is performed). Sectors such as banking, insurance, airlines and pharmaceuticals could be particularly affected by this.

EU businesses in competition with UK companies in many business fields may benefit from the UK withdrawing from the EU, in that the EU market would become more difficult to access for the latter companies. On the flip side, EU businesses with branches, subsidiaries or offices in the UK, and vice-versa, may experience different drawbacks, depending on the way the UK, and other EU jurisdictions, deal with the issues created by Brexit at a local level.

The UK, Scivoletto predicts, will look for strong business partners once it has lost the benefit of direct access to the EU market. Currently the EU is one of, if not the main commercial partner of the UK.

‘The recent diplomatic exchanges with the US seem to confirm this assumption’, says Scivoletto. ‘Although in this new scenario the UK may benefit from being freed from the many ties arising from its participation in the EU, negotiating new commercial agreements with foreign parties while being in a position of need may not represent the best option for the UK’.

What should in-house lawyers be doing to prepare for Brexit?

General

Without much guidance from the UK government, it is unclear what will happen, so businesses across all sectors should prepare for the worst and keep speaking to suppliers and contacts so that they have plans in place for the various outcomes, says Jo Sellick, Managing Director of recruitment specialists Sellick Partnership.

‘For in-house lawyers specifically, one of the biggest challenges will be remaining compliant as new regulations come in’, says Sellick. ‘Keeping on top of any updates will be essential for those keen to stay ahead of the game’.

Scivoletto suggests in-house lawyers of businesses established in EU Member States should look at whatever legal measures their country of establishment has enacted in case the UK withdraws from the EU with no deal. An example is Italy’s Law Decree 22/2019.

‘The Decree details specific rules in the fields of energy, transportation, communication, banking and finance, including investment funds and providers of money services, for example. It also makes specific reference to immigration rules and the ongoing possibility for UK citizens to reside in Italy.

‘In-house lawyers of companies employing UK employees should make their employers aware of these rules, and urge them to take the necessary actions to comply with them, as a condition precedent to the continuation of the employment relationship in Italy’, says Scivoletto.

The European Commission has published detailed Brexit preparedness notices. These set out in detail, on a sectoral basis, the legal position from 1 November 2019 in the event of a no-deal Brexit, says Belitz. ‘In-house lawyers would do well to consult these notices in detail, and advise of the impact of legal changes in all areas that affect their business. These [notices] are incredibly wide ranging, providing detail on everything from copyright to consumer protection, aviation and medicines.’

UK solicitors will lose their rights to practice EU and local law on the continent. Hans-Jürgen Hellwig is a Co-opted Member of the IBA BIC International Trade in Legal Services Committee and a partner at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB in Frankfurt. He says that for UK solicitors, their ‘practice rights on the continent are in most countries quite restricted, namely limited to home country law and international public law, with the exclusion of EU law. So UK law firms need to do a basic reorganisation of their continental practices. There are likely to be similarly negative effects on secrecy protection.’

Employment

Since we do not know whether we are ultimately facing a ‘hard’ or ‘soft’ Brexit, or what the position will be in terms of customs, tariffs or employment rights, Belitz says that in-house lawyers need to risk-assess all scenarios for their business, on a worst-case scenario basis.

Belitz suggests in-house lawyers adopt a particular focus on whether they need to build any new capabilities and expertise that may be required. ‘For example, many firms will need to develop know-how and precedent documents relating to tariffs and customs requirements for traded goods and services. Lawyers whose companies currently source new employees within the EU may need to build additional capacity and know-how in terms of assisting employees with visa applications. Issues may also arise as regards the recognition of EU professional qualifications in the UK, and vice versa.’

Brexit will certainly have a real impact on the employment sector, she says, particularly if the International Monetary Fund’s predicted two-year recession in the event of a no-deal Brexit comes to pass. In-house lawyers should therefore prepare for the redundancies and layoffs that a recession inevitably heralds, as well as an increase in employment disputes. Struggling companies may have to be sold; as such, a brush-up on the transfer of undertakings regulations may also be required.

As a practical point, says Noel Deans, partner and head of employment at Rosenblatt, in-house lawyers should be considering the direct implications of Brexit on employees and in particular on their right to live and work in the UK. ‘Particularly given the lack of clarity as to whether the UK will leave the EU with or without a deal, where workforces include EU, EEA [European Economic Area] or Swiss citizens (or their family members) these individuals ought to consider the application of the EU Settlement Scheme to their circumstances’.

Immigration

Karl Waheed, Senior Vice Chair of the IBA Immigration and Nationality Law Committee and founder of Karl Waheed Avocats in Paris, say it’s very hard for in-house lawyers to prepare for an event which is constantly shifting.

However, Waheed thinks the most conservative approach would be to brace for a hard Brexit. ‘This means sending UK personnel to remaining EU Member States to serve European affiliates or clients, before the hard Brexit date [of 31 October], and vice versa; and being prepared, on the hard Brexit date, to replace third-country nationals (ie, non-EEA country nationals) working under EU freedom of service provision, [with] workers who have the right to work under the national laws of the country where they are working’.

Such third-country nationals – defined as individuals who are in transit and/or applying for visas in countries that are not their country of origin (ie, country of transit), in order to go to a destination country that is likewise not their country of origin – who are on the payroll of UK companies and working in the remaining EU Member States, and vice versa, do not currently need work permits under EU free movement of services rules. ‘However, on the hard Brexit date, such freedom will cease to exist and the third-country nationals will immediately become subject to work permits. Furthermore, after Brexit (and the yet to be finalised transition period) all movement of workers between the EU and the UK will be subject to visa and work permit regulations.’

The EU and UK are likely to put in place reciprocal arrangements that respect the wishes of their respective citizens to settle and work wherever they have been working and living before the Brexit date, says Waheed. ‘This is the case when we look at the UK’s Settled Status System dealing with EU nationals in the UK. France and many other EU Member States have legislation in place which will do the same.’

Among other legal chaos, a no-deal Brexit would make hiring EU nationals without EU Settlement Scheme (EUSS) status more expensive, time-consuming and challenging for UK businesses, says Levine.

‘With this in mind, and with the caveat that each sector will face unique challenges, with regard to immigration businesses should consider the following as they prepare for Brexit: digesting the UK Government’s EUSS Employer Toolkit, which includes support contacts, leaflets, flowcharts and factsheets, for employees, as well as a more detailed briefing for use in presentations by HR and line managers; knowing employees’ immigration status and referring current EU staff to the EUSS application page; and reviewing the European Temporary Leave to Remain information and the White Paper on the Future Skills-Based Immigration System.’

Gary McIndoe, immigration law solicitor and managing director of immigration boutique Latitude Law, says in-house lawyers should be reviewing their company’s current business plan, to ascertain and plan well in advance for staff movements between the UK and the rest of Europe in a post-Brexit world. ‘It may prove necessary [for in-house lawyers] to work alongside specialist external counsel in the various jurisdictions in which their company operates, to ensure compliance with immigration rules across Europe’.

There are no benefits to Brexit from an immigration lawyer’s point of view, he says. ‘Things will only get harder, due to the administrative obstacles Brexit will introduce’.  McIndoe describes these as including the inability of companies to relocate staff freely across borders into and out of the UK; the need to plan staff relocations much farther in advance; the cost of a new visa and residence system to employers, their staff and families; the regulatory burden of the UK’s current sponsor management system, with its myriad reporting duties in the event of corporate restructuring, changes to staff levels, location and salaries; and the ending of the UK’s participation in the Mutual Recognition of Professional Qualifications Directive, which will restrict the ability of professionals to practise in the EU territory of their choice.

Data protection

From a data protection point of view, preparing for Brexit means preparing for worse-case scenarios, believes Paul Breitbarth, Director of Strategic Research and Regulator Outreach at privacy compliance software company Nymity.

‘In-house lawyers should make an inventory of all data flows within the organisation – so what data is flowing to and from the EU Member States, as well as with third countries’, says Breitbarth. ‘Next, they would be advised to decide if they are comfortable using the pre-approved model clauses for international data transfers. If yes, these can be used as an add-on to existing contracts, of course pending approval of the other contracting parties. However, the model clauses have to be used as is and cannot be modified. If the model clauses would not work for the organisation, specific data transfer clauses would need to be drafted and submitted for approval to the data protection authorities.’

For organisations that have so-called Binding Corporate Rules (BCR) – a set of intra-group data protection provisions that are approved by the data protection authorities – in place, in-house lawyers will need to find out who their lead supervisory authority is. ‘This would typically be the authority that has assessed the draft BCR’, explains Breitbarth. ‘If this is the UK Information Commissioner’s Office (ICO), the responsibility for the BCR will have to be handed over to one of the other EU data protection authorities since the main responsibilities for this mechanism can only lie within the EU’.

If the UK leaves Brexit with a deal, data flows will be able to continue for the time being without any change to the current situation. ‘If [this is the case], in-house lawyers would be wise to monitor the guidance from the ICO as well as from the European Data Protection Board, to be alerted to next steps in the data relationship between the EU, the UK and other third countries’, Breitbarth says.

Litigation

Although many in-house lawyers will have already assessed their exposure against various Brexit scenarios, few appear to have requested budget contingencies to fund disputes and litigation that may possibly arise, says Louis Young, co-founder and managing director of litigation and dispute funding institution Augusta Ventures.

‘This is quite rational – it’s hard to ask finance for a budget for an unknown unknown’, Young says. ‘But this means that all the good analysis and thinking that has been done can yet lead to embarrassment if cases present themselves, and counsel do not have the financial firepower to take action. Litigation finance is one option to resolve this.’

Intellectual property

Caroline Warren, partner at Mathys & Squire, says there is little difference in the advice she would give in-house lawyers in a deal or no-deal situation.

‘The main difference is in the speed at which the transition will need to take place. There is a lot to consider, but top tips for in-house lawyers include: considering whether you or your advisors will be able to continue to act before both the European Union Intellectual Property Office and the UK Intellectual Property Office for the filing of trademarks and designs, and have the necessary experience to do so; remembering that patent work is largely unaffected; and ensuring that any records systems are ready to handle the cloning of EU rights to create a corresponding UK right.

‘In-house lawyers should also ensure that evidence is gathered to show use of a trademark both in the EU and the UK so that both rights can be maintained after Brexit if a third party should apply to revoke them; review existing agreements to that they refer to both the UK and the EU, where previously they have referred only to the EU; and, for exporters, review whether the change in the exhaustion of rights regime means that new agreements will need to be put in place.’