UK referendum on EU membership raises countless legal questions

Friday 15 July 2016



The result of the UK’s referendum on membership of the European Union on 23 June sent shockwaves through the financial markets.

While the country, the rest of Europe and indeed the world begin to come to terms with the result there are still many vexing legal questions that are challenging both lawyers and lawmakers.

 Euro flag with British flag jigsaw piece missing

‘The simple question that lawyers are already arguing about is that the referendum is not a legally binding referendum as parliament is sovereign and therefore must have the final say,’ says Professor Tony Travers of the London School of Economics. ‘Perhaps the most intriguing question is what counts as triggering Article 50,’ he says, referring to the formal legal process for EU withdrawal.

Some legal experts are concerned the UK government could use its authority to trigger Article 50 under the royal prerogative – a collection of executive powers held by the Crown that relates to foreign affairs. Others argue that the Prime Minister, or her cabinet, can only issue Article 50 once they have received parliament’s consent.

Two legal challenges, including one being led by London law firm Mishcon de Reya on behalf of a group of business leaders, have already been brought to try and prevent the government from triggering Article 50 without first seeking parliamentary approval.

‘‘The simple question that lawyers are already arguing about is that the referendum is not a legally binding referendum as parliament is sovereign

Professor Tony Travers

Jeff King, a constitutional and administrative law expert at University College London, says parliament’s involvement will be crucial to the negotiation process: ‘It’s an enormous body of people with talent and knowledge, who have largely agreed now that what’s done is done and that we can’t ignore this fact – this is crucial when 48 per cent of the people that voted wanted to remain in the EU.

It’s not just a formality because parliament can create a framework for how bargaining can happen, what approvals need to be made and perhaps even put forward the withdrawal agreement for a second referendum.’

Although King says the various claimants’ chances of success are unclear at this stage, he says it’s incumbent on the judges to resolve the dispute in a timely fashion: ‘We have to recognise that judges’ rulings on the royal prerogative in the area of foreign affairs have always been difficult to reach. Judges are often reluctant to interfere, particularly in relation to political disputes. That said, it does give judges a mandate to answer a question and they have a legal requirement to answer it.’

Turbulent times

 Peter Rees

Peter Rees

As the legal debate continues on how Article 50 will be invoked, Peter Rees QC, a barrister at 39 Essex Chambers who chairs the IBA Corporate Counsel Forum and was legal director at Royal Dutch Shell from 2011-2014, says the intervening period poses particular challenges for businesses, and by association, their in-house counsel. ‘Until there is a clearer understanding of what the UK is like as a place to do business outside the EU then businesses will be very wary of making investments or increasing investments in the UK. It’s hoped that in around two years’ time from this October that the picture will be clearer, but in the short term there is very little certainty for businesses.’

One adverse effect of leaving the EU is the potential loss of the UK’s ‘passporting’ rights – a privilege which currently allows banks and other financial entities across the EU and the European Economic Area (EEA) to provide services to clients anywhere in the single market without incurring additional charges or requiring further authorisation.

‘It would be an awful blow for the City if the passporting rights are lost,’ says Philip Wood, Special Global Counsel at Allen & Overy, who was a member of the IBA's 2009 Task Force on the Financial Crisis. ‘Even though many banks have already set up subsidiaries within remaining EU countries so as to get passport rights anyway, there could be a lot of pressure on these foreign banks to move their senior people to a continental European location and that could be damaging.’

Some argue that the UK could retain the passporting privilege by striking a deal like Norway, which is outside of the EU but part of the EEA. However, Dirk Bliesener, partner at Hengeler Mueller in Frankfurt and European Liaison Officer for the IBA Banking Law Committee, says the UK’s task of negotiating the right deal involves many issues asides from passporting: ‘One part of the freedoms that exists in the EU is the freedom to supply goods and the abolition of customs duties and tariffs. The UK government and the EU could conclude a satisfactory agreement in this regard, but this is just one type of freedom. There’s also the freedom of movement as well as the freedom to provide services and so on, so these all need to be discussed.’

A number of banks, including US investment bank JPMorgan Chase, are already exploring options to relocate staff and restructure operations from London after the UK exits the EU. Despite the uncertainty ahead, the proposed $27bn merger between the London Stock Exchange Group (LSEG) and Deutsche Börse is still expected to be completed by early 2017.

The exchanges, which hope to save around €450m by overlapping back-office functions and slashing more than 1,000 jobs, have said the referendum result won’t derail their plans to create the world’s largest exchange by revenue to challenge rivals in the US and Asia. However, Bliesener questions the rationale behind the deal: ‘There is still a certain logic in the merger, in view of globalisation and scale, but from the corporate governance point of view it’s hard to imagine the headquarters being located outside of the EU given that one of the benefits of the merger is the umbrella of a harmonised EU regulatory framework. It’s logical to have all of it in the EU.’

Despite some people’s reservations about London’s future status as a financial centre, Rees believes the city will remain a go-to jurisdiction for financial and legal services and dispute resolution. ‘London will remain a key financial and legal centre due to the favourable time zone and English law will continue to be viewed as a good, neutral law that people will write into their contracts,’ he says. ‘In some respects we need to look at how London has grown to become a strong legal and financial centre. I don’t think that’s necessarily because it’s been part of the EU.’