'Businesses should continue to prepare for the worst and hope for the best', says Hogan Lovells

Hogan Lovells responds to the UK Cabinet backing the Withdrawal Agreement and Political Declaration on the Future Relationship reached between the respective negotiating teams of the UK Government and the EU Commission:

Charles Brasted, partner in the Hogan Lovells Brexit Taskforce, said: “Today’s political agreement on a draft withdrawal treaty has put the wheels of a potential orderly Brexit into motion, and the Prime Minister has cleared the first of a number of hurdles. Businesses can afford some cautious optimism after today’s agreement that there will be a transition period that avoids the 29 March 2019 cliff edge.  However, there remain many obstacles: the deal requires approval by both the UK and EU Parliaments. It is already clear that it will face significant challenges in the UK Parliament, where the UK Government does not command an effective majority.  There is a real prospect of the deal falling through at the UK end, leading to further negotiations and potentially a vote of no confidence and a general election hard up against the March 2019 deadline. So, uncertainty remains high even though the shape of the transition period, if it can be delivered, is clearer. Our message to businesses continues to be: prepare for the worst, hope – and advocate vigorously – for the best. ”

Susan Bright, UK & Africa Managing Partner and leader of the Hogan Lovells Brexit Taskforce, added: “In the lead up to today's Cabinet meeting, Downing Street briefed the media that the deadline for the UK Government to trigger the implementation of no-deal preparations is 1 December 2018.  Even if political agreement is reached between the governments of the UK and the EU27, the risk of a no-deal Brexit remains until the deal is finally signed, sealed and delivered.  The meaningful vote is the key remaining hurdle; prudence suggests that at least until then both sides will need to continue practical preparations to mitigate the most immediate consequences of a no-deal Brexit.”

The impact on financial services

Hogan Lovells partner Rachel Kent said: “The really good news from today’s announcement is that the financial industry will have a transitional period to give them additional, and much needed, time to adapt to new framework post-Brexit.

“More generally on the potential future deal, while details of the agreement today still need to be ironed out, what we have seen so far provides us with a clearer understanding of what a future relationship could look like for the City of London. 

“Although there is nothing here that is binding, it is probably as much as we could hope for at this stage. However, we now have a platform for good conversations on a mutually beneficial future deal.

“We hope that equivalence decisions will be made before the end of the transition period to provide further certainty for businesses. The door is still open to conversations about increases in scope where there are economic benefits to both parties. The industry’s concerns about processes have also been heard and these will be considered. I don’t see that any doors have been closed.”

Partner Michael Thomas added:

"Whilst it is encouraging for the financial sector that a deal has been reached, it still needs to be approved both in the UK and the EU. If it is, then the transition period will kick in and the financial sector will have a bit more time to prepare for the eventual future arrangement. If not, then we could still be facing a hard Brexit. Firms cannot yet suspend their contingency planning for the hard Brexit scenario.

"The future arrangement looks to be based on an equivalence arrangement. We will need to see what that means in practice. At the moment, we have three bullet points covering financial services. How those three bullet points expand will be of intense interest over the coming months."

The impact on data protection

Nicola Fulford, partner in the Privacy and Cybersecurity practice at Hogan Lovells, said: "It is disappointing but not surprising that we have no adequacy at this stage.

"The agreement broadly requires that the GDPR will continue to apply to UK processing of EU citizens' data during transition and, after transition, under the agreement, unless the UK receives an 'adequacy' decision from the European Commission, in which case UK law would apply. In the event that the UK loses its adequacy decision, then the UK commits to protecting EU citizens' data to an "essentially equivalent" standard.

"Currently a small number of countries have received adequacy decisions, which means that personal data can flow freely from the EU to those countries, without the need for additional restrictions such as standard form contracts that must be put in place by each individual business. This would mean effort and expense and put a brake on the digital economy.

"Although an adequacy decision would be less favourable than agreement at this stage that the UK's data protection laws and their enforcement are already adequate (as it can be unilaterally revoked by the Commission), it has been a goal for the government, and very much influential for the ICO since the referendum. Whilst this falls short of the ideal position of agreed equivalence of data protection, this is not surprising given previous statements from the Commission.

"It is interesting to note that data protection is second of nearly sixty points describing the outline of the framework for the future relationship of the EU and the UK, with a clear commitment to a high level of data protection and, what will be key for UK businesses that operate internationally, "appropriate" cooperation between regulators. UK businesses will hope this cooperation is meaningful, but it seems unlikely that the ICO will continue to be a member of the European Data Protection Board or a lead authority, so they will need to make plans for alternatives in the EU."

The impact on international trade

Aline Doussin, partner in the international trade team at Hogan Lovells, said: "Our clients will welcome the certainty that goods and services will continue to move freely within the EU until the end of transition (or referred to as "implementation") period, and that in the absence of an agreement on the future relationship, the EU and the UK could agree to jointly extend the transition period or rely on a temporary EU/UK customs territory. The ability to trade as freely as possible with the EU27 remains at the heart of our client's advocacy positions both in the EU27 and in the UK.

"The draft Withdrawal Agreement also contains very important clarifications on the rules that will apply to goods that are placed on the UK market before the end of the implementation period, in essence confirming that they will continue to circulate freely in the EU. This is extremely important for clients who trade regulated products, are subject to CE marking requirements and use the UK as first point of entry into the EU market. It will be up to traders to ensure that they retain all evidential records of the date of placement on the market, to benefit from these transition trading rights. As ever this agreement still needs to become law, and there are still some political deadlines ahead, both in the EU27 and in the UK.

"With regards to the future relationship, our clients will strongly welcome the confirmation that no tariffs, fees, charges or quantitative restrictions will apply for EU/UK trade once the implementation period ends. The framework for a comprehensive customs cooperation is yet to be built, but where there is political will , there is generally a legal way."

The impact on competition law

Angus Coulter, partner in the competition team at Hogan Lovells said: "Considering competition law, the draft treaty provides welcome points for practitioners, regulators and business – both clarity and the substance of what is proposed.

"The provisions make clear that the Commission will not have to drop the UK element of existing merger reviews and antitrust investigations, meaning that the UK's CMA will not have to launch duplicative inquiries. They also give guidance on which investigations will be saved by these provisions. UK lawyers will remain able during the transition period to represent clients in the EU courts.

"Otherwise, the level playing field provisions of the draft treaty reintroduce the core elements which the EU competition law currently provide for EU-UK trade, on anticompetitive agreements, abuses of dominance and mergers. Probably most importantly, the UK (and the EU) are required to give effect to these rules taking into account the EU rules and case law as these evolve – not a snapshot of EU jurisprudence at the date of leaving (which is what the UK no-deal backstop in this area takes as its starting point).

"In all this is a package which – if it comes into effect – should please business. Their advisors will be able to continue to give a very clear steer – important in an area where there is a huge reliance of companies to work out for themselves what is legal and what is not. It will give the UK the flexibility to move its enforcement as practice moves, to avoid for now British companies having to adhere to two, diverging sets of rules. This will be most important in cutting-edge areas where both the UK and the EU have live (and often interlinked) cases, on topics like excessive pricing for pharmaceuticals and the role of technology and big data in giving market power."

The impact on energy

Alex Harrison, energy partner at Hogan Lovells commented:

"The outlook on energy looks positive. In its future relationship, the UK and EU27 will continue to have technical cooperation between electricity and gas networks and mechanisms will be put in place to ensure security of supply and efficient trade over interconnectors. There are plans for continued cooperation on carbon pricing by linking a new UK greenhouse gas emissions trading system with the EU ETS and there will be continued wide-ranging nuclear cooperation. There is a specific protocol in the withdrawal agreement to deal with the backstop arrangements which preserve the single electricity market on the island of Ireland."

The impact for the life sciences sector?

Transition period and the application of EU law during the transition period

Hogan Lovells lawyer Jane Summerfield, who leads the firm’s life sciences commercial regulatory practice in the UK, said:

“The agreement on a transition period beginning on 30 March 2019 and ending on 31 December 2020 is particularly important for the life sciences sector, as a "no deal" scenario could potentially result in disruption to supplies of medicines and medical devices to patients in both the EU and UK.

“A number of provisions of the draft Withdrawal Agreement, including Article 4 and Article 127(3), provide that EU law will, during the transition period, continue to have the same legal effect in the United Kingdom as it does in the EU27.

“This suggests that, while the United Kingdom will continue to benefit from free movement during the transition period, from a regulatory perspective the country will retain the responsibilities of EU membership without the related powers. The UK would not be permitted to participate in the EU decision-making processes, a limitation that could have particular implications in the life science sector where decision-making is an on-going process."

Implications for medical devices

Hogan Lovells Partner Elisabethann Wright, a leading expert in regulatory issues governing the pharmaceutical and medical device industries, said:

“The EU medical devices directives are specifically mentioned as provisions that will continue to apply in the UK during the transition period. The fact that EU law, including these directives, will continue to apply in the UK suggests that notified bodies in the UK will be permitted to continue to issue CE Certificates of Conformity during this period that are valid throughout the EU. This would mean that medical devices to which they relate could be supplied throughout the EU during the transition period.

“In an apparent view towards the end of the transition period, Article 46 of the draft Withdrawal Agreement establishes a mechanism for exchange of information between notified bodies established in the UK and the EU during this period. The purpose would appear to be to permit medical device manufacturers with a UK notified body to transfer to a notified body in the EU27 at the end of the transition period.”

Implications for medicinal products

Hogan Lovells life sciences lawyer Alexander Roussanov said:

“Article 44 of the draft Withdrawal Agreement requires the MHRA to transfer all documents related to assessments, approvals and authorisations procedures led by the Agency by 29 March 2019. This transfer would be to the competent authority of an EU Member State which would be permitted to use the dossier to assess an application for marketing authorisation of a medicinal product.

“The draft Withdrawal Agreement makes clear, however, that after 30 March 2019 the UK would no longer be permitted to act as a Reference Member State in decentralised or mutual recognition marketing authorisation procedures. Somewhat surprisingly, given the clear statement in the Agreement that EU law, including the Community Code on medicinal products, would continue to apply in the UK during the transition period, this exclusion would apply even during the transitional period. The UK could, however, still be a Concerned Member State in such procedures during the transition period. Medicinal products authorised by the MHRA could also serve as reference medicinal products during the transition period. In addition, UK companies could, at least in principle, apply for marketing authorisation under the decentralised or mutual recognition procedures. They would, however, be required to make the application to the competent authorities of one of the EU27.

“In addition to the regulatory implications above, the provisions in the draft Withdrawal Agreement in other areas such as customs arrangements, data transfers, intellectual property and competition law are of particular relevance to the life sciences sector."

What should life sciences companies do in response?

Jane Summerfield, added:

“While the Withdrawal Agreement text is a step forward in the process, given the uncertainty as to whether it will be accepted by the UK or EU Parliaments, at this stage, life sciences companies should continue to prepare for Brexit based on a "no deal" scenario."

What happens now?

The UK Cabinet has today backed the Withdrawal Agreement and Political Declaration on the Future Relationship agreed between the respective negotiating teams of the UK Government and the EU Commission.  Now begins the Prime Minister's hard sell to British MPs and to the country at large.  

With today's political sanction of the deal in the UK, the EU27 are expected to push ahead with an extraordinary European Council Summit on 25 November 2018, at which EU27 leaders will be asked to sign off on the deal.  There is scope for further changes to the text between now and then as a result of political concerns in the EU27 capitals, although the EU Commission reportedly stressed to Member State ambassadors on 13 November 2018 that the deal was "settled".  If on 25 November political agreement is reached by both the UK Government and the EU27, the UK Government is expected to present the deal to the UK Parliament for a "meaningful vote" in early December 2018.

Speculation as to what happens then has already been filling the press for weeks.  At present, with both Brexiteer and Remainer MPs coming out against Theresa May's deal, the possibility of Parliamentary endorsement of the outcome of the negotiations looks more remote than ever.  However, in spite of the many vocal critics, the Prime Minister remains staunchly optimistic that she can get the deal through.

The House of Commons' meaningful vote on the deal looks set to be the most significant moment in UK politics since the EU Referendum itself and a moment of reckoning for the UK's warring political factions.  The stakes could not be higher: any deal cannot be ratified by the UK unless and until the House of Commons has voted in favour and passed an Act of Parliament implementing it into UK law.  

The implementing Act would need to become law before March 2019 to avoid the UK inadvertently leaving the EU without having properly implemented the deal.  Even if the House of Commons votes narrowly in favour of the deal in the meaningful vote, the passage of such a controversial and highly technical Bill through Parliament will present many opportunities for spoilers on both side of the Brexit divide to threaten the deal being realised before Brexit day.  Meanwhile, the European Parliament would also need to vote by simple majority on whether to consent to the deal, which is expected to take place in March 2019.

If the House of Commons votes down the deal, under s. 13 of the EU Withdrawal Act the Government has 21 days to present a way forward to be voted on by the House of Commons.  Similarly, if no deal is reached before 21 January 2019, the Government must make a statement in Parliament saying what it proposes to do next.  

In both cases, if the Government's plan for how to proceed is also rejected by the Commons, we are in General Election or second referendum territory.  

Under the Fixed Term Parliaments Act, a General Election can be triggered only when:

  1. the House of Commons carries a motion of no confidence in the Government and does not pass a second motion within 14 days endorsing a new Government; or
  2. the House of Commons votes by a two-thirds majority for a General Election.

Holding a second referendum would require an Act of Parliament.  Such an Act would provide the basis for the referendum campaign and set the question to be put to voters.  Given the Government's current stance firmly against a second referendum, this is only likely in the event of a clear vote in Parliament in favour of holding a second referendum or a new Government coming to power on the basis of a promise to hold one.  The terms of the referendum campaign, covering issues such as campaign expenditure rules, the franchise and particularly the options put to voters, would be highly contentious and could take time to pass through Parliament, as was the case with the EU Referendum Act in 2015, which took just under seven months to become law.  

If it gets to that, it is highly unlikely either a General Election or a second referendum could be held in time without an extension to the Article 50 period.  Such an extension would require a unanimous vote of the EU27 and the UK at a European Council summit.  Without an extension, this could mean the UK crashing out with no-deal before a General Election or second referendum is held.  

That being the case, it is significant that, in the lead-up to today's Cabinet meeting, Downing Street briefed that the deadline for the UK Government to trigger the implementation of no-deal preparations is 1 December 2018.  Even if political agreement is reached between the governments of the UK and the EU27, the risk of a no-deal Brexit remains until the deal is finally signed, sealed and delivered.  The meaningful vote is the key remaining hurdle; prudence suggests that at least until then both sides will need to continue practical preparations to mitigate the most immediate consequences of a no-deal Brexit.

Businesses can afford some cautious optimism that a route out of Brexit uncertainty that avoids the cliff edge of a no-deal Brexit is beginning to appear, but many obstacles remain.  Our message to businesses continues to be: "prepare for the worst, hope – and advocate vigorously – for the best".

The key documents, including the Draft Withdrawal Agreement and Political Declaration can now be found here.


Contacts:

Charles Brasted
charles.brasted@​hoganlovells.com
44 20 7296 5025

Susan Bright
susan.bright@hoganlovells.com
+44 20 7296 2263

Rachel Kent
rachel.kent@hoganlovells.com
+44 20 7296 5825

Michael Thomas
michael.thomas@​hoganlovells.com
+44 20 7296 5081

Nicola Fulford
nicola.fulford@​hoganlovells.com
+44 20 7296 2988

Aline Doussin
aline.doussin@​hoganlovells.com
+44 20 7296 2961

Angus Coulter
angus.coulter@​hoganlovells.com
+44 20 7296 2965

Alex Harrison
alex.harrison@​hoganlovells.com
+44 20 7296 2000

Jane Summerfield
jane.summerfield@​hoganlovells.com
+44 20 7296 2000

Elisabethann Wright
ea.wright@​hoganlovells.com
+32 2 505 09 11

Alexander Roussanov
alexander.roussanov@​hoganlovells.com
+32 2 505 0931




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