BREXIT: 'Out' vote in referendum would introduce regulatory uncertainty, but increased lobbying opportunity, says expert

Out-Law Analysis | 16 Feb 2016 | 12:06 pm | 4 min. read

FOCUS: Businesses in highly regulated industries such as financial services or air transport may have to submit to a whole new regulatory process or move to another EU country if UK voters choose to leave the EU later this year. 

This is part of Out-Law's series of news and insights from Pinsent Masons lawyers and other experts on the impact of the UK's EU referendum.

Political observers say that the most likely date of an EU in/out referendum is June and that public opinion is narrowly balanced. The UK's departure from the EU would have profound consequences for businesses in the UK.

'Passported' industries and a lobbying opportunity

Many businesses in highly regulated fields operate in the UK despite being regulated in other EU countries. They operate under a 'passport' which would no longer work if the UK left the EU, unless the UK manages to negotiate continuity as part of its Brexit arrangement. If continuity was not possible to negotiate, UK companies currently benefitting from EU passports may need to relocate some or all of their business in an EU country and may need to rethink their tax status.

Alternatively they could continue UK operations, but they might have to submit to whatever regulatory process the UK put in place, which may result in uncertainty and compliance costs.

The degree of UK flexibility in this area will doubtless be part of the overall horse trade between the EU and the UK. Exposure of UK companies to the EU single market will doubtless be at a high price, which is likely to involve continuing to accept EU regulations. The real haggle will be over precisely which regulations continue to bind UK companies.

Few companies would welcome this regulatory upheaval or uncertainty, but some may relish the chance to influence policy in a newly-departed UK. Many EU laws take direct effect in member countries. Those would most likely simply become UK laws, but the UK government may have the ability to alter them without consulting Brussels or other EU governments.

This would give companies the opportunity to lobby the government to amend laws such as those governing public procurement, financial services regulation, employment and the environment. Though the business community is largely against leaving the EU, many companies would welcome the opportunity to lobby to change these and other laws.

Not so free movement

The ability of UK citizens to work and do business in the EU could be significantly restricted in the event of an 'out' vote. UK workers could lose their right to free movement and the working arrangements would be subject to negotiation.

There are two commodities which currently flow freely through Europe and which the economy is highly reliant on: energy and data. The UK imports and exports significant amounts of energy, and the trading of energy across borders is highly regulated. 

With a low oil price already introducing volatility into that industry, the negotiation and imposition of tariffs and limits on the buying and selling of energy could have a major impact both on companies operating directly in that sector and on energy-intensive industries such as manufacturing and transport.

Financial services, technology and retail businesses are now highly reliant on people's personal information. They need to be able to collect, transfer, analyse and process enormous amounts of personal data. An EU-wide system allows this data to flow between EU countries. Much stricter controls exist when data leaves the EU.

Though the UK can apply for, and is likely to receive, permission to move data in and out of the EU it may well not be on the same terms as EU countries. This could have a significant impact on businesses which are reliant on the collection and analysis of large volumes of personal data from EU citizens.

Trade trouble

In the event of an exit UK businesses may feel the sudden impact of no longer being in a free trade area with some of its biggest trading partners. Tariffs, quotas and import/export duties could be imposed for the first time in decades, limiting access to the UK's closest neighbours.

This all could have a major impact on the economic viability of the trading of goods and services with EU countries. It might also introduce logistical problems, as the negotiation of borders, paperwork and regulations could make the transporting of goods more time-consuming and costly.

Laws of the land

The legal and judicial sector would face a massive task in the case of an 'out' vote of working out what laws actually apply in the UK. They would need to identify what legislation and case law that came from EU laws or judgments still apply.

The government would then need to decide which of these to keep, and whether they will change as the EU changes them, or only when the UK government or courts makes a change. The government may want to maintain parallel laws in some areas, and a new settlement with the EU may even require this. But in many areas even laws that began with EU cases or laws are likely to change only when the government or courts in the UK make changes.

Dropping or removing EU laws may well be a difficult process, and another area where businesses are likely to lobby heavily. It also raises a risk that some laws or regulations will fall between the cracks and areas will not be covered by laws when they really should be.

These are problems of government but they raise serious issues for businesses. The period of uncertainty over laws that may have a fundamental impact on companies could hamper investment, planning and development.

Though businesses may welcome the chance to lobby to change the laws the cost is a long period of relative uncertainty and regulatory instability.

The UK and the EU have two years from the moment the UK prime minister writes to Brussels to declare an intention to leave the EU in which to negotiate the separation. But that period can be extended, and uncertainty may last much longer.

The overarching feeling amongst businesses will be of uncertainty if an 'out' vote is returned. Non-UK companies may delay investment in UK until new rules are confirmed, and may even move investment from UK.

UK businesses may move some or all of their business elsewhere, and may struggle to reconcile increasingly divergent standards, regulations and rules as time goes on, which may make it more difficult for them to address the UK market and EU markets.

On the other hand, changes to how business is regulated may make the UK a more attractive hub for some businesses, and some companies may choose to move operations from the EU to the UK, though this is not likely to happen until the uncertainty surrounding the process dies down.

Guy Lougher is an EU and competition law expert at Pinsent Masons, the law firm behind Out-Law.com.