June 2020 Brexit Update – Where are we now?
As we near the halfway point of the transition period, political and media attention is slowly shifting from the COVID-19 crisis back to Brexit.
Despite bandwidth on both sides of the Channel consumed by the pandemic and its consequences, negotiations between the UK and EU have continued virtually in recent months, with four rounds of talks taking place via videoconference.
While the two sides remain at loggerheads over many issues, both sides can agree that progress has been slow to date.
The formal deadline for extending the transition period is 1 July, however it seems unlikely that the UK will seek to exercise this option. On 12 June, the Chancellor of the Duchy of Lancaster, Michael Gove, formally confirmed to his EU counterparts that the UK would not seek an extension:
“I formally confirmed the UK will not extend the transition period & the moment for extension has now passed. On January 1, 2021, we will take back control and regain our political & economic independence.”
Despite this, three outcomes still technically remain, although the third looks increasingly unlikely:
1. The UK and the EU agree a free trade deal
If a UK-EU trade deal is ready by the end of the year, the UK could begin the new trading relationship as soon as the transition ends on 31 December.
If the trade deal is reached but questions remain in other areas - like the future of security co-operation - than the trade deal might go ahead, with contingency plans used for other parts of the relationship. However, the EU wants one, comprehensive deal covering all aspects of the future relationship while the UK argues there should be a series of separate agreements, including a basic free trade deal.
2. The UK and EU are unable to agree a free trade deal
Under this scenario, UK and EU negotiators fail to agree and implement a trade deal by 1 January 2021 and no transition extension is agreed. That would leave the UK trading on WTO (World Trade Organization) terms with the EU. This means that most UK goods would be subject to tariffs until a free trade deal was ready to be brought in. If other aspects of the future relationship aren't ready, they too would have to proceed on no-deal terms.
3. A short technical extension is granted
Under the terms of the withdrawal agreement, the transition period is allowed to be extended by 12 or 24 months, in order to continue negotiations, if both the UK and the EU agreed to it. The deadline for extending the transition is 1 July 2020. If a deal is within reach but time is short, it is foreseeable that a short technical extension might be granted in order to finalise the details.
However, as above, the UK government has repeatedly ruled out any extension to the transition. UK law also prohibits the Government from agreeing to one, so barring a last-minute u-turn, this scenario appears very unlikely.
After UK prime minister Boris Johnson and EU Commission President Ursula Van Der Leyen met on 7 June week to take stock of the negotiations, the prospects of an October deal appear to hang on the crucial issues of trade tariffs and 'level playing field' regulatory commitments.
The EU have indicated that a deal would need to be completed by 31 October 2020 in order to give member states enough time to scrutinise and ratify it. The UK could, in theory, ratify and implement a deal much quicker given the size of the Conservative majority even if some primary legislation was required. Time therefore appears to be the most significant barrier.
Both sides have now agreed to accelerate and intensify negotiations and have set out the following timetable over the summer:
- Restricted round in the format of a meeting of the Chief Negotiators and of specialised sessions week of 29 June to 3 July (Brussels)
- Meetings of the Chief Negotiators / their teams / specialised sessions: week of 6 July (London)
- Meetings of the Chief Negotiators / their teams / specialised sessions: week of 13 July (Brussels)
- Round 5: week of 20 July to 24 July (London)
- Meetings of the Chief Negotiators / their teams / specialised sessions: week of 27 July (London)
- Round 6: week of 17 August to 21 August (Brussels)
For the IFoA and its members, the negotiations on the services sector will be of most interest.
With services contributing to 80 percent of GDP and the UK’s largest importer of services being the EU (accounting for 41 percent of all service exports) there is some concern about the amount of progress made on this aspect of the negotiations.
According to its draft agreement, the UK is still pursuing an enhanced equivalence and regulatory cooperation regime, proposing a Financial Services Committee with UK, EU and independent representatives to ensure the financial services chapter is respected. Although the proposal is embraced by the City, the EU is unlikely to accept any obstacles to its power to withdraw equivalence and believes these decisions should be unilateral and according to their own interests.
The UK draft agreement also seeks to enable UK financial firms to service in the EU market and vice versa. Importantly, according to the terms provision of services depends on how each party defines ‘doing business’ and ‘solicitation’, which may create barriers along the way.
Facilitating free trade in services requires the removal of non-tariff barriers. Free trade agreements only cover services lightly and the single market itself is not as open for services as it is for goods. At present, firms based in any member state are able to enjoy: the discharge services in other member states, the freedom of establishment, mutual recognition of qualifications and regulatory bodies, free flow of data, freedom of movement and effective enforcement.
Without a deal however, UK firms that want to trade in services would have to comply with a mix of regulatory regimes, with many of those that can afford it already setting subsidiaries in EU member states. Losing access to the EU markets would affect service providers from the UK differently depending on the member states in which they operate or used to operate in.
One of the main sticking points that resurfaced in the last round of negotiations was around mobility for professionals discharging their services in the EU market, with the EU concerned that the UK wanted ’almost’ freedom of movement. This is an issue that would affect legal services and business consultants for instance.
In addition, on professional qualifications, the UK has been asking for more than the EU has offered as part of previous EU free trade agreements with Canada and Japan, pushing for mutual recognition to be considered as the default. The EU instead wants UK qualifications to be governed by the national policies of the member state.
Deal or No Deal?
With an extension to the transition looking increasingly unlikely and progress on negotiations not where either side would have expected, the odds on ‘No Deal’ will have shortened in recent weeks. However both sides have recommitted to agree the principles that will underpin a future agreement in July, and are committed to an “ambitious, broad, deep and flexible partnership across trade and economic cooperation with a comprehensive and balanced Free Trade Agreement at its core.”
The IFoA’s policy and public affairs team will continue to monitor the negotiations to ensure members can keep abreast of developments as and when they happen.
Brexit timeline of events
The UK left the EU on 31 January 2020 on the terms of the deal negotiated with the EU in 2019, and enter a transition period until the end of 2020. A no-deal exit is not ruled out if an agreement on the UK’s future relationship with the EU is not reached by the end of the year. Whatever happens, it is important that the IFoA and its members continue to prepare for any eventuality.
When the UK does leave the EU, in whatever form Brexit takes, it is likely to impact the work of actuaries in the UK and EU. It will mean potential changes to regulation, such as Solvency II, and it will have implications for migration, demographics and the broader economy. Quite how its effects will manifest themselves still remains highly uncertain.
View our Brexit timeline of events for more details on the process to date, and the key dates still to be navigated.
Brexit challenges and opportunities for the profession
Over the past year, the IFoA’s Council has considered the potential for Brexit to impact the IFoA, actuaries and the industries in which they work. These challenges and opportunities are summarised below.
Managing macroeconomic effects
- No Deal: Most sources predict that a ‘No Deal’ Brexit will have an immediate negative effect on the UK economy, potentially causing a shrink in UK GDP.
- The Deal: A managed Brexit is predicted to lead to a smaller negative impact on the UK economy following withdrawal
Trade relationships with EU and non-EU countries
- No Deal: With no new trade agreement with the EU, the rules of the World Trade Organisation would apply. Mutual recognition and access to the single market would end, necessitating a new regime, however the UK Government has indicated it would accept some European Union rules allow EU firms to operate in the UK for up to three years.
- The Deal: The Government aims to secure the freest and most frictionless trade possible in goods with the EU outside the single market via a new free trade agreement. Mutual recognition of professional qualifications would continue, but importantly services will not be included in the new customs arrangement.
Maintaining high regulatory standards while encouraging innovation and growth
- No Deal: The UK would cease to be a member of dozens of regulatory agencies that govern many aspects of daily life. It will be particularly challenging for the UK to assume this responsibility all at once if a 'no deal' scenario also means that there is no transition period.
- The Deal: There would be regulatory arrangements for financial services, but these would not replicate the EU's passporting regimes (which enables authorised EU firms to trade freely in any EU state), meaning that the UK and the EU will not maintain current levels of access to each other's markets.
The impact on actuaries and their employers
- No Deal: The UK government has indicated it intends to secure the rights of EU citizens living in the UK under a 'no deal' Brexit scenario. The rights of UK citizens living in the EU have not yet been guaranteed. Members would experience significant disruption while new regimes were put in place, including mutual recognition of qualifications and working cross-border.
- The Deal: While an agreement will limit the immediate effects of a Brexit on the profession, the end of passporting, the lack of regulatory equivalence, and freedom of movement are potential challenges.
We will continue to monitor and react to the opportunities and challenges that Brexit presents.
Useful Brexit Links
The IFoA has been engaging with the UK Department for Business, Energy and Industrial Strategy (BEIS) to ensure that the IFoA is prepared for all Brexit eventualities. BEIS provides the IFoA with regular updates and resources, and we have also attended numerous Brexit Readiness events, including forums on no-deal communication and the mutual recognition of qualifications.
The IFoA will be taking steps to mitigate any potential Brexit effects, and would encourage all members to make sure their places of work are aware of the need to do the same.
The Government has prepared a number of tools and resources to help people and businesses get Brexit ready, and the IFoA would encourage its members to take advantage of the available guidance:
- Gov.UK has a dedicated webpage for Brexit preparation, with resources for individuals and organisations https://www.gov.uk/transition
- The Government has also created a tool to check your Brexit readiness https://www.gov.uk/get-ready-brexit-check
- There is also a library of sector-specific briefings on how to ensure businesses and individuals are ready in the event of no-deal https://www.gov.uk/government/collections/how-to-prepare-if-the-uk-leave...
- For residents of British Overseas Territories also affected by Brexit, guidance is available from the UK Government via its main Brexit page. The Government of Gibraltar and the Gibraltar Financial Services Commission have also issued Brexit guidance https://www.gibraltar.gov.gi/brexit / https://www.fsc.gi/regulated-firms/brexit-info-firms
- IFoA Members living and working in non-UK EU states should also look for guidance issued by their Government on the effects of Brexit, and any actions they will need to take once the UK leave the EU.
Further information is being issued all the time, so remember to keep checking for the latest updates and guidance. Organisations wanting to keep up to date with the latest news and preparedness events from BEIS via the Brexit Business Readiness Bulletin can join the mailing list by emailing firstname.lastname@example.org.
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