Brexit: the legal implications

An overview of the possible legal implications if the UK exits the EU.

"Brexit" is the term commonly used to refer to a UK exit from the EU.

The UK Government has committed to holding a referendum on the UK’s continuing membership of the EU on 23 June 2016 on the basis of the settlement agreement negotiated by the prime minister, David Cameron.

The basis for remaining

The Government’s stated four-point plan for reform included: protecting non-Eurozone countries within the single market (important for the City of London); a British opt-out from "ever closer union"; improving competition and reducing regulation; and the ability to restrict access to welfare payments for migrant workers. The deal that was agreed at the European Council meeting on 18-19 February 2016 will come into effect only if the UK votes to remain in the EU. It included the following:

Safeguards for non-Eurozone Member States: The UK sought safeguards that the Eurozone Member States would not be able to legislate against the interests of non-Eurozone businesses. The settlement provides that legislation must respect the rights of Member States whose currency is not the euro, that any discrimination against individuals or businesses based on the currency of the State in which they are based is prohibited, and that any differing treatment must be based on objective reasons.

The UK also sought to ensure that responsibility for maintaining financial stability in a non-Eurozone State was clearly allocated to the financial authorities of that State. This point was important to the City of London, where the Bank of England has had sole responsibility for ensuring financial stability in the UK. The agreement states that measures taken to preserve the stability of non-Eurozone Member States (including supervision and resolution of financial institutions and markets and macro-prudential responsibilities) are a matter for their national authorities and are their own budgetary responsibility. However, this principle is subject to:

  • the development of the single rule book - a unified regulatory framework for the EU financial sector in order to complete the single market in financial services)
  • EU macro-prudential supervisory mechanisms to prevent and mitigate systemic financial risk, and
  • existing EU powers to take necessary action to respond to threats to financial stability.

These points will be enshrined in a future Treaty change. The UK will also have the right to escalate an issue relating to the application of the settlement to the European Council for discussion.

Ever closer union: An acknowledgement that the UK is not committed to further political integration, and that in a future Treaty change, it will be made clear that the reference to “ever-closer union” does not apply to the UK, was agreed.

Competitiveness: Language committing the EU to increase competitiveness and lower administrative burdens was agreed.

Welfare: The compromise “emergency brake” permits a seven year period within which a graduated restriction on in–work benefits to newly arrived migrants may be imposed for four years. It will be possible to index payment of child benefit according to the cost of living or benefit rates of the country where the child lives, subject to a transition period, so that existing claimants would see reductions only in 2020.

These changes will be implemented only if the UK decides to stay in the EU.

The consequences of a Brexit will stem largely from how the UK Government chooses to develop its relationship with the EU post-Brexit. In practice this will be the subject of negotiation between a referendum in favour of an exit and the implementation of that exit.

There is likely to be a period of perhaps two years between a referendum outcome in favour of an exit and the final departure of the UK from the EU.

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The significance of the UK's membership for business
  • The UK’s membership of the EU is significant to UK and international businesses because it:

    • Provides access to the single market of the 28 EU Member States, both to UK businesses and to international businesses that operate in the UK. The single market provides the benefit of the “four freedoms”: the free movement of products, services, people and capital, as well as harmonised regulatory regimes and cross border trade within the world’s largest trading bloc.
    • Requires UK businesses or businesses with operations in the UK to comply with EU law whether they operate solely within the UK or across EU borders .
Mechanisms for withdrawal
  • If there is a successful "Out" vote in the referendum, little would change in practice until the UK Government actually triggers a withdrawal from the EU.

    Article 50 TEU

    Article 50 of the Treaty on European Union (the TEU) provides the legal basis and procedure for an EU Member State to withdraw from the Union. This route to withdrawal is the only one that complies with international law. David Cameron has indicated that he would lead negotiations under this procedure. Under Article 50, the Member State must provide notice of its intention to withdraw, which triggers the start of a two year period in which the Member State and the EU negotiate the terms of withdrawal, taking account of the framework for (rather than settling the terms of) their future relationship. If no agreement on the arrangements for its withdrawal is reached, a Brexit will occur once the two year period is over, with no terms in place. The two year period could however be extended if negotiations are incomplete, but only with the unanimous consent of the Council of the EU (and thus all 28 Member States). It is very possible that securing that consent would come at a cost to the UK and involve it making concessions to any State threatening to withhold its consent. The two year period will include time at the start when the Commission will seek a negotiating mandate from the Council and time at the end when the Council and Parliament consider the terms of the agreement, so the available period for negotiation is less than two years.

    The Article 50 procedure has never before been used and the provision is somewhat opaque. The Council is ultimately responsible for concluding the withdrawal agreement on the basis of a qualified (weighted) majority, having sought the consent of the European Parliament. However, it is by no means clear at this stage exactly how the procedure would work and who the UK would be negotiating with, although it is clear that the Council will provide guidance on how the negotiations should be managed.

Effect and application of EU law in the UK
  • EU law is deeply embedded in the legal landscape in the UK at the moment. More generally, the UK and its laws must comply with the Treaty obligations of the UK under the EU treaties and acknowledge the principle of the supremacy of EU law. The nature of EU law has had a profound impact on the UK legal systems over the last 50 years.

    Two main types of EU legislation shape UK law:

    EU Regulations

    EU Regulations lay down general rules that are binding at EU and at national level. They are “directly applicable”, which means that they do not need to be separately enacted through UK legislation to have effect. Regulations would fall away with a Brexit, although when precisely this would be would depend on how the UK chooses to exit (see below). The Government would therefore need to put in place alternative arrangements for areas of law currently governed by EU law. Without alternative arrangements, UK companies would, for example, lose access to the EU Customs Union (established by EU Regulation 952/2013) from the moment that the UK withdraws from the EU.

    EU Directives

    EU Directives are binding in terms of the results to be achieved - but the Member States have flexibility as to how to achieve those results. In the UK, EU legislation is implemented either as standalone legislation or integrated into a broader piece of legislation, and as either primary legislation (Acts of Parliament) or secondary legislation. Secondary legislation could include orders, rules, byelaws or, confusingly, regulations. The vast majority of EU Directives are implemented through secondary legislation. Following a Brexit, each piece of primary legislation implementing an EU Directive remains in force unless or until separately repealed by Parliament. Each piece of secondary legislation implemented under the ECA, unless expressly retained by Parliament, would only remain in force until abrogated by the repeal of the ECA. This means, for example, that immediately after repeal of the ECA, UK companies would no longer be bound by the Working Time Regulations 1998 (implemented under the ECA) but would remain bound by the Data Protection Act 1998 (implementing the EU Data Protection Directive).

Alternatives to membership of the EU
  • The extent to which the UK’s legal landscape will change as a result of a Brexit depends on which alternative is chosen to govern the relationship between the UK and the EU post-exit. The five most commonly discussed models are discussed briefly below. In practice, the UK would negotiate its own position, which is unlikely to match any of the arrangements that already exist for other countries:

    The Norwegian option (EEA membership)

    Under the “Norwegian” option, the UK would join the European Free Trade Area (EFTA) and seek membership of the European Economic Area (EEA). Norway is an example of a current EEA/EFTA member which has gained full access to the EU single market in exchange for compliance with the bulk of EU laws. EEA members pay reduced (but still significant) membership fees to the EU, but have no say in shaping its laws.

    The Swiss option (bilateral agreements)

    Switzerland has negotiated access to the majority of the single market through a web of bilateral agreements with the EU. These agreements oblige Switzerland to implement EU law and any subsequent changes within their respective areas, although Switzerland has no say in shaping the changes. The “Swiss” option would involve access to EFTA and elements of the EU single market. Under this option, the UK would not pay fees to the EU, although there are costs involved in EFTA membership.

    The Turkish option (customs union)

    The Turkish option would see the UK forming a customs union with the EU, as Turkey has done, dispensing with customs checks and providing access to the single market in relation to specified types of goods (processed agricultural goods and industrial goods). Where Turkey has access to the single market, it complies with rules equivalent to those of the EU (eg competition, product and environmental rules). It does not have access to the single market in terms of services. Turkey’s external tariffs are aligned with EU tariffs as part of the customs union, but it must negotiate separate terms for its own access to the markets of those third countries.

    The Canadian option (negotiated bilateral free trade agreements with the EU and separately with other trading nations)

    Having a bespoke Free Trade Agreement in place would enable the UK to formalise its economic relationship with the EU in the form of a single agreement encompassing only those areas in which the UK wishes to participate, and setting out the terms of that participation. The EU-Canada Trade Agreement, for example, (concluded in 2014) took seven years to negotiate and is still not yet in force. It requires Canada to comply with EU rules when exporting to the bloc, but does not cover a number of service sectors (such as aviation), imposes quotas on some agricultural products, and requires financial institutions to establish a local subsidiary inside the EU and comply with local regulatory requirements in order to benefit from passporting.

    World Trade Organisation

    Instead of formal relations with the EU, the UK could rely on its membership of the World Trade Organisation (WTO) as basis for regulating trade between itself and the EU. It would, however, need to update the terms of its membership of the WTO and negotiate commitments with all 161 members. UK goods would be subject to the tariffs that the EU applies to all WTO members without a preferential scheme or agreement in place.

    None of these options would give the UK any say in the EU legislative developments to which it would be subject.

Looking ahead
  • It is likely that if there is a Brexit, the UK will seek to withdraw by making use of the Article 50 procedure, as previously indicated by David Cameron. However, it is not possible to predict much else, such as which route the UK might take to establish trading relationships with the EU or what the precise consequences of the withdrawal might be in practice for the UK.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.