The British Bankers Association (BBA) recently released a series of short papers called the BBA Brexit Briefs that cover regulatory, political and commercial considerations around Brexit. The BBA is the leading trade association for the UK banking sector, which counts 80 percent of the world’s biggest banks amongst its members. In its paper, An Orderly Exit from the EU, the BBA examines what exactly Article 50 is, and how the UK should navigate it. It also deliberates on the temporary risks to businesses both in the UK and the EU and the complexity of migrating financial services.
Brexit is a truly unique case. While the exit process in the Treaty on European Union is written, no member state has ever decided to leave the Union. As such, no precedence for the event has been set, nor is there an established definition of what Article 50 should cover.
Article 50 provides limited guidance on how an orderly exit from the EU should be proceeded. It states that the EU state member wishing to leave the Union should have two years to negotiate terms once it notifies the European Council of its decision. If an agreement hasn’t been reached once the two years are complete, then the EU treaties will cease to apply to the exiting member state. Upon formal exit of the European Union in this way, the UK will become a ‘third country,’ whereby it will lose free access to EU markets. The UK will instead be obliged to adopt standard trade tariffs as set out by the World Trade Organisation—a rule that will also be applicable to EU member states who wish to trade with the UK.
Article 50 suggests that future trade agreements between the EU and the exiting member state can only be constructed once it has formally left the Union and becomes a third country. According to the BBA, if this legislation is rigidly enforced, it could cause significant disruptions to businesses in the interim of the UK leaving the Union and the time then taken to reach a free trade or bilateral agreement. Businesses who trade between the UK and the EU could face temporary trading prohibitions, restrictions and expensive tariffs in a market that is currently free for the UK to access.
The BBA argues that this will have even more of a detrimental impact on the trading of services because the current rights extended to the UK by the EU legislation are already more restrictive than the rights for the trade of goods. This could ultimately result in an ‘outright prohibition’ of some trade of services, including financial services, in the time between the departure of the UK and any future negotiations coming into effect. This is of particular national concern as the financial sector is one of the UK’s largest export areas. Avoiding this scenario is in the best interest economically for both the UK and the European Union, says the BBA.
The BBA strongly encourages the prime minister to attempt to define a favourable exiting sequence that sees this agreement reached before the Article 50 process is complete for an orderly exit from the EU. Both the UK and the EU should agree a future trade agreement alongside the withdrawal agreement for a smooth transition, giving businesses the time to adapt and prepare for new legislations.
Article 50 asserts that the two-year process can be ‘extended by unanimous agreement’ of the EU states and the exiting state. In theory, the two-year negotiations period should provide the UK the time required to prepare for leaving. However, taking into account the length of time it will take financial services—including banks—to adapt, a truly ‘smooth’ and orderly exit from the EU will likely require longer than the maximum two years implied. The BBA paper highlights the complexity of migrating financial services from the UK to an established operation inside the EU should corporations decide to do so. This, if it is best economic practice, is appropriate in the case of UK or EEA banks currently located within the UK who face losing the passporting rights that allow them to maintain their services to EU members post-Brexit. Complexities in migration include the physical location of the bank, in which real estate locations and lease negotiations must be considered and ‘human resources,’ in which relocating existing staff and recruiting and training new staff must be considered. It also includes ‘business migration,’ which takes into account the testing of systems, processes and procedures and shifting of operations.
The complex nature of the Article 50 process has prompted some to suggest that the UK should simply expedite exit to repeal the UK’s European Communities Act; the legislation that sets EU law in Britain. This would have a negative impact on the British economy and should be avoided. Repealing the Act in this way would mean the UK has breached its commitment to international law. Without the safety net of the negotiations, the UK will risk not having a favourable bilateral treaty and trade agreements that aim to reduce exit costs and economic disruption.
The future economic and political relationship between the UK and the European Union are dependent on the negotiations that the prime minister will be able to achieve. These should ideally be negotiated as early on in the Article 50 process as possible, according to the BBA’s view an orderly exit from the EU.
Read the full paper, here: An Orderly Exit From the EU
Further reading: BREXIT IMPLICATION FOR UK TRADE AND EXPORTS