Brexit (3): the UK period of "purgatory" - from referendum to exit

Key points

• Legally the UK remains part of the EU until the day the UK ceases to be a member of the EU and at many levels it is ‘business as usual’.
• EU law and EU derived obligations are still fully applicable in relation to the UK. UK regulators have emphasised to firms the need to continue with implementation of new EU legislation such as MiFID II.
• At other levels, however, the referendum result has fundamentally changed the UK’s political position within the EU resulting in a major loss of influence, now that it is ‘on the way out’.
• During this period, there are likely to be considerable tensions arising from these conflicting legal and political realities.

This report looks at the position of the UK as an EU member until Brexit takes effect at the Brexit implementation date (‘BID’).

The current status of the UK within the European Union

The vote to leave the EU in the UK referendum on 23rd June 2016 does not have any legal effect under UK or EU law (see RegZone report: Brexit (2): the referendum vote – the start of the process).

The UK remains an EU Member State and still enjoys the rights and responsibilities afforded under the Treaties. A recent House of Commons Library Briefing Paper[1] stated:

“Although the UK has voted to leave the EU, from 24 June until the point of departure from the EU the UK is still a member of the EU. Nothing about the UK’s EU membership will change initially.”

The status of EU law within the UK is unchanged. The rights and obligations derived from EU law apply in full, both in relation to the UK state and its citizens and companies, and in relation to other Member States and their citizens and companies in their dealings with the UK.

Article 50 notice

The UK is expected to give notice to withdraw from the EU under Article 50 of the Treaty on European Union. It is still unclear both when notice will be given and when the UK will cease to be a member of the EU (which might occur, for example, 2 years later in accordance with Article 50(3)). Article 50 is a relatively new provision and the entire withdrawal process is untested and uncertain.[2] (There is a separate RegZone report – Brexit (4): A legal analysis of the Article 50 process).

The Treaty, which very largely pre-dated the insertion of Article 50, makes no provision for the status of a state that is a continuing member of the EU but is due to withdraw. The legal position described in the section above will not change even when Article 50 is triggered. Indeed under the Treaty, the UK’s position will be exactly the same on the day before BID as it was before the referendum. It is only at BID that the UK loses its status as an EU member state.

We have called this period until the UK ceases to be an EU member (at BID) ‘purgatory’ because, in terms of EU operation, the UK is in a strange, almost surreal, holding zone – for example negotiating and agreeing new EU laws that may never be adopted in the UK.

There is no precedent and no settled basis for dealing with the practicalities of this period of purgatory. The EU and the Member States, including the UK, are having to feel their way and are largely ‘making it up’ as they go along.

Business as usual

There is no change to the many EU-derived obligations and requirements applicable to UK firms (both directly applicable EU law such as EU regulations and UK rules introduced to implement EU directives). There is also the question of the implementation of new EU requirements such as MiFID II and EMIR.

The immediate messages from the UK regulators have emphasised the need for firms (as well as the UK authorities) to continue their implementation projects -

FCA “Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.”[3]

Payment Systems Regulator “[…] the changing relationship with the EU is likely to impact the payments industry. Current payments regulation deriving from the EU will remain applicable until any changes are made, which will be a matter for Government and Parliament.”[4]

Payments UK “The outcome of the EU referendum has no immediate effect on payments or payments policy and regulation. It remains: ‘business as usual’.”[5]

Most implementation projects are concerned with implementation dates which are expected to occur during the purgatory period. Firms should therefore assume that they will be expected to be fully compliant with these new EU requirements.

Once there is a better idea of the Brexit timeline and the possible post Brexit EU-UK relationship, further attention will no doubt be given to this issue.

Business NOT as usual

The day-to-day business of the EU continues within the legal framework described above but the referendum result is already triggering change, even before Article 50 notice has been given.

Following the referendum result, on 25 June 2016, Lord Hill resigned[6] as the UK’s European Commissioner. Hill held one of the most important portfolios and was responsible for Financial Stability, Financial Services and the Capital Markets Union. The portfolio was immediately handed to Valdis Dombrovskis – Vice-President for the Euro[7].The UK’s new European Commissioner, Sir Julian King, has been handed a relatively narrow brief as Commissioner for the Security Union.

Theresa May has announced that the UK would no longer be taking up its scheduled Presidency of the Council of the EU – due to commence on 1 July 2017. The rotating Presidency role allows Member States to set the agenda and participate in trialogue discussions i.e. informal EU inter-institutional talks regarding forthcoming legislation. The EU and other Member States may well have challenged the UK’s Presidency (had May not relinquished the role) given that the role could be used to shape legislation to the UK’s advantage post Brexit.

In practical terms, the UK’s influence within the EU is clearly much diminished following the referendum result. It now sits on the other side of the negotiating table and its continuing membership, from a legal perspective, is at odds with the political reality within the EU.

Tension between EU membership and EU withdrawal

As the Brexit timetable and BID become clearer, there are likely to be many uncertainties and tensions arising from the obligations deriving from the UK’s continuing EU status and the approaching withdrawal.

The role of the Court of Justice of the European Union (CJEU) is one example. On 27 July 2016 the UK Supreme Court made its first reference to the CJEU since the referendum. Ironically, the reference was in relation to the free movement of EU citizens, an issue hotly debated during the referendum, and how this applies to individuals who have committed crimes in the UK.[8] As BID approaches there are likely to be questions about, and litigants no doubt will seek to argue against, the need to make preliminary references to the CJEU to clarify a point of EU law, if that reference could be determined post BID.

The UK government/Parliament will need to address the future status of CJEU decisions (both those given before and after BID). Chris Grayling, now Secretary of State for Transport, had highlighted (in pre-referendum interviews) the possibility of seeking to restrict the authority of the CJEU and of limiting free movement ahead of BID. Might full compliance with EU law (as it operated before the referendum) become a casualty of the challenging politics of the purgatory period?

As UK influence diminishes and BID approaches, the EU may also feel less constrained by the UK’s EU rights given their short, residual life span. The UK does not have the benefit of the protections agreed in the pre-referendum UK/EU settlement, so there may well be a temptation to legislate without regard to UK concerns and without fear of challenge before the CJEU. The EU may not wait until BID before proposing legislation that would normally face a UK challenge (see details of previous UK challenges in the RegZone report – Brexit (6): the key issues for financial services and the City of London). Contentious new legislation might, however, be timed for implementation after BID (and would not therefore impact UK law).

Completing the journey out of the EU

Both the UK and the EU are still at an early stage in their preparations for the Brexit negotiations and their plans for Brexit implementation. There is no definitive or agreed timetable yet for the process or the eventual BID.

Brexit is a huge project which faces considerable challenges and uncertainty, particularly if the objective is a smooth transition. To-date, however, the government of Theresa May has successfully created the expectation that Brexit will be delivered and that the period of ‘purgatory’ from the referendum to BID will be around 3 years, i.e. well before the UK general election due in 2020. It remains to be seen whether this can be achieved. Hopefully it will not be too long before a more concrete, reliable and detailed Brexit plan/timescale emerges from the UK and EU.

[1] House of Commons Library Briefing Paper No. 07632, ‘Brexit: what happens next?’, (30 June 2016), p. 8.

[2] Article 50 TEU was introduced with the Lisbon Treaty, which came into force in October 2009, and was carried over verbatim from the Constitutional Treaty of 2004, which was eventually abandoned.

[3] FCA referendum result statement (24 June 2016).

[4] PSR statement on EU referendum result (24 June 2016)

[5] Payments UK responds to EU referendum outcome (24 June 2016)

[6] Lord Hill statement (25 June 2016)

[7] And for Social Dialogue

[8] Secretary of State for the Home Department (Appellant) v Franco Vomero (Italy) (Respondent) [2016] UKSC 49