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EC on Brexit: Phased and Orderly

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May 16, 2017

European Commission approves negotiating principles and orderly approach to Brexit.

Brexit 209With less than two years left before the UK becomes a “third country,” the European Commission (EC) approved a mandate in early May that sets out core negotiating principles. Key issues impacting multinational corporations (MNCs), such as passporting and the status of European Union (EU) and UK citizens working in the other jurisdiction, have yet to be decided, but the directives set out in the mandate suggest the EU will try to make the transition as smooth as possible.

“Businesses will need to adapt to the changing political landscape and flex their plans,” said Tim Wright, leader of Pillsbury Winthrop Shaw Pittman’s global sourcing team, in a recent note to clients. “They will, however, take some comfort that the EU appears to be open to a phased and orderly approach to withdrawal, seeking to avoid abrupt disruption and change…”

Mr. Wright noted further that the transparent process laid out by the EU means that although the discussions will take place behind closed doors, there will be regular updates on progress to the EU’s institutions and the wider public.

As a third country, the UK and its overseas territories will no longer be subject to EU laws, although EU law that has already been incorporated into UK law will be unaffected. In addition, free trade “passports,” which allow companies located in the UK to provide services anywhere in the EU from a single country may disappear. This will especially impact global banks, many of which have established large offices in London that in part service the rest of Europe, and indeed there numerous reports of financial institutions moving at least some jobs from the UK to new or growing offices in the EU. Bloomberg reported in March that global banks favor Dublin and Frankfurt as locations to expand or build new offices.

MNCs that have established offices in London, in part to allow treasury staff to be in proximity to the financial firms they bank with, may want to rethink that strategy. In addition, the passport issue applies to nonfinancial companies using the UK to provide services to the rest of Europe. Should passporting disappear, those companies may have to expand or build new operations in the EU to support customers there.

The EC envisages a two-phased approach to negotiations, the first of which will aim to provide clarity and legal certainty to citizens, businesses and other stakeholders, likely addressing issues such as passports. Mr. Wright noted that the second phase is less well-defined but may include transitional arrangements that will act as a bridge toward the future relationship between the EU and UK rather than the “cliff edge” approach that many have feared, often referred to as a “hard” Brexit.

While a phased in and orderly approach by the EU is certainly preferable, it won’t necessarily work in the UK’s favor for issues such as passports.

“With regular media reports of banks and insurers eyeing up European destinations for new operations or shifting roles to ramp up existing European locations, a quick deal to preserve market access via passporting or equivalency is looking less and less likely,” the report says.

Mr. Wright took note of the experienced negotiating team the EU has assembled and the groundwork it has already completed. “The EU has assembled a formidable negotiation team and has mustered key stakeholders across the EU27 so as to present itself as a unified block, shutting out the UK’s ability to pick off individual countries through back channels in order to kick start discussions about a future trade agreement,” Mr. Wright said.

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