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With a no-deal Brexit in January 2020 looking to have been avoided, the focus of market participants will now be on the practical and documentation implications of the UK entering the transition period and beyond.
The UK is expected to formally leave the EU on 31 January 2020 (exit day), however the practical impact of this will be limited during the transition period which will follow pursuant to the EU-UK Withdrawal Agreement. This is expected to apply until 31 December 2020, absent any extension.
From an EU law perspective, whilst the UK will no longer be part of the EU, it will nevertheless be treated as if it were a member state (except for political/decision-making purposes).
From a UK law perspective, the European Union (Withdrawal) Act 2018 (EUWA) will repeal the European Communities Act 1972 (ECA) on exit day. However, notwithstanding this repeal, the legislation will operate such that during the transition period, for most practical intents and purposes, the ECA will still apply until the end of the transition period (dubbed “IP completion day"). The UK and EU may agree to extend the transition period for one or two years under the Withdrawal Agreement, but such an agreement must happen before 1 July 2020.
This means that the next real “crunch time” on EU-UK negotiations will be the end of June 2020, as this is the time by which the EU and UK would need to have agreed to any extension to the transition period.
For financial services, it is worth noting that under the Political Declaration, the EU and UK have agreed to “start assessing equivalence with respect to each other under these frameworks as soon as possible after the United Kingdom's withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020". It remains to be seen whether meaningful progress on this front will be made in this timeframe.
In the absence of equivalence or agreement on an extension, a “no-deal” Brexit from a financial services perspective would effectively occur on 31 December 2020.
Whilst EU and UK law will continue to operate as if the UK were still a member of the EU during the transition period, contracts and other documents referring to the “EU” or “EEA” and related terms will need to mention explicitly the UK if it is intended that they should apply to the UK/UK persons.
ICMA has produced draft versions of its EEA public offer and PRIIPs selling restrictions, MiFID II product governance legends and EU stabilisation language to reflect a transition period and a no-deal Brexit. The drafting prepared for a transition period will need to be used following exit day and it may therefore be prudent to start implementing these changes now for any new transaction documentation which will straddle or go beyond exit day.
The ISDA Brexit FAQs contemplate entry into the Withdrawal Agreement and will remain helpful to market participants in providing a high-level summary of the key impacts of the Withdrawal Agreement, and the implications of the end of the implementation period, for the OTC derivatives market and ISDA documentation.
The EUWA will be amended so that EU legislation will be saved into domestic UK law on the IP completion day. Government powers to make Statutory Instruments (SIs) under the EUWA will be modified to allow for further SIs to be made to reflect the end of the transition period.
As a result of all the above, we should expect to see the Government release new SIs and update previous transitional provisions to reflect the envisaged end to the transition period in due course. The preparatory work for a no-deal Brexit will therefore likely not have been in vain and documentation will need to be amended to reflect the UK domestic versions of applicable EU legislation following the IP completion day.
For more information, see our client publication Brexit: How the transition period works, the Brexit Microsite on the Knowledge Portal and Linklaters Brexit homepage.
Explore further topics across our DSP Horizon Scanning 2020 publication