What is Brexit and its Legal Ramifications for the UK?

The 28 nation “single market” received a stunning blow when the UK voted, in a referendum on June 23, 2016, to terminate its membership and, subsequently, its passport-free, duty-free, trade and other advantages. From a legal perspective, under the January 2017 Miller decision by UK’s Supreme Court, Parliament has the right to thwart Brexit by the court’s affirmation that the Brexit referendum is not legally binding until Parliament ratifies the outcome of the negotiations by virtue of Section 20 of the Constitutional Reform and Governance Act of 2010 (the Act). The rejection of a prospective UK-EU withdrawal agreement can only happen if a majority of MPs vote against the ratification of such an agreement since the Act enables the House of Commons to block any international agreement negotiated by the Government. As to the question whether the ‘Brexit bomb’ can be stopped once it is detonated, the answer is resoundingly ‘No’ because Article 50 of the Treaty of Lisbon that established the EU as of December 13, 2007 provides so. Under Article 50 of the Lisbon Treaty, notice leads to the immediate cessation of EU membership, with or without a deal on the terms of withdrawal, within two years from withdrawal notification. The two-year period allows is not designed for the UK and the EU to negotiate whether the UK should withdraw, but for the two parties to negotiate the terms of withdrawal. Clearly, the UK benefits from the EU, since more UK imports originate from other EU nations by a wide margin (almost as much as the other EU nations combined). The EU has accounted for the largest portion of UK trade for over a decade, from 2005-2015. The effects that the loss of passporting rights on UK insurers with policyholders in the EEA If a post-Brexit world means the UK loses passport rights:
  • Insurance companies in the UK would be required to establish subsidiaries or branches in EU, thereby increasing funding costs.
  • Exports of insurance from the UK to the EU could fall.
  • There would also likely be an indirect effect associated with lower exports, e.g. reduction in legal advice services
  • Migration of insurers away from the UK, leading to a loss of domestic jobs
Writing business through local branches would require local authorization, and capital being deposited to support the branch in certain cases. In advance of full regulatory clarity, some major insurers with UK operations may establish a greater presence on the continent, in order to operate more easily under a single license. Insurers (both UK and EU domiciled) may be required to establish new, additional operations or headquarters elsewhere, with revenues migrating accordingly. By providing specific instructions to insurers and seeking to avoid inefficiencies in the authorization process, UK authorities have the opportunity to minimize disruption in the UK’s domestic and international insurance markets due to Brexit and to reinforce the reputation of the UK and the London insurance market as a business-friendly venue. Solvency II Solvency II, a directive designed to protect policy holders by aligning insurance and re-insurance company’s regulatory capital requirements and their true risk profile, is fast becoming an international regulatory standard. Brexit negotiations started as soon as notice was given under the Lisbon Treaty; however, however, it is still unclear what the ultimate UK-EU relationship will look like in a year’s time. Ideally, UK insurance firms will want to retain their ability to sell insurance products across borders through so-called passporting rights, which would be possible if the UK were to negotiate to stay within the European Economic Area (EEA), like Norway. Staying within the EEA, however, would also require UK insurers to comply with Solvency II as part of that deal, at least as it is required currently for Norway and other EEA nations that are not part of the EU currently. However, practically speaking, Brexit or no Brexit, the wholesale roll-back of Solvency II in the UK seems unlikely since the UK was one of the principal architects of Solvency II and should readily agree to continue to be bound by it as part of the Brexit withdrawal. Potential Economic Impact of Brexit on the UK Once the UK leaves, there will be numerous challenges to its economy. This includes challenges to London as city of choice to locate a foreign branch or subsidiary, which may not follow, given the strong decrease in value in the British Pound in the London stock market average after the referendum votes were counted. As a further analogous omen, a severe recession hit the UK economy once it entered the Common Market, the precursor to the EU, in 1973. Not only is future trade with the EU at risk. Obtaining authorization for a UK branch or subsidiary is a substantial process and would have to be largely completed before the outcome of Brexit negotiations is known.

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