UK-EU Evolving Relationship Bulletin: Friday, March 5

Although the UK-EU trade agreement has been concluded, it has become clear that there are still many issues to resolve and many areas left for the UK and EU to discuss further. At Instinctif Partners we will continue to track the evolving UK-EU relationship and monitor major changes in regulations the UK may adopt post-Brexit on a fortnightly basis. We will also include in the bulletin other post-Brexit trade deals to keep you informed of the most important political and regulatory developments between the UK and the rest of the world going forward.

If you have any questions or requests, please contact jason.esi@instinctif.com

The European Parliament has postponed setting a date to ratify the Brexit trade deal after it accused the UK of breaking international law over the Northern Ireland Protocol

• It came after the UK announced that, rather than impose checks due to come into force on 1 April, they would unilaterally extend until October grace periods on paperwork relating to parcels and goods heading to Northern Ireland’s supermarkets from mainland Britain.
  • The EU argued that, under the protocol, the extension should have been agreed with them first, and have threatened legal action through the European Court of Justice which could lead to fines.
  • The UK-EU trade and security deal is provisionally in force, but it is yet to be formally ratified by the European Parliament. Its provisions would fall away if MEPs failed to give it their backing, leaving the UK with a no-deal outcome, including tariffs on goods.
  • It had been expected that a vote would be held on 25 March, however that could now be delayed until late April to allow MEPs to see how the row over the Northern Ireland border develops.
  • The UK denies breaking international law, and argues it is a technical and temporary measure designed to deal with significant problems facing Northern Ireland.
  • EU officials have noted that the UK would have probably obtained a lot of what it was seeking through discussions at the joint EU-UK Committee anyway.
  • However, UK officials countered that the EU was moving too slowly. The UK argued that businesses in Northern Ireland needed at least 4-weeks’ notice, yet the EU wasn’t going to formally agree to the extensions until 29 March — which was far too late to keep supermarket shelves stocked, and so would have risked further destabilising Northern Ireland’s political situation.
  • Meanwhile business groups in Northern Ireland have publicly backed the UK Government’s decision as they said they were not ready to implement full EU regulations on the export of plant and animal products that were due to come into force on 1 April.
• All this came after a lack of progress at a UK-EU Committee session on 24 February.
  • The EU continued to insist the protocol must be fully enforced, and any flexibilities can only come from within the existing legal envelope of the EU customs code.
  • The UK, meanwhile, is pressing for the EU to allow British supermarkets with outlets in Northern Ireland to provide monitoring and traceability of foodstuffs to EU standards themselves if their IT surveillance systems were upgraded thanks to UK financial support.
  • The UK is also demanding concessions from the EU that essentially come down to a mix of light-touch enforcement and a broad trusted trader scheme that goes far wider than just supermarkets.
  • The two sides also tentatively discussed the idea of a bilateral veterinary agreement as a way around many of the food safety and animal health trade barriers associated with the Northern Ireland Protocol. However, the EU would prefer a Swiss-style agreement, through which the UK would agree to largely align itself to the EU’s food and plant safety and animal health rules, whereas the UK would prefer a New Zealand-style agreement, whereby both sides would regard each other’s food safety regime as “equivalent”.
  • The EU is wary of such an arrangement due to the significantly different profile of Great Britain food movements to Northern Ireland, compared to the consignments New Zealand sends to the EU.

The Governor of the Bank of England Andrew Bailey has warned the EU against a potential raid on the UK’s financial services

• Bailey said that the Bank of England will “resist very firmly” any moves by the EU to force financial trading worth trillions of pounds to relocate following Brexit.
  • It comes amid growing speculation that EU officials are moving towards a position where euro-denominated derivatives clearing would be forced to take place within the eurozone.
  • Bailey said such a move would be a “serious escalation”, and would require controversial measures such as extraterritorial legislation or an attempt to force banks and dealers to say there will be some other penalty unless they move this clearing activity into the eurozone.
  • The dispute centres on the clearing of trades in the vast €681tn EU derivatives market – products bought by professional investors to protect against, or speculate on, movements in financial markets; including the price of shares, bonds, interest rates and currencies. London dominates the market for clearing.
  • Bailey said that some 75% of around €83.5tn in clearing positions now held at the London Stock Exchange’s LCH clearing house, the biggest in the market, are not held by EU counterparties, meaning the EU should not be targeting them.
  • Financial services were largely absent from the UK-EU trade deal and the two sides are aiming to reach an agreement on financial services regulation by 31 March. However, the EU has already temporarily granted equivalence to the UK’s financial regulations in certain sectors to enable trading to continue in the euro derivatives market,  which is due to expire at the end of June 2022.
  • The EU has been working to tempt banks to transfer clearing within the EU after Brexit, as it seeks to cut its reliance on a financial centre which now sits outside its borders. Europe’s top banks have been sent letters asking them to justify why they should not have to relocate the activity, applying renewed pressure.
  • Bailey said the EU had granted equivalence status – a mutual recognition of each side’s regulatory standards – to Canada, the US, Australia, Hong Kong and Brazil based on their adherence to international regulations, but was insisting that the UK also track the twists and turns of EU rules.
  • Meanwhile Mairead McGuinness, the EU Commissioner for financial services, has said the UK’s unilateral decision on the Northern Ireland protocol may impact the EU’s decision to grant equivalence. McGuinness also said their remained gaps in information provided by the UK on its intentions to diverge from EU rules.

Other post-Brexit news

• The European Court of Justice (ECJ) has found that the UK has “systematically and persistently” broken air pollution laws in its first ruling against the UK since Brexit. This could mean that the UK faces a fine, with the court adding that the UK failed to take measures to keep breaches of pollution as low as possible. Though the UK left the ECJ on 31 December, it is still subject to rulings in cases it has been involved with before Brexit.
• The USA has lifted tariffs on Scotch whisky and other British goods for four months, pausing a long-running dispute over aircraft subsidies. During Donald Trump’s Presidency the US imposed tariffs on European Union food, wine and spirits, including on Scotch whisky. It was a response to the dispute between Airbus, which builds wings and commercial aircraft in Europe, and US manufacturer Boeing. The UK unilaterally dropped tariffs placed on the US late last year. The US decision means that whisky tariffs are being reduced from 25 per cent to zero. Cashmere producers in Ayrshire, pig farmers in Yorkshire and stilton makers in the Midlands will also benefit.
• The European Court of Auditors has raised concerns about how the EU’s €5 billion Brexit fund will operate, suggesting that some member states may have to pay money back because so much of the fund is being paid out up front, and because of the risk of funding projects which might later turn out to be ineligible. Ireland is by far the largest recipient of the Brexit Adjustment Reserve (BAR), receiving nearly one quarter of the first tranche, on the basis that it will be worst hit by Brexit.
• Northern Ireland First Minister Arlene Foster and other senior DUP MPs have launched a legal action challenging the Northern Ireland protocol. They will be joining other unionists from across the UK in judicial review proceedings unless alternative post-Brexit trade arrangements are put in place that secure their consent. A separate group of DUP members have engaged senior legal counsel to prepare for a series of challenges to the protocol.
• The UK has formally granted the EU a two-month extension to 30 April to ratify the trade agreement. The EU said the extension was needed “to allow the time needed for the completion of the legal-linguistic revision of the Agreement in all 24 languages for its scrutiny by the European Parliament and the Council”.
• Northern Ireland’s Agriculture Minister Gordon Lyons has temporally halted work on new permanent border control posts (BCPs). These are used to check food products from mainland Britain. Existing temporary BCPs are continuing to operate. The BCPs are a requirement of the Brexit deal between the UK and EU.  Lyons said he was responding to “practical difficulties” caused by the Northern Ireland Protocol.
• A Freedom of Information request from the Financial Conduct Authority (FCA) has found that around 1,000 EU finance firms are eyeing up opening offices in the UK for the first time. About 1,500 money managers, payment firms and insurers have applied for permission to continue operating in the UK after Brexit, with around two-thirds having no prior physical operations in Britain. The FCA said more than 400 insurance firms as well as more than 100 banks plan to move to or boost their presence in the UK. Some 230 Irish firms were on the list, with 186 from France and 168 from Germany.
• The locations of England’s eight new freeports have been revealed as East Midlands Airport; Felixstowe and Harwich; Humber region; Liverpool City Region; Plymouth; Solent; Thames; and Teesside. The new freeports will begin operations from late 2021. Goods that arrive into freeports from abroad are not subject to tariffs. These tariffs are only paid if the goods leave the freeport and are moved elsewhere in the UK. Otherwise, they are sent overseas without the charges being paid.
• A Government review by Lord Hill of Oareford, a former EU finance commissioner, has said the UK could become the go-to destination for listings by founders of fast-growing businesses in areas such as technology and life sciences if rules are liberalised and simplified. His report includes proposals for dual-class shares to allow founders to keep control over their companies by giving them deciding votes on decisions such as corporate takeovers. The free float requirement — the amount of a company’s shares that are in public hands — would be reduced from 25 per cent to 15 per cent. Special purpose acquisition companies, or Spacs, would also be allowed in London.
• Belzutifan, a treatment for a rare genetic disease that causes cancer has become the first drug to benefit from a new fast-track approval process aimed at speeding up patients’ access to breakthrough medicines and boosting the UK’s appeal to life sciences companies post-Brexit. The approach, which mirrors the way the UK led approved the first coronavirus vaccines in December, is intended to dramatically cut the 10 years it usually takes for a new drug to move from initial concept to receiving a licence. Prior to its departure from the EU, drugs used in the UK were covered by the same approval process as the bloc’s 27 members.