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The Impact on Corporate Law and Regulation

Posted on 24 June 2016

Brexit: The Impact on Corporate Law and Regulation

Now that the UK public have voted in favour of the UK's withdrawal from the European Union, one of the questions businesses will be asking themselves is whether Brexit will mean less regulation of UK corporates. In the run up to yesterday's vote, some Brexit campaigners had been arguing that the influence of Brussels lawmakers has resulted in many UK laws and regulations being unnecessarily complex. Leaving, they said, would provide the UK with the opportunity to simplify and streamline its laws for the benefit of UK businesses.

Much of the UK's legislative framework has its origins in EU legislation. In the areas of company law and financial services law, some EU laws are directly effective in the UK, while other EU law provisions have been woven into national law through amendments to the UK's existing legislation and the introduction of new primary and secondary legislation, rulebooks and codes.

What form will Brexit take?

There is no precedent for the withdrawal of a member state from the EU. EU legislation does however provide a mechanism: following a withdrawal notification, there is a two-year period for a withdrawal agreement to be negotiated. Assuming the UK's withdrawal notification is given in the coming days, the UK would have until the summer of 2018 to negotiate the terms of its exit from the EU. A variety of potential outcomes could result from those negotiations, but one of the five options below is seen as most likely.

  1. Remain part of the European Economic Area (EEA) and deal with the remaining members of the EU on the same basis as Norway, Iceland and Liechtenstein do. As an EEA member, the UK would have to continue to abide by many EU laws, but would cease to have a vote in the EU legislative process.
  2. Re-join the European Free Trade Association (EFTA) but remain outside the EEA; like Switzerland, the UK would be able to enter into bilateral trade agreements with the EU.
  3. Enter a customs union with the EU, giving the UK access to the EU Internal Market for goods (subject to the UK imposing the EU common external tariff on imports), but allowing the UK to regulate its own services sector.
  4. Enter into a free trade agreement with the EU, covering goods and services. The agreement would specify those aspects of EU law to which the UK would be subject.
  5. Opt not to put in place a separate agreement but instead rely on the UK's existing membership of the World Trade Organisation as the basis on which it trades with the EU.

How will the UK's laws change?

At UK level, there is no prescribed process for disentangling the UK's legislative framework from the UK. The way in which UK laws might change will depend on which of the options described above (or a variant of one of those options) is chosen.

Since the immediate enactment of new UK laws and regulations to replace EU-based law will not be practicable, and in some cases may not be desirable, it is likely that transitional arrangements will be put in place. Under such arrangements, EU-derived UK law could be retained where appropriate, and directly effective EU law would be deemed to continue to have effect in the UK until policy decisions had been made as to the areas in which UK law should continue to track, or diverge from, EU law.

Brussels-derived "red tape"?

Some proponents of Brexit argued that UK businesses would no longer be subject to the burden of overregulation from Brussels. To take a company law example, the UK Government has recently brought into force a requirement for UK companies and LLPs to maintain "registers of people with significant influence and control" over those corporate entities. The EU's Fourth Money Laundering Directive (4MLD) also sets out a regime for recording information about the ultimate controllers of corporate entities. Both the UK's and EU's disclosure regimes derive from corporate transparency principles formulated by the FATF and endorsed by the G20. Current EU law requires the UK to amend its laws by June 2017 to bring them into line with the EU regime's additional requirements. For example, the UK's PSC regime does not require information on beneficiaries of trusts to be held in central registers, unless those beneficiaries ultimately control a UK company or LLP. The 4MLD requirement to record beneficiaries of trusts in central registers arguably increases the regulatory burden for users of trust structures in the UK - trusts being a feature of English law that is unfamiliar to some of the civil law regimes of other EU member states. Some of those who championed Brexit will be of the view that going forward the UK will now be able to regulate in areas like this only to the extent appropriate and proportionate for the UK.

The counterargument: "gold plating" by the UK of current EU requirements

On the other hand, some of those who favoured the UK remaining in the EU argue that much of the regulatory burden on UK companies has actually resulted not from the requirements of EU law, but from UK-based initiatives or the way in which the UK chooses to implement EU requirements. In particular, they point to the UK's "gold plating" of EU minimum standards.

In the field of corporate transparency, for example, the UK Government has been keen to be seen as paving the way for other countries. As noted, the beneficial ownership register requirements of the EU's 4MLD go further in some respects than the UK's current transparency regime. Equally, however, the UK's regime in some ways goes further than what is required under EU law. 4MLD requires ownership information to be held in a "central register", but not necessarily on a fully public register. Some EU member states are expected not to follow the UK's example of making registers public. Also, as announced at the beginning of the UK's Anti-Corruption Summit on 12 May, the UK is planning to require the public disclosure of details of the people controlling overseas companies that hold UK property. 4MLD does not require this and so the UK's regime will go beyond the EU minimum requirements.

Will Brexit in fact mean a greater regulatory burden for multi-jurisdictional corporates?

In recent years, EU legislation has increasingly incorporated the concept of "equivalence" for "third countries". As a non-EU member state, the UK's laws may need to be deemed "equivalent" to EU laws in order for it to take advantage of certain provisions of EU law as a third country. If, for example, the UK's capital markets regime were not deemed "equivalent", UK prospectuses would not benefit from mutual recognition in EU member states ("passporting"). A multi-jurisdictional corporate wishing to issue shares in the UK and the EU could therefore be faced with the additional burden of applying to have its prospectus approved both by the UK and at least one EU member state.

The EU's Capital Markets Union (CMU), which the European Commission hopes will be fully functioning by 2019, is intended to remove barriers between investors' money and investment opportunities and overcome the obstacles that prevent businesses from reaching investors. Following the implementation of Brexit, the UK will be outside the CMU and arguably UK-based businesses will continue to face some of the obstacles that will have been removed for their EU-based counterparts.

More generally, the Commission has been on a drive to reduce EU regulation for businesses. One area of focus for the reform of the EU's Prospectus regime has been the "proportionate disclosure regime", the aim of which is to reduce the burden of complying with the full specific disclosure requirements for prospectuses for smaller issuers or issuers with reduced market capitalisation. To date, this regime has not been widely used but the aim of the European institutions in reforming it is to make it truly proportionate and therefore of more use to smaller issuers. Outside the EU, the UK may not be in a position to take advantage of this reform and will no longer have a say in shaping the regime.

Will compliance with EU law be inevitable post-Brexit, whatever form Brexit takes?

All of the potential exit models contemplated above, except perhaps the WTO option, will involve the UK having to comply with EU law to some extent. In the realm of company and financial services law, even if the UK looks at its laws individually and seeks to amend each one in a sensible way to try to reduce overregulation, a certain amount of complexity will need to be retained for the UK's new regime to be sufficiently sophisticated to be compatible with the EU's financial services regulatory regime.

There are many uncertainties regarding the implementation of Brexit and the UK's future relationship with the EU and the rest of the world. In the corporate and financial services law area, however, whether the UK's withdrawal from the EU will result in greater or lesser legal and regulatory burden is a complicated question.

If you have any questions arising from this, please contact Nicholas Mcveigh; 020 3321 6259

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