19 Dec 2018

The European Commission has published its Contingency Action Plan for a "no deal" Brexit. The contingency plan seeks to mitigate significant adverse effects, but the Commission's paper emphasises:

  • Contingency measures should not replicate the benefits of EU membership, nor the terms of the transition period that would take effect if the Withdrawal Agreement were ratified; and
  • Contingency measures will be temporary. They will provide only a brief respite from the "cliff edge".

The EU Commission's press release includes the stark message:

These measures will not – and cannot – mitigate the overall impact of a "no-deal" scenario, nor do they in any way compensate for the lack of stakeholder preparedness or replicate the full benefits of EU membership or the terms of any transition period, as provided for in the Withdrawal Agreement. They are limited to specific areas where it is absolutely necessary to protect the vital interests of the EU and where preparedness measures on their own are not sufficient. As a rule, they will be temporary in nature, limited in scope and adopted unilaterally by the EU. They take into account discussions with Member States and are in addition to the preparedness measures that have already been taken, as set out in the two previous preparedness Communications.

The EU's proposed measures include limited protection for citizens' rights, subject to reciprocity. The Commission has called upon Member States to take a "generous approach" to UK nationals who are already resident in their territory. However, the Commission "expects the reassurances given by the UK authorities – that, even in case of no deal, the rights of EU citizens in the United Kingdom will be protected in a similar way – to be formalised soon so that it can be relied upon by citizens".

Strikingly, there is no specific mention in the EU Commission's Contingency Action Plan, or in the accompanying Questions and Answers paper or press release of measures to preserve the flow of data between the EU and UK. There is no indication that the EU will put in place any form of temporary "adequacy decision" to allow transfers of data, based on the UK's Data Protection Act 2018. Consequently, businesses would have to ensure that other GDPR-compliant safeguards are in place, such as "model" or "standard" clauses, Binding Corporate Rules or permitted derogations under GDPR Article 49.

For business, the key measures are:

Customs and export of goods

If the Withdrawal Agreement is not ratified, all relevant EU legislation on imported goods and exported goods will apply as soon as the UK's Article 50 notice expires on 29 March 2019. This includes the levying of duties and taxes and the respect of the formalities and controls required by the current legal framework. Declarations will have to be lodged, and customs authorities may require guarantees for potential or existing customs debts.

The EU Commission papers emphasise the impact of these measures on businesses with little or no existing experience of customs and border clearance formalities. HMRC estimates indicate that up to 145,000 UK businesses, including many SMEs, fall into this category. This will focus considerable attention on HMRC's new online system for customs declarations (CDS). HMRC's most recent evidence to the DExEU Select Committee suggests that CDS is highly unlikely to be fully operational by the end of March 2019, requiring many businesses to grapple with the existing (and largely paper-based) CHIEF system. The need to make customs declarations would be one factor contributing to delays at ports such as Dover, though perhaps less significant than the need for regulatory checks on agricultural produce and foods, pharmaceuticals and goods.

EU law allows some flexibility for temporary premises to be used as inspection rooms or sharing commercial facilities for the storage of consignments. However, in order to be ready by 30 March 2019, the new or extended border inspection posts must be proposed by the Member States to the European Commission before 15 February 2019. This places significant onus on ports and other points of entry within the EU27 to accelerate contingency plans to reduce the risk of catastrophic delays.

Export of dual-use items from the EU to the United Kingdom will require individual licences as of the withdrawal date. Dual-use items are goods, software and technology that can be used for both civilian and military applications. The EU controls the export, transit and brokering of dual-use items so it can contribute to international peace and security and prevent the proliferation of Weapons of Mass Destruction (WMD). Union General Export Authorisations (EUGEAs) allow exports of dual-use items to certain destinations under certain conditions. To facilitate controls on the export to the United Kingdom of dual use items as of the withdrawal date if the Withdrawal Agreement is not ratified, and to ensure the good functioning of the export authorisation regime for all EU27 Member States, the Commission has adopted a proposal for a Regulation to add the United Kingdom to the list of countries for which a general authorisation to export dual-use items is valid throughout the EU.

Financial services

In case of no deal, entities headquartered in the UK providing banking services will no longer be allowed to provide services in the EU on the basis of their current authorisations.

Similarly, in case of no deal, UK insurance undertakings will no longer be allowed to provide services in the EU, including through online sales, on the basis of their current authorisations.

Financial institutions that wish to provide banking or insurance services in the European Union should take all necessary steps to be properly authorised on withdrawal date, including by establishing presence in the EU27.

The EU's contingency plans include strictly time-limited measures to mitigate the risk to financial services.

  • A temporary and conditional equivalence decision for 12 months to ensure that there will be no disruption in central clearing of derivatives. This will allow the European Securities and Markets Authority (ESMA) to recognise temporarily central counterparties currently established in the United Kingdom, allowing them temporarily to continue providing services in the Union. The Commission has concluded that EU27 companies need this time to have in place fully viable alternatives to UK operators.
  • A temporary and conditional equivalence decision for 24 months to ensure that there will be no disruption in services provided by UK central securities depositories. It will temporarily allow them to continue providing notary and central maintenance services to operators in the Union. This will allow EU27 operators that currently have no immediately available alternative in the EU27 to fulfil their obligations under EU law.
  • Two Delegated Regulations facilitating novation, for a fixed period, of certain over-the-counter derivatives contracts with a counterparty established in the United Kingdom to replace that counterparty with a counterparty established in the Union. This allows such contracts to be transferred to an EU27 counterparty while maintaining their exempted status and thus not becoming subject to clearing and margining obligations under the European Market Infrastructures Regulation. Such contracts, pre-dating EMIR, are exempted from EMIR requirements. This act will ensure that a change of counterparty will not change that exempted status.

In case of no deal, payment institutions authorised by UK competent authorities will not be allowed to provide payment services in the European Union, as of the withdrawal date, or through the use of branches located in the Member States, under their current authorisations. Entities headquartered in the UK providing payment services, as well as e-money issuing, will no longer benefit from the authorisation to provide those services and activities in the European Union.

Air transport

To avoid the immediate risk of disruption to passenger and freight flights, the EU Commission's package of measures includes:

  • A proposal for a Regulation to ensure temporarily, for 12 months, the provision of certain air services between the United Kingdom and the EU27 Member States, allowing air carriers from the United Kingdom to fly across the territory of the Union without landing, make stops in the territory of the Union for non-traffic purposes, and perform scheduled and non-scheduled international passenger and cargo air transport services. This is subject to the United Kingdom conferring equivalent rights to air carriers from the Union, as well as to the United Kingdom ensuring conditions of fair competition.
  • A proposal for a Regulation regarding aviation safety to extend temporarily, for 9 months, the validity of certain existing licences, to address the specific situation in the aviation safety sector where the European Union Aviation Safety Agency (EASA) can only issue certain certificates on the basis of a licence issued in a third country, while the United Kingdom can only issue licences as of the withdrawal date, when it has re-gained the status of "State of design".

The EU's stated objective is to maintain "basic connectivity", meaning the level and volume of air transport services that will suffice to cover the basic needs of the Member States' economies and mitigate to some extent the impact of withdrawal, without however guaranteeing the continuation of all existing air transport services under the same terms as they are supplied today.

Road haulage

To reduce the risk of disruption to supply chains, the EU Commission proposes a Regulation to allow temporarily, for 9 months, access for road haulage operators licenced in the United Kingdom to the carriage of goods by road between the territory of the latter and the EU27 Member States.

In essence, the EU proposal would mean that operators from the United Kingdom would temporarily be allowed to carry goods into the Union, provided the United Kingdom confers equivalent rights to Union road haulage operators.

However, in case of no deal, cabotage by UK operators in the European Union will not be possible. In practice, this would mean that UK hauliers would be limited to single, direct journeys. It would not be possible for UK hauliers to pick up additional contracts to transport goods within the EU. This could have a significant impact on the viability of haulage businesses, as secondary contracts often provide an essential source of revenue.