Brexit outcome – to diverge or not to diverge, that is the question!

13 March, 2018

On 7 February, Olivier Morel, Partner, Cripps’ Head of International, delivered a seminar to the Brexit Forum of the French Chamber of Commerce In Great Britain on: “The Potential outcome of business regulations within the UK: Convergence or Divergence?”.

 

Alongside Olivier, Geoff Skingsley, Chairman L’Oréal UK, presented a fascinating case-study of the group’s highly integrated global business and the potential impact of Brexit on its European supply chain.

 

This article summarises the key points made at the seminar.

 

On 28 February 2018, the EU issued the draft legal agreement to formalise the principles agreed with the EU on 8 December 2017 – all 168 articles, 120 pages and 5-chapter Protocol of it.  Given the strong reactions it triggered in the UK, it is worth looking at a practical example of what divergence might mean for a pan-European integrated business.

 

1          The Big Legislative and Political Picture

 

The future regulatory environment in the UK is an unknown quantity while the EU and the UK are still negotiating the terms of the separation.

 

European Union (Withdrawal) Bill 2017-19

 

As part of that process, Parliament is currently examining the European Union (Withdrawal) Bill 2017-19: the objective of the legislation is to repeal the 1972 European Communities Act, which took Britain into the EU.

 

Once that Bill becomes law, all EU legislation will be transferred across into domestic law in the UK.  Afterwards, Parliament can alter, cancel and create new legislation independently of the EU.  This is where discussions about convergence and divergence start: if the UK wants access to the Single Market (SM), it will have to abide by the same rules and regulations as the EU, albeit without having an influence on the law-making process – it will be a rule-taker with no say on drafting the legislation.  The EU insists access to the SM is inseparable from the 4 freedoms – free circulation of goods, people, services and capital.  This is the model where the UK remains closest to the current situation, often referred to as “the Norway model” – Norway isn’t a member of the EU but abide by the four freedoms.  There lies the rub: the UK government has declared its intention to come out of the SM, so as to be free to diverge from EU legislation, supervision by the European Court of Justice, and independent control of its immigration.  At the other end of the scale, i.e. complete divergence from the EU, the UK would be operating under World Trade Organisation (WTO) rules, i.e. no specific agreement, so-called “Hard Brexit”.  The expectation is that the UK and the EU will sign a trade agreement, but there is uncertainty about what form it will take and how long its negotiation will last.

 

Ireland And Borders

 

On 8 December 2017, an agreement was signed between the EU and the UK.  These are “Heads of Terms” in legal jargon, i.e. pending a detailed and binding legal agreement, they are the principles agreed in relation to 3 key issues of the separation: (i) the amount of money due by the UK to the EU; (ii) the rights of EU citizens in the UK and UK citizens in the EU post-Brexit; and (iii) Ireland.

 

The latter proves to be the most intractable so far.  Whilst both sides agreed that they will abide by the Good Friday Agreement (1998), a key component of which is keeping an open border between the Republic and Northern Ireland, that border becomes an external border of the EU post-Brexit: unless a specific agreement is reached, goods, services and people coming across it will have to be subjected to some kind of check, to preserve the integrity of the Union.  So the 8 December Agreement sets out a 3-tier mechanism to deal with that conundrum: (i) a specific trade agreement EU-UK, with no hard border; (ii) if that isn’t possible, “specific solutions to address the unique circumstances of the island of Ireland”; that second option seems to suggest a special status for Northern Ireland, different from the rest of the UK, but this is anathema to the Democratic Unionist Party (DUP), on whose support the government relies for a majority in the House of Commons; or (iii) “full alignment with those rules of the Internal Market and the Customs Union”; in other words, Northern Ireland would be part of the SM and Customs Union, but the rest of the UK wouldn’t.  Again, anything that signifies a different treatment of Ulster and the rest of the UK is unacceptable to the DUP.

 

The legal agreement issued by the EU on 28 February triggered strong reactions in the UK, so we are still some way off a settled deal.

 

2          Case Study – Cosmetics

 

The Irish border issue provides a perfect backdrop to the case study of the market for cosmetics across the EU; the vital role of the EU and the industry in creating and maintaining robust regulations for consumer protection; and what might happen after Brexit to this pan-European industry.

 

Geoff Skingsley, Chairman of L’Oréal UK, reported that current EU guidelines in the cosmetics industry are seen as setting the world standard for best practice.  They guarantee high product specifications and ensure customer safety.  They also set compliance standards on labelling and advertising and promote good practices in the development and manufacturing of products.

 

Specifically for the cosmetics industry, this means standard product definitions and safety evaluations, ingredient definitions, post-market surveillance and in-market control and enforcement.

 

Other global cosmetics markets including UEA/Saudi Arabia/Gulf States, ASEAN countries and MERCOSUR countries (including Brazil) use European guidelines as a reference.

 

Skingsley argues that the industry believes that the best way forward would be for the UK to continue to operate to current EU legislation.  However, there is uncertainty if this will be possible, as regulations are subject to the political negotiation process.

 

Ideally, a deal should be negotiated which would allow the UK to have the status of ‘being established in the European Community,’ irrespective of the UK’s eventual status as EU/EEA member or not.

 

Any changes from the current regulatory framework would result in significant additional costs and complexity, both for UK companies trading in the EU and EU companies trading in the UK. Crucially, these additional costs and complexities would have no benefits to consumers, inside the UK or in the remaining EU27 countries.

 

The cosmetics industry is lobbying the Government to keep current EU regulations, as have chemicals and pharmaceuticals industries, as the easiest way forward for the industry and consumers alike.

 

Further information

 

L’oreal UK & Ireland: Presentation for the French Chamber of Commerce in Great Britain (CCFGB) Brexit forum. 

 

Acknowledgements

  • Thanks to Geoff Skingsley for sharing his presentation and thoughts on this critical issue.
  • Thanks also to the Brexit Forum of the French Chamber, expertly co-chaired by Angela Hepworth, Corporate Policy and Regulation Director, EDF Energy, and Neil Sherlock CBE, Partner, Corporate Affairs, PwC. The Forum is sponsored by the ESCP Europe Business School, represented by Simon Mercado, UK Director