Brexit and the New Era in the Law of International Finance

• Publication year: 2016
• Author: By Gordon F. Peery

Brexit and the New Era in the Law of International Finance

By Gordon F. Peery^*

International developments remind us that we are practicing law in arguably the most dynamic and challenging period in modern history. As lawyers still digest new bodies of law arising out of the Great Recession of 2007 to 2009,¹ we are now experiencing unforeseen changes in financial services law resulting from an historic referendum by the United Kingdom to leave the European Union coupled with worldwide reverberations in financial markets as well as central bank moves to prevent recessions across the Atlantic and throughout the world.

These developments do present, however, historic opportunities to reshape the financial legal landscape and business practices that cross borders. Many legal and business practices are already changing today and bodies of established law are being rejected outright by new legislative initiatives at home and abroad. This article brings these recent developments into sharper focus, reveals new opportunities presented by these developments, and concludes with a recommendation for counsel in certain practice areas that appear to be most affected by the recent international developments.

I. THE UK REFERENDUM TO LEAVE THE EU (BREXIT)

The June 23, 2016 UK referendum to leave the EU has been called "the most important European vote since 1945,"² in part because other members of the EU may similarly elect to leave the EU, possibly creating a domino effect that would continue to undercut the law and regulation over the entire spectrum of market practices in Europe and destabilize the global economy.

A. Origins of Brexit

The historic vote of the UK to leave had its roots in domestic pressures and initiatives that developed most significantly at two junctures well before 2016. In fact, Brexit as a political goal has been pursued since the UK joined the European Economic Community in 1973. It is widely thought that the 52% to 48% vote to leave the EU, with a 72% turnout, was the result of a wave of public anger in northern UK cities and the countryside which did not experience the prosperity that integration into a global (largely service) economy brought to London.³ With over 30 million voting,⁴ the June 23, 2016 Brexit referendum was anything but a sudden, unanticipated flashpoint in domestic or international developments.

Even before public anger and anxiety over migration developed, the roots of the referendum took hold in two historical developments. The first occurred in 1992, when the Maastricht Treaty mandated the creation of the EU Monetary Union. The treaty's shortcoming was the lack of a mechanism for member states to help the union weather storms such as the Greek debt crises and mass migrations.⁵

The second historical development occurred in 2004, when the EU grew with east and central European states becoming members. New member states Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia brought the EU population to 450 million in 28 member states. The result: the EU became the largest trading block in the world.⁶

However, because an integral part of the EU mandate is the free flow of citizens across member states' borders, hundreds of thousands of workers from less prosperous EU member states immigrated to the UK. By 2015, there were 790,000 Poles working in the United Kingdom, which is more than the entire population of Krakow. With the gross domestic product per capita in Poland at $12,830, compared with $33,640 in the UK, and given the perception that migration was weighing down the UK, the Brexit referendum took hold and secured a majority vote from a disillusioned and vexed electorate.⁷

B. Short-Term Legal Considerations in the Wake of Brexit

Brexit creates myriad, novel legal issues, but aside from immediate central bank relief, which is discussed later in this article, most of the banking policy and legal issues across the Atlantic are matters to consider over the long term; there are very few immediate legal repercussions from the vote to Brexit. This is because the legal requirements for a member state of the EU to formally leave that union have not yet been met to bring about the formal legal separation of the UK from the EU. As this article goes to print, the UK actually remains in every respect a member state of the EU. Contrary to erroneous reports, the June 23, 2016 referendum was merely a vote within the UK as to whether to leave from (as campaigned by the group "Vote Leave") or remain in (as campaigned by the group "Britain Stronger in Europe") the EU.

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The majority within the UK having voted to leave the EU, the next step, which has never been taken at any time in our history pursuant to the Treaty on European Union, is for the UK to invoke Article 50 of that treaty. Article 50, which did not exist within the treaty before 2009 and has never been used,⁸ states:

1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.⁹

Immediately after the results of the June 23, 2016 referendum in the UK were made known, there were calls by leaders in the EU outside of the UK for a rapid withdrawal by the UK via Article 50. As of this writing, there is no indication as to when the UK will formally invoke Article 50, thus obscuring a clear-cut timeline for the exit of the UK from the EU. Until Article 50 is invoked, the UK remains a member of the EU. This also means that the legal landscape will remain largely the same, and this is expected to be the case for at least two years from the date of this publication.

Once the UK invokes Article 50, thereby formally communicating to the remaining EU states the UK's intention to exit the EU, the remaining member states - 27 national parliaments - then negotiate an international agreement, between those members on the one hand and the UK on the other. It is the terms of this agreement that will provide a roadmap for how the entire spectrum of law and practice areas with the laws will change-or not. This agreement, known in parlance as an Article 50 "withdrawal agreement," will address the terms and conditions of the UK's exit from the EU as well as the future relationship between the UK and the EU after Brexit.¹⁰ New British Prime Minister Theresa May repeatedly reiterated that she would not issue a formal Article 50 notice of withdrawal in 2016.¹¹

When the Article 50 notice is served (and it is slightly possible, though seemingly highly unlikely, that it may never be served), the negotiation of an EU-UK withdrawal agreement begins and this negotiation will likely take two years¹² or more, perhaps over a decade.¹³ The UK will have two years to conclude this negotiation unless that period of time is extended by all of the other EU member states (if there is no agreement to extend the two-year period, then EU treaties cease to apply to the UK and if the UK seeks a return to the EU, it must then apply like any other country seeking admission to the EU).¹⁴ Until the end of this negotiation, it is expected that the UK will continue to follow UK treaties and regulation, but representatives will not take place in EU decision-making.¹⁵

Once the withdrawal agreement has been fully...