Tag: UK

Getting Closer to put the UPC into Force

April 26, 2018 is a remarkable date: first it’s World IP Day celebrating IP around the world. Second, and this is unique, the British IP Minister Sam Gyimah MP announced that the UK ratified the Unified Patent Court Agreement (UPC Agreement). By doing so the UK agreed to be bound to both the UPC agreement and the UPC’s Protocol on Privileges and Immunities (PPI). The UPC will be a court common to the contracting member states within the EU having exclusive competence in respect of European Patents and European Patents with unitary effect.

In addition to Paris and Munich, London hosts a section of the Court’s central Division dealing with patents in the field of life sciences and pharmaceuticals. The way is now open for discussion about UK’s future within the UPC system after-Brexit. As of today, the UPC Agreement is ratified by 16 countries of the European Union.

To bring the Agreement into force, UK, France and Germany have to ratify the UPC Agreement and the PPI, now everyone is waiting for Germany, as France has already ratified.

Germany’s completion is currently on hold due to a constitutional complaint pending before the German Federal Constitutional Court.  According to rumours abound in the German IP community this complaint might be dismissed and the ratification will be finished during this year.

It’s time to get ready for playing with the new system!

 

Copyright 2018 K & L Gates.
This post was written by Christiane Schweizer of K & L Gates.
Read more on intellectual property on the National Law Review’s Intellectual Property Page.

Brexit: Limiting the Damage

It is one of the ironies of history that the EU as it is today, starting with the single market, was largely made in Britain, the achievement, above all, of former prime minister Margaret Thatcher and her right-hand man in Brussels, the then Commissioner (Lord) Arthur Cockfield. The single market has long been viewed by observers in countries with less of a free market tradition as a typically British liberal invention. And yet it is this market, as well as the EU itself, that another Conservative government is now seeking to leave.

Britain has also left its stamp on key EU initiatives from regional policy to development assistance and fisheries. The EU’s interest in a common foreign and security policy originally stemmed from Britain. The EU’s comparatively transparent and accountable administrative rules date from the reforms introduced by former British Labour Party leader Neil Kinnock when he was Vice-President of the European Commission from 1999 to 2004. Thus, representatives of Britain’s two major parties have helped to make the EU what it is today.

If British prime ministers had explained to public opinion earlier the extent of their country’s influence on the EU, something that other Europeans never doubted, the referendum of 23 June 2016 might never have occurred.

A “Smooth and Sensible” Brexit

Be that as it may, Europeans on both sides of the English Channel are now grappling with the consequences of that vote. If reason and economic interest prevail, a “smooth and sensible” Brexit, as evoked by the British prime minister in Florence in September, might yet emerge.

This would involve a broad agreement, in 2017, on the principal aspects of the divorce settlement. This concerns mainly Britain’s financial commitments to the EU, the residence, professional and health rights of citizens living on both sides of the Channel after Brexit, and the need to maintain the Common Travel Area between Britain and Ireland and to avoid a hard border across the island of Ireland after Brexit. While Brussels, London and Dublin have affirmed their intention of achieving these goals, there are many practical and political issues to resolve.

If sufficient confidence and trust between EU and UK negotiators is established, it should also be possible to agree to the general terms of a future political and economic agreement between London and Brussels by the end of the year and to broach the question of transitional arrangements to smooth the way for government and business. The British government wishes to ensure that business need adjust to Brexit only once, hence the need for a smooth transition to a well-defined future relationship.

If good progress is made next year, the separation agreement and transitional arrangements could be drawn up by October 2018, allowing enough time for approval by EU and British institutions ahead of Britain’s exit from the EU at midnight between 29 and 30 October 2019. Little, except Britain’s lost vote in EU institutions, would then change for the next two to three years, as the UK continued to make payments to the EU budget, respect judgements of the European Court of Justice and accept the free movement of labour.

The breathing space would be used to negotiate, sign and ratify a two-part long-term agreement. The first part would cover trade and economic issues; it could take effect provisionally relatively quickly after agreement had been reached. The second part, though, would be a wide-ranging political agreement, involving security and even aspects of defence. Both sides have an interest in cooperation on armaments production and unconventional forms of conflict, as well as police and judicial affairs. This would involve the member states’ legal responsibilities and require ratification by all twenty-eight countries concerned. It might not come into effect before the mid-late 2020s.

This relatively benign sequence of events assumes that the British government is unified behind its negotiator, David Davies, and that the political situation in Britain and the EU remains generally stable. It also assumes that the EU can move beyond its rigid two-stage sequencing of the negotiations.

However, there may well be political upsets, involving a leadership competition in the Conservative Party and, perhaps, an early general election. The opposition Labour Party may come to power bringing a change in priorities but also differences of opinion in its own ranks. The British economy will be damaged by Brexit, according to leading economists, and public opinion is likely to react when this is widely felt.[1]Until now, the main impact has been a decline in sterling and rising inflation, raising the prospect of higher interest rates.

The “Cliff Edge” Scenario

Such uncertainties, as well as the divergent political agendas of London and Brussels, may make the smooth and sensible Brexit impossible to achieve during the limited time available. This opens the way to a second scenario, widely described in Britain as the cliff edge. Under this hypothesis, the December 2017 goal for achieving a breakthrough in the separation talks is missed. This further postpones discussion of transitional arrangements and a future long-term agreement.

Negotiations continue fitfully during 2018 but the two sides are too far apart to reach agreement by October 2018, which the EU chief negotiator, Michel Barnier, has designated as the effective deadline. If October passes without an overall agreement, it will probably be too late to secure the agreement of the European Parliament before 29 March 2019, when the two-year negotiating period initiated by the British government’s notification of withdrawal expires. Nonetheless, negotiations might well go down to the wire.

Unless all twenty-eight countries “stop the clock” at midnight, an old Brussels ruse, the UK would then leave the EU without an agreement. Business leaders have warned of the chaos this will bring. There will be an unmanageable fivefold increase in work at British, Irish and mainland European ports checking consignments, the suspension of air travel between the UK and the EU, pending the conclusion of a new air transport agreement, and other major disruptions.

Health, safety, veterinary and phytosanitary inspections, as well as the assessment of customs duties, would lead to long queues of lorries at ports on both sides of the channel. Neither side can build the necessary infrastructure and linked IT systems or recruit sufficient qualified staff in time to cope with dramatically increased requirements after a hard Brexit. Supply chains would be disrupted and many foreign-owned companies, which had not already relocated to remaining EU countries, would seek to do so rapidly.

The political and economic damage of going over the cliff edge would last for years and embitter the UK’s relations with the EU and third countries. Many would question the value of Britain’s WTO commitments in the absence of appropriate trading arrangements between Britain and the EU.

This then is a sketch of the cliff edge. Those who admire Britain for its pragmatism, fairness and common sense find it hard to believe that such a scenario might become reality. Surely, they say, Britain and the EU are involved in preliminary skirmishing of the type that precedes any negotiation. They are sure to come to their senses as the decisive deadlines approach. Nothing is less than certain.

A Tale of “Downside” Risks

The outcome may well diverge from either the optimistic or the pessimistic scenarios delineated above. However, the risks are mainly “downside” as the economists put it. British negotiators have not yet grasped the fundamentally asymmetric nature of negotiations between twenty-seven countries backed by European institutions on the one side and a single country seeking to leave the club on the other. It would be better for government, business and the public, if this reality were more widely recognized, leading to realistic negotiating targets. Indeed, Brexit is not really a negotiation at all in the usual sense. It is rather an effort by the leaving country to secure some exceptions from the club’s rules at the time of its departure. This is much akin to the efforts of a candidate (joining) country to achieve some, temporary, transitional exceptions to the EU’s rules.

The Brexit talks are essentially an exercise in damage limitation, mainly through transitional arrangements. When the divorce and transitional arrangements have been agreed, Britain and the EU can concentrate on negotiating a long-term partnership which will be in their mutual interest.

This post was written by Michael Leigh of Covington & Burling LLP., © 2017
For more Global legal analysis, go to The National Law Review

Religious Dress at UK Workplaces Revisited – is the fuss justified?

Religious Dress UK Workplace“Bosses can ban burkas, scarves, crosses” shouts the front page of last Tuesday’s Metro, followed by a commentary far too short to explain that this is almost always untrue.

This is the resurrection of an old debate concerning the extent of your right to manifest your religion at work through how you dress. When last seen, the European Court of Justice had decided in a Eweida v. British Airways that it would be religious discrimination to ban an employee from wearing a visible crucifix at work unless there was a good reason for it, for example health and safety. The two cases which led to yesterday’s headline (one of which – spoiler alert – said that bosses couldn’t ban religious dress) were considering slightly separate points. Bougnaoui v. ADDH considered whether it would be discriminatory for the employer to react to a customer complaint by banning the wearing of a Muslim head scarf, while Achbita v. G4S asked whether it would still be discriminatory if the employer banned all outward signs of religious or political belief.

In Bougnaoui the ECJ was clear – if you use the potentially discriminatory views of your customers as a ground for imposing dress restrictions on your employees, that will be unlawful.  Ms Bougnaoui wore a headscarf at work but was asked to remove it after a customer complained.  That was just visiting the customer’s views on the employer’s staff and so was unlawful.

However, in Achbita the employer maintained a written, comprehensive and consistent ban on the wearing of all religious and political symbols, regardless of the faith or political affiliation in question.  It did this because it wished to present a picture of overt neutrality among its workforce.  This was in turn a result of the nature of its business, supplying security and reception staff to a variety of Government and private sector clients, some in highly confidential and security-critical environments.  It did not want those customers to have any reason, real or (particularly) perceived, to doubt the commitment, loyalty or intentions of the people G4S supplied to them.

The ECJ had to find that there was no direct discrimination on religious grounds since all religions and beliefs were treated exactly the same. Ms Achbita’s headscarf was no more or less welcome than would have been Ms Eweida’s little crucifix.  It then asked whether G4S’s stance could constitute unlawful indirect discrimination, i.e. whether it was the imposition of a provision, criteria or practice (the ban on religious indicators in what you wear at work) which prejudiced more people with a particular characteristic than not (religion), affected the individual employee (Achbita’s headscarf) and wasn’t justifiable.

The question here therefore revolved around whether G4S’s ban was justifiable, i.e. a proportionate means of achieving a legitimate aim. The objective of overt neutrality was accepted as a legitimate aim given the very particular circumstances of the services G4S provided and to whom.  This will obviously be very much the exception as corporate objectives go, hence the misleading nature of the Metro’s headline.  But even given the legitimacy of the objective, was a blanket ban on religious or political wear a proportionate means of achieving it?

Reluctantly the ECJ decided that it was, largely since there was no other means of achieving that objective. Nonetheless, to satisfy that test G4S had to show that the policy was enforced regardless of religion and no matter how mainstream (and so probably uncontroversial) the political belief.  That meant not just the items in the title but also what the employee manifested through badges worn and bags carried, etc.   It meant showing there was rigorous enforcement of the rule – obviously you could not claim it as necessary if breaches were ignored.  It meant also that G4S had to show that it had considered means by which the adverse impact of the rule had been minimised as far as practicable, for example by applying the rule only to those in sensitive public/client-facing roles and looking at the possibility of transferring affected staff out of those jobs where possible.

The ECJ’s decision has been greeted with predictable dismay by religious leaders. “It will lead to an increase in hate crime”, says one, and “shows that faith communities are no longer welcome”, says another, both equally without supporting evidence.  The issue here however is not supressing religious belief at all, but in allowing businesses where it really matters (a tiny minority only) to provide a service where its customers do not have grounds to push back against individuals on perceived political or religious grounds.  At one level, professional opportunity could thereby be said to be increased, not limited.

But I repeat – the businesses in which overt neutrality will be a legitimate aim will be very few in number indeed. These cases do not alter for a moment the basic rule that limiting religious manifestation in the workplace will be unlawful discrimination unless you have an exceptionally good reason to do so.  But then you are left with the headline: “Bosses Can’t Generally Ban Burkas”, etc. and that somehow lacks the same punch.

ARTICLE BY David Whincup of Squire Patton Boggs (US) LLP

© Copyright 2017 Squire Patton Boggs (US) LLP

UK Employee Classification: Uber Drivers Uber Happy

Uber employee ClassificationAs you may have seen from the extensive press coverage, the UK Employment Tribunal has delivered its much anticipated judgment in Aslam and Farrar v Uber. The case was about whether Uber drivers are self-employed contractors, or are “workers” with rights to minimum wage, statutory holidays, sick pay and breaks, amongst other workers’ rights.

In Depth

A “worker” is someone who has entered into a contract to personally do work for, or provide services to, a third party. This contract can be implied and does not have to be in writing. If that third party is a customer of the individual’s business undertaking, however, then that individual is self-employed.

Determining the status of the relationship between businesses and those they engage involves the Employment Tribunal looking beyond the terms and conditions in place between the parties to the reality of the relationship. The Tribunal will look at a number of factors to determine the true status of the relationship, but what really matters is the Tribunal’s view of how much control the business exerts over the individual, and whether or not that tips the balance away from the individual truly having the autonomy of being self-employed.

Uber’s Position

Uber said that it did not have the necessary control over drivers because

  • It is just a “platform” (through the Uber app) that links fare-paying customers to Uber drivers, rather than a transportation business.

  • Once linked, the Uber driver uses his/her own vehicle to take the customer to the requested destination.

  • There is no obligation on the drivers to work and drivers are not performance managed or subject to disciplinary procedures, although they do receive a “rating” from customers at the end of the journey.

  • Uber does not “pay” the drivers.  The drivers receive the fare paid by the customer (collected by Uber through the platform), after the deduction of Uber’s service fee. The service fee to Uber is taken as payment for the use of the app.

  • The drivers pay for the vehicle, the expenses associated with running that vehicle and their own taxi licenses.

  • It is the end-user (Uber’s customers) who contract with the drivers; they engage the drivers as self-employed contractors.

  • The drivers accept their self-employed status for tax purposes.

  • The drivers are permitted to work for other organisations, including direct competitors of Uber; they are not required to work exclusively for Uber.

The Employment Tribunal’s Decision

The Tribunal was not persuaded by Uber’s arguments nor, in relation to some aspects, Uber’s perspective on how its business operated. The Tribunal found that Uber was, indeed, running a transportation business through which the drivers provided skilled labour, from which Uber profited. The key factors were

  • That the drivers can only use the Uber app on Uber’s terms.

  • Uber interviews and “recruits” the drivers.

  • Uber handles customer complaints and often compensates customers following these complaints. Uber’s findings in respect of customer complaints are not always shared with the driver.

  • Uber accepts liability for losses, e.g., refunds to passengers, which would usually fall to a driver who was genuinely self-employed.

  • Uber does pay the drivers.

  • Uber’s ratings system (whereby the customer would rate the driver following the completion of a journey), is essentially a performance management procedure that could result in the driver being disconnected from the app.

  • Fares are fixed by Uber.

  • The language used by Uber in its PR communications is inconsistent with their argument that the drivers are self-employed.

What’s Next?

Uber has confirmed to customers and the press that it will be appealing the decision. In order to get an appeal off the ground, however, Uber will need to identify an error of law in the Tribunal’s judgment, or show that it had reached a decision which no reasonable tribunal could have reached on the facts.

How Does This Affect My Business

The analysis of an individual’s employment status will depend on the facts of each individual case. The Uber judgment therefore does not necessarily mean that all companies within the gig economy, or who engage self-employed contractors, must now give these individuals workers’ rights.

It does, however, serve as a useful reminder to review your workforce, consultancy/contractor agreements and other documents/communications and processes. Keep in mind, however, that were there to be a dispute over the status of the working relationship, a tribunal or HMRC would look beyond the contractual documents to the true relationship of the parties.

ARTICLE BY Katie L. Clark & Paul McGrath of McDermott Will & Emery

© 2016 McDermott Will & Emery

Brexit: Keep Calm and Carry On

As the country recovers from the shock outcome of last Thursday’s Referendum, the question which Restructuring professionals must now consider is “what does Brexit mean for me?”. The truth is that nobody really knows. The Referendum decision is not legally binding on the UK Government and the process of the UK leaving the EU will only start once the UK has served formal notice on the EU pursuant to Article 50 of the Treaty on the European Union. This will start a two year negotiation period to effect Brexit. In the meantime, the UK remains a member of the EU and EU law continues to apply.

Brexit, EU Referendum

So, in some respects it is very much business as usual for now, but on the basis that David Cameron’s successor will give notice to leave the EU, we recommend that clients start considering the consequences of Brexit now. Preparation for those consequences may include looking at the following:

Contract Reviews – Many contracts refer to an array of EU laws, regulators and territories which should be reviewed to determine how Brexit may/will impact. Can the contract be varied to mitigate the impact of Brexit? What is the potential impact on the contract price being linked to Sterling, the Euro or the Dollar? Does the governing law clause need amending? Will Brexit result in a breach of contract? Whilst unlikely, can force majeure or material adverse effect clauses be relied upon? How can the contract be future-proofed?

Financing and security reviews – Brexit caused turmoil in the markets initially and led to a reduction in the UK’s credit score rating and a significant devaluing of sterling. Before the Referendum, warnings of a post Brexit recession were rife. Is your business/customer at risk of breaching its financial covenants as a consequence of Brexit? Do those facilities and security need to be reviewed and changes made to protect the position?

Vulnerability to Brexit – Brexit is going to impact some more than others. How much do you or your clients/customers trade with other EU countries? How will your supply chain be affected? Do you currently benefit from EU funding? Is the tax efficiency of your business based on EU law? Does your business benefit from EU emission allowances? Will you need a licence or other authorisation to trade in the EU?

Public Policy – The UK will have to review where domestic legislation may need to be amended to take account of Brexit. It will be important to businesses to understand what changes are likely to be coming down the line. Many of the legal changes will be driven by policy decisions made in London and/or Brussels in particular. Keeping on top of these Policy decisions may allow businesses to position themselves to benefit from or at least mitigate the effects of legislative change. Do you need to engage with public policy professionals to assist in lobbying for changes which will have a positive impact on your business?

International Trade Arrangements – To what extent does your business involve the supply of goods between the UK and other EU member states? How will your business be impacted by the potential imposition of tariffs and other trade barriers restricting the free movement of goods post-Brexit?

Immigration and employment– What nationality are your employees? How will your ability to recruit/second employees be affected and will any parts of your business have to be downsized?

Communication – To what extent do you need to make any public statements or disclosures in relation to the impact of Brexit on your business. What is your strategy for communicating the impact of Brexit with your staff?

Other issues will arise as the full impact of Brexit unravels over the coming weeks and months.

ARTICLE BY John Alderton & Caroline Castle of Squire Patton Boggs (US) LLP

© Copyright 2016 Squire Patton Boggs (US) LLP

“Brexit” Dominates, as Financial Markets Roil

brexit financial marketsSecretary Kerry Heads to Brussels and London; President Obama Heads to Canada for the North American Leaders’ Summit; While the House is in Recess, Senate Committees Will Focus on the State-Foreign Operations Appropriations Measure and the Full Chamber May Consider the Zika Compromise Measure

President Barack Obama acknowledged from San Francisco early Friday morning that the British had exercised their sovereign rights and chosen to exit the European Union.  Washington awoke to the news and the corresponding negative reaction of the international financial markets soon after. Secretary of State John Kerry changed his travel schedule, adding a stop in Brussels and London to a trip that had him in Italy over the weekend. Meanwhile, President Obama travels to Canada this week to attend the annual North American Leaders’ Summit.

Democratic Members of the House staged a 24-hour sit-in on the floor of the chamber last week, protesting what they believed was the Republican leaders’ unwillingness to address gun control through legislation.  On Thursday, Speaker Paul Ryan (R-Wisconsin) abruptly adjourned the House until after the July Fourth holiday.

Senate Majority Leader Mitch McConnell (R-Kentucky) cut off an effort to keep suspected terrorists from buying guns last Thursday after Republicans and Democrats failed to reach an agreement on the issue, effectively ending debate of gun control in that chamber ahead of the November elections.  The Senate will be in session this week.

Brexit: British Vote to Exit the EU

Washington awoke to news Friday morning that the British had decided to exit the EU, a development that promptly caused international markets to slump.  Many expect market uncertainty will eventually impact the anemic economic growth in the United States.  After traveling to London in April and speaking in favor of Britain remaining in the EU, President Obama released a statement on Friday saying:

“The people of the United Kingdom have spoken, and we respect their decision.  The special relationship between the United States and the United Kingdom is enduring, and the United Kingdom’s membership in NATO remains a vital cornerstone of U.S. foreign, security, and economic policy.  So too is our relationship with the European Union, which has done so much to promote stability, stimulate economic growth, and foster the spread of democratic values and ideals across the continent and beyond.  The United Kingdom and the European Union will remain indispensable partners of the United States even as they begin negotiating their ongoing relationship to ensure continued stability, security, and prosperity for Europe, Great Britain and Northern Ireland, and the world.”

Senate Foreign Relations Committee Chairman Bob Corker (R-Tennessee) also issued a statement on Friday recognizing the British decision, while emphasizing the “special relationship” and importance of trade between the two countries:

“[The] referendum will not change our special relationship with the United Kingdom.  That close partnership will endure, and we will continue to work together to strengthen a robust trade relationship and to address our common security interests.”

Secretary of State Kerry said on Friday of the U.K. Referendum:

“I want to emphasize that although the U.K. will be leaving the European Union, the British are in no way departing from the principles and values that undergird the Transatlantic Partnership or from the important role the U.K. plays in promoting peace and stability in the world. The special relationship that has long existed between the United States and the U.K. endures. Our two countries remain strong and vigilant NATO Allies, permanent members of the UN Security Council, commercial partners, and close friends.”

He added:

“I also want to reaffirm the U.S. commitment to the European Union and the common agenda we share with Europe on such issues as Ukraine, nuclear nonproliferation, climate change, trade, and human rights.”

Secretary Kerry will be in Brussels and London today, meeting this morning with EU High Representative for Foreign Affairs and Security Policy Federica Mogherini, and later today with U.K. Foreign Secretary Philip Hammond.  In speaking with reporters in Italy over the weekend, Secretary Kerry said,

“The most important thing is that all of us as leaders work together to provide as much continuity, as much stability, as much certainty as possible in order for the marketplace to understand that there are ways to minimize disruption, there are ways to smartly move ahead in order to protect the values and interests that we share in common.”

North American Leaders’ Summit This Week

President Barack Obama, Mexican President Enrique Pena Nieto, and Canadian Prime Minister Justin Trudeau will meet on Tuesday in Ottawa for the annual North American Leaders’ Summit.  President Obama will also address a joint session of the Canadian Parliament.

Upcoming Presidential Trip – NATO, Poland and Spain

From 7-11 July, President Obama will travel to Poland and Spain. He will participate in the NATO Summit in Warsaw from 7-9 July.  The summit is expected to underscore the Alliance’s solidarity and to advance efforts to bolster security along NATO’s eastern and southern fronts. While in Warsaw, President Obama will hold a bilateral meeting with Polish President Andrzej Duda. He will also meet with the Presidents of the European Council and the European Commission to discuss U.S.-EU cooperation across a range of shared priorities, including countering terrorism, fostering economic growth and prosperity, and addressing the global refugee crisis. The U.K. referendum will also likely be a topic of discussion, as well as ongoing free trade agreement negotiations between the United States and EU.

From 9-11 July, President Obama will visit Spain, where he will meet with King Felipe VI and Acting President Mariano Rajoy.  This visit to another NATO member country will highlight security cooperation between the United States and Spain as well.

SelectUSA Investment Summit & GES

President Obama started last week out at the SelectUSA Investment Summit in Washington, which focused on attracting investments to the United States.  In addressing the forum, President Obama spotlighted, “Over the last four years, no other country has been named by CEOs around the world more frequently as the best place to invest with confidence.”

President Obama ended the week in San Francisco, attending the annual Global Entrepreneurship Summit (GES), which focuses on innovation.  The President signed an Executive Order on Friday to institutionalize key entrepreneurship programs of his Administration highlighting entrepreneurship is a hallmark of American leadership in the world.  The White House released a fact sheet on the GES, available here.

North Korea – Censured Again

After a failed attempt early last week, North Korea claimed on Thursday to have conducted a successful test-firing of a ballistic missile, swiftly drawing the censure of the United Nations Security Council.  In a press statement, the Security Council urged all countries “to redouble their efforts” to fully implement sanctions against North Korea, particularly those imposed in March, which were the toughest in two decades.  U.S. Ambassador Samantha Power sharply criticized North Korea’s “inherently destabilizing behavior” on Wednesday.

Venezuela Dialogue – U.S. Participates

Secretary General of the Organization of American States (OAS) Luis Almagro cited the current Government in Caracas as responsible for the near-collapse of Venezuela’s economy and called for the recall of President Nicolás Maduro.  Under Secretary of State for Political Affairs Tom Shannon joined the mediation efforts underway in Caracas last week, saying that a follow-on meeting date has yet to be determined.

Zika Funding Compromise Reached – Veto Threat Issued

Last week, House and Senate Republicans reached a compromise on funding a response to the Zika virus without Democrats’ input.  Before adjourning, House Republicans advanced (239-171) a spending measure that includes a $1.1 billion plan for the Zika virus.  The measure would provide $230 million for the National Institutes of Health to develop a vaccine and $476 million for the Centers for Disease Control and Prevention for mosquito control efforts.

Democratic Senator Bill Nelson (Florida) objected to the compromise, citing the $750 million in budget cuts to other health care programs.  The bill would cut $543 million in unused funds for implementing the Affordable Care Act, $107 million from funds used to fight Ebola, and $100 million in administrative funds from the Health and Human Services Department.  The $1.1 billion is also short of President Obama’s request for $1.9 billion to combat the virus.  The Senate is expected to take up the bill before it leaves Washington this week for its July 4 recess, but its prospects are unclear at best.

TPP – Implementing Bill Reportedly Being Drafted

Despite the public backlash to trade in an election year, U.S. Trade Representative Michael Froman said last Monday that the Obama Administration has begun drafting an implementing bill for a potential lame-duck vote on the Trans-Pacific Partnership (TPP) under Trade Promotion Authority (TPA). Ambassador Froman acknowledged that Majority Leader McConnell “has made clear publicly that he doesn’t want to see a vote [on TPP] before the [November] election,” which leaves the lame-duck session as the best window of opportunity for trying to advance a TPP implementing bill.

Privacy Shield – Agreement Reached

The European Commission and U.S. negotiators wrapped up their discussions over the transatlantic data-flow “privacy shield” agreement late on Thursday.  A Commission official reported the deal contains “additional clarifications regarding the Ombudsperson mechanism, onward transfers and data retention, as well as on an additional U.S. document on the bulk collection of data.”  The Article 31 Committee will next vote on the text of the agreement.

NDAA – Pre-Conferencing Stage

Senate Armed Services Committee Chairman John McCain (R-Arizona) reported last week that the leaders of the House and Senate Armed Services Committees met on Thursday to begin the process of reconciling the differences in their versions of the National Defense Authorization Act (NDAA).  A formal House-Senate conference does not begin until the two chambers appoint their conferees, which has yet to occur.

Congressional Hearings This Week

  • On Tuesday, 28 June, the Senate Armed Services Committee is scheduled to hold a hearing titled, “Improving Strategic Integration at the Department of Defense.”

  • On Tuesday, 28 June, the Senate Foreign Relations Committee is scheduled to hold a hearing titled, “Global Efforts to Defeat ISIS.”

  • On Tuesday, 28 June, the Senate Appropriations Subcommittee on State-Foreign Operations (SFOPs) is scheduled to hold a mark-up of the Fiscal Year (FY) 2017 SFOPs measure.

  • On Wednesday, 29 June, the Senate Commerce, Science, and Transportation Committee is scheduled to hold an executive session, where they will consider S. 3084, The American Innovation and Competitiveness Act, among other matters.

  • On Thursday, 30 June, the Senate Foreign Relations Committee is scheduled to hold a hearing titled, “Corruption: Violent Extremism, Kleptocracy, and the Dangers of Failing Governance.”

  • On Thursday, 30 June, the Senate Armed Services Committee is scheduled to hold a closed hearing titled, “National Security Cyber and Encryption Challenges.”

  • On Thursday, 30 June, the Senate Appropriations Committee is scheduled to markup the FY 2017 SFOPs measure.

Looking Ahead

Washington is expected to focus on the following upcoming events:

  • 29 June: North American Leaders Summit in Ottawa, Canada.

  • 7-11 July: President Obama travels to Poland and Spain

  • 8-9 July: NATO Summit in Warsaw, Poland

  • 18-21 July: Republican National Convention in Cleveland, Ohio

  • 25-28 July: Democratic National Convention in Philadelphia, Pennsylvania

  • 4-5 September: G-20 Leaders’ Summit in Hangzhou, China

  • 13 September: 71st Session of the U.N. General Assembly (UNGA) Begins

  • 20 September: UNGA General Debate Commences

  • 19-20 November: Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit in Peru

ARTICLE BY Stacy A. Swanson of Squire Patton Boggs (US) LLP

© Copyright 2016 Squire Patton Boggs (US) LLP

Brexit – What Next for the UK and EU?

UK EU BrexitSo after all the shouting, the half-truths and the speculation, there it is, a vote to leave. What does this mean for your business? What will your Board need to know today?

Let us be clear – no one knows all the details of what happens next, and that includes all the people who said that they did. But there is still plenty of reassurance available for many months, potentially years, into the future. In immediate legal terms there is much less to this than meets the eye.

Remember that the vote is just a vote. By itself it does not alter our legal relationships with Europe at all. Even if Parliament follows the stated wish of the people and formally petitions to leave the EU, the constitutional procedures for an exit will potentially take years to run their course. There are unlikely to be material changes to UK law during that time.

But that does not mean that you should not now be proactive in reviewing how the vote may or may not affect your legal obligations and best practice. In this note we summarise by topic some of the more immediate considerations which may arise in your business.

Employment

    • Leaving the EU does not by itself change our domestic employment law, either from today or from when we do actually leave, even if that law is based on an EU decision or Directive. That means no immediate changes to TUPE, the Human Rights Act, Works Councils, collective information and consultation rules, the Agency Worker Regulations, the Working Time Regulations or any of our EU-derived health and safety rules.
    • Your existing EEA national workers will not automatically have to leave the country or stop working for you, though they may choose to do so. They will still be able to get back into the UK if they go abroad on holiday or business.
    • You can still recruit EEA nationals without work visas for the time being, but if your business relies heavily on relatively unskilled labour from the EEA, start to consider whether it will be practicable to source such workers from within the UK market.
    • The UK may feel itself no longer obliged to implement into domestic law the forthcoming EU Trade Secrets Directive or General Data Protection Regulations, but will probably do so anyway to minimise the damage to inward investment from EU countries.
    • Your existing UK workers based in Continental Europe will not have to come back home immediately. Longer-term (two years at least) their position will depend on what stance the EU adopts towards its own UK-facing immigration controls.
    • It will remain discriminatory to hire EU staff in place of UK nationals (or vice versa) on racial or needs-a-visa grounds.
    • Leaving the EU will potentially take the UK out of the area regarded by the rest of Europe as “safe” for the processing of employee data. Unless an English version of the former US Safe Harbor Agreement can be negotiated, you may ultimately expect difficulties using personal data concerning your EU employees in the UK, and so you should begin to consider adopting increased data protection safeguards in your arrangements with your EU data subjects and processors.
  • The vote will probably mean a weakening of Lock-type holiday pay claims, and of any other legal arguments or proposals which are based on EU law but not yet incorporated into domestic UK statute. Whether the UK Government feels it necessary to pass such statutes before the formal point of exit remains to be seen – our view is that this is unlikely.

Pensions

    • The immediate focus for pensions will inevitably be on investment, not legal issues. Optimists before the vote acknowledged the market shock that is already occurring to sterling and equity markets but suggested that if gilt yields rose on the back of Bank of England intervention, that would reduce defined benefit liabilities. If that scenario plays out,it would be a boon for UK corporates who are struggling to fund deficits but the truth will no doubt be more complex and falls in asset values may cancel out any rise in yields. The worst case is that yields don’t rise. Longer term the vote will mean institutional investors will be reconsidering their investment strategies.
    • These investment consequences will of course affect the values of millions of defined contribution savers too. Sharp falls in asset values there will do nothing for confidence.
    • For UK corporates who are heavily reliant on EU earnings, new covenant assessments may be required by trustees.
  • European-derived equality legislation that applies to pensions will, as with employment law, remain in place, even though speculation will no doubt continue about whether guaranteed minimum pensions still need to be equalised. In the longer run, arguments about the detail of the draft IORP II Directive may now be academic.

Commercial Contracts

    • Termination clauses in contracts are most unlikely to be triggered by the Brexit vote. Even if a contract allows for termination if the obligations under it become more difficult to perform, Brexit is unlikely to mean that goods cannot be delivered or services provided so it is unlikely that automatic termination will occur.
    • Force majeure clauses are equally unlikely to be triggered immediately – the leave vote is hardly an Act of God, even if it may have been beyond the reasonable control of the parties.
    • Governing law clauses are more tricky to predict in terms of their effect but again nothing will change immediately or automatically.
  • Commercial terms, especially where financial instruments are involved and currency hedging is provided for as an option within a contract, may come into play automatically but those provisions will be contract-specific. For longer-term contracts being signed now, consider protection against Brexit consequences such as trade tariffs, exchange rate swings, capital movements, tax changes.

Trade

    • In the likely event of a total break from the EU Single Market, the erection of trade barriers (whether by way of direct tariffs, re-establishment of customs processes, or non-membership of EU trade facilitation schemes) will be inevitable. However, for the time being, all current internal market rights will apply. Agreements as they affect trade may be concluded within the two years allowed for a negotiated withdrawal, so companies should begin adjusting to the new situation as soon as possible.
  • In terms of customs duty, and unless agreed otherwise with the EU before formal withdrawal, the UK will lose the benefit of the duty rates afforded by being an EU Member State under the existing EU trade agreements with third countries. This would be likely to result in an increase in the landed cost of many goods, which may also be affected by any volatility of exchange rates. From an exporter’s perspective, those considerations should be carefully catered for in advance at contractual negotiations stage, starting now.

Financial Services

    • Those non-EEA firms using the UK as the base for their offering of financial services into and around Europe will need to assess their options: potentially they will lose their cross-border or branch passports into other EEA countries. This may mean they need to seek licences/authorisation in the other member states in or into which they conduct activities. Whilst it is possible that the UK may seek to agree a replacement passport regime, financial services providers relying on passports may need to look at their contingency plans and relocate or establish new offices in other member states from which the passports are available.
    • Parties to contractual documentation referencing EU Directive regulatory status (e.g. “credit institution” and “financial counterparty”) as a representation, condition or requirement will need to check whether the consequence of the UK falling outside the jurisdiction of the relevant Directives causes an event of default with immediate termination or right to termination. Consequently, parties may need to agree amendments to that documentation to avoid the potentially material financial consequences of termination.
  • As market uncertainty is already upon us firms with market positions will need to have regard to margin and collateral held against trading activity. Firms seeking to exercise rights under trading and security documentation in the event of defaults by counterparties will need to be alive to due process to ensure their enforcement rights can be properly executed.

Taxation

    • Parties to commercial contracts with EU counterparties which straddle any EU withdrawal will need to consider carefully the VAT and the customs duties consequences of those contracts. Customs duties are particular points of concern. Depending on the nature of the EU withdrawal negotiated by the UK, imports into the EU may give rise to customs duty costs and there is likely to be negotiation between the supplier and the relevant counterparty as to who is to bear the economic burden of those costs.
  • Going forward, policy makers will need to consider the interaction of EU law on the UK’s tax system as many aspects of the UK’s tax system (such as transfer pricing) have been shaped by EU rules. Policy makers will need to consider the extent to which they wish to reshape (if at all) the UK’s tax landscape.
ARTICLE BY Jens Rinze of Squire Patton Boggs (US) LLP
© Copyright 2016 Squire Patton Boggs (US) LLP

No Going Back – Rejection of Promotion Offer Not a Failure to Mitigate

soccer players.jpgGibbs -v- Leeds United Football Club concerned the former Assistant Manager of the Club who took his £330,000 constructive dismissal claim to the High Court so as to sidestep the compensation ceiling in the Employment Tribunal.

Having fairly easily established the fundamental breach of contract necessary to win his claim against Leeds, Mr Gibbs then faced two more difficult questions about his compensation. First, how do you provide for mitigation where you know the dismissed employee is going to get a bonus from his new employer, and when, but don’t know how much it will be?  Second, is it a failure to mitigate that the employee declines to accept an offer of improved employment terms from the old employer?

On the first point, the Judge reviewed the options of (i) estimating the bonus figure (but thereby certainly being wrong in one party’s favour of the other) or (ii) delaying the compensation award until the bonus amount were known, but thereby racking up interest charges for Leeds and denying Mr Gibbs receipt of his money. Note that part of the relevant bonus was due to be paid by Mr Gibbs’ new employer, Tottenham Hotspur FC, little more than four months after the High Court’s decision, at a time of low prevailing interest rates and when Mr Gibbs was safely in receipt of a salary from Spurs and so had no immediate need for the money. Nonetheless, this was still felt to be hardship enough all round to leave that option on the bench.

The Judge chose instead to order that:

  • the full amount of the £330,000 award should be paid to Mr Gibbs’ solicitors to be held in an interest-bearing account;

  • the parties should then agree how much of that could be released to Mr Gibbs (i.e. leaving at least enough in the account to cover any likely bonus award from Spurs); and

  • the rest would be offset against that bonus, with the bonus amount going back to Leeds and the balance to Mr Gibbs, plus interest in each case.

All very sensible and the fact that this was a High Court case in no way prevents a similar Order (or agreement between the parties) being made by the Employment Tribunal where there is a need to reflect an uncertain future receipt in the amount of a settlement or compensation award.

On the second point, was it a failure by Mr Gibbs to take reasonable steps to mitigate his losses when he rejected Leeds’ post-resignation offer to stay at Elland Road as Head Coach/Manager? The Judge gave this allegation a fairly short shrift – having found the Club guilty of a repudiatory breach of Mr Gibbs’ contract, it could not fix things so easily.  Though the new role would have been more senior and presumably better paid, the damage caused to Mr Gibbs’ credibility among players and staff by the Club’s earlier treatment of him made it reasonable for him to refuse.  He could have taken the chance that Leeds would change its behaviour towards him, but he was not obliged to do so.  Bear in mind also the recent Employment Appeal Tribunal decision in Cooper Contracting -v- Lindsey which stressed just how high is the hurdle of showing a failure to mitigate, and also Buckland –v- Bournemouth University in 2010. There the Court of Appeal decided much against its own better judgment that once the employer was guilty of a repudiatory breach of contract, it could not “mend” that breach by profuse apologies and other appropriate steps afterwards, even if those measures would have undone all or most of the harm caused in the first place.

© Copyright 2016 Squire Patton Boggs (US) LLP
  • See more at: http://www.natlawreview.com/article/no-going-back-rejection-promotion-offer-not-failure-to-mitigate#sthash.ueEsoJnq.dpuf

Financial Services Sector Implications of ‘Brexit

Should Britain decide to leave both the EU and EEA as a result of a “Brexit” vote on 23 June 2016, the impact on UK and EU financial services firms could be significant.

The City of London is Europe’s key financial centre and one of the world’s leading financial centres. As such, asset managers, investment banks, retail banks, broker-dealers, corporate finance firms, and insurers choose the United Kingdom to headquarter their businesses, anchoring themselves in a convenient time zone and location from which to access the European and global markets.

A central plank of the European Union’s vision for a single market in financial services is that financial services firms authorised by their local member state regulators may carry on business in any other member state by establishing a local branch or by providing services on a cross-border basis without the need for separate authorisation in every host state. UK-based regulated asset managers (e.g., long-only, hedge fund, and private equity), banks, broker-dealers, insurers, Undertakings for Collective Investment in Transferable Securities Directive (UCITS) funds, UCITS management companies, and investment managers of non-UCITS (known as alternative investment funds or AIFs) have a passporting right to carry on business in any other state in the European Economic Area (EEA) in which they establish a branch or into which they provide cross-border services, without the need for further local registration. Passporting also facilitates the marketing of UCITS and AIFs established in the EEA (EEA AIFs) into other member states.

Members of the EEA (which comprises the 28 EU member states and Norway, Liechtenstein, and Iceland) are subject to the benefits and burdens of the financial services single market directives and regulations, including passporting rights. One outcome of a vote to leave the European Union in the UK referendum to be held on 23 June 2016, would be that the UK leaves the EU but decides to remain in the EEA (with a similar status to, say, Norway)—in which case the impact of a “Brexit” on the financial sector would likely be minimal. Another outcome would be that the UK finds it unpalatable politically to leave the EU whilst remaining in the EEA and therefore decides to leave both the EU and the EEA; it is this scenario that would have significant impact on both UK and EU financial services firms.

Effect on Passporting for UK Financial Services Firms

According to figures released by the European Banking Authority (EBA) in December 2015, more than 2,000 UK investment firms carrying on Markets in Financial Instruments Directive (MiFID) business (e.g., portfolio managers, investment advisers, and broker dealers) benefit from an outbound MiFID passport, and nearly 75% of all MiFID outbound passporting by firms across the EEA is undertaken by UK firms into the EEA. Notably, according to the EBA, 2,079 UK firms use the MiFID passport to access markets in other EEA countries, and the next two highest totals in the EBA list are Cyprus (148 firms) followed by Luxembourg (79 firms). EEA-wide, there are around 6,500 investment firms authorised under MiFID. The United Kingdom, Germany, and France are the main jurisdictions for more than 70% of the MiFID investment firm population of the EU; more than 50% are based in the UK.

We consider that these figures suggest that Continental consumers potentially stand to lose more than UK consumers in terms of the cross-border provision of financial services in the event of a Brexit, which could be a driver for the UK being given a special deal to permit access to continue, although this needs to be weighed against the political imperative that the remaining EU countries would likely feel against being seen as being too accommodating to a country leaving the EU.

In the event of a Brexit where the United Kingdom leaves the EEA, unless special arrangements for the UK were to be agreed between the UK and the EU, and subject to the more detailed comments below, UK firms would cease to be eligible for a passport to provide services cross-border into, or establish branches in, the remaining EEA countries (rEEA) and to market UCITS and AIFs across the rEEA. Instead, local licences would be required, and the use of relatively low-cost branches in multiple member states may have to be reassessed. UK-authorised firms no longer able to passport into the rEEA but wishing to do so would need to consider moving sufficient of their main operations to an rEEA jurisdiction in order to qualify for a passport.

Effect on UK Financial Services Regulatory Law

The EU is a major source of UK financial services regulatory law. Recent UK parliamentary research estimates that EU-related law constitutes one-sixth of the UK statute book. That figure does not include the deposit of more than 12,000 EU “regulations” which take direct effect in each member country (including the UK) in contrast to EU “directives” which must be implemented or “transposed” in local law by each country; EU regulations would cease to apply in the UK post-Brexit. In addition, it would be necessary for the UK to renegotiate or reconfirm a series of EU negotiated free-trade deals that would not automatically be inherited by the UK upon Brexit. Post-Brexit, the UK would need to legislate to “renationalise” voluminous laws rooted in the EU and fill any regulatory gaps in UK legislation once the EU treaties ceased to apply.

It would be open to the UK merely to incorporate directly applicable EU regulations into UK law. This might be the easiest course of action, given the volume and breadth of issues which would need to be addressed by the UK government in the event of a vote to leave the EU.

Accordingly, in contrast to the impact that the UK leaving the EEA would have on passporting, the UK regulatory environment for financial services firms may not change dramatically in the event of a Brexit, at least in the short-term. Furthermore, any subsequent changes to the UK regime are more likely than not to be deregulatory in nature and therefore favourable to UK firms. In relation to the AIFMD, to take one example, the UK government would have the option to introduce a more tailored and proportionate regime for fund managers managing AIFs with lower risk profiles.

Pre-Referendum Planning

Planning for a Brexit is difficult without knowing what a post-Brexit landscape would look like (as yet, this is a “known unknown”). However, in the run up to the UK referendum, it seems prudent for UK financial institutions to consider the impact of a Brexit on the terms of any new contracts being entered into and, if relevant, seek to make provision for a Brexit (e.g., by including Brexit in a force majeure provision; providing for termination rights in the event of a Brexit and adapting references to the EEA to continue to cover the UK, if appropriate).

Passporting aside, UK firms will also need to assess the practical issues that would arise in the event of a Brexit. For instance, investment strategies that permit investments in the EEA may need to be amended in order for investments in the UK to continue to be permitted. Similarly, a Brexit may impact the terms of product distribution agreements and other service agreements.

Alternative Investment Fund Managers Directive (AIFMD)

If the UK were to leave the EEA, then, potentially: UK AIFMs would be treated as non-rEEA AIFMs, marketing by UK AIFMs of AIFs to rEEA investors would have to be undertaken on the basis of member state private placement regimes, and UK AIFMs would no longer be able to manage (from the UK) an AIF established in an rEEA member state without being locally authorised in that member state to do so. Further, UK AIFMs that utilise AIFMD passports for MiFID investment services to provide segregated client portfolio management and/or advisory services on a cross-border basis would cease to be able to use those passports. Conversely, rEEA AIFMs that seek to manage or market AIFs in the UK or provide MiFID investment services to clients in the UK in reliance on AIFMD passports would no longer be able to do so.

However, unlike other single-market directives, the AIFMD provides for its regime to be extended to non-EEA managers, and this offers a potential “third way” should the UK not remain in the EEA. If the UK were to leave its current AIFMD compliant regime in place, it ought to be technically straightforward, following a Brexit, for the AIFMD to be extended to the UK. In this scenario, UK AIFMs could continue to be authorised under the regime and be entitled to use the AIF marketing and management passports (a non-rEEA manager passport). This possibility may influence the UK government to leave the current UK regime unchanged in the event of a vote to leave the EU. However, any such extension of the AIFMD would require a positive opinion from the European Securities and Markets Authority (ESMA) and a decision by the EU Commission, so there would be a political dimension to it that would likely introduce uncertainty.

It is important to note, though, that the use by a UK AIFM of a non-rEEA manager passport would be subject to a number of conditions prescribed by the AIFMD that would have material practical implications. In particular,

  • a UK AIFM would need to be authorised by the regulator in its rEEA “member state of reference” (this would be determined in accordance with the AIFMD by reference to where in the rEEA the manager is proposing to manage and/or market funds). This regulator could not be the Financial Conduct Authority (FCA), so the use of a non-rEEA manager passport would involve dual regulation and supervision—by the FCA in the UK and by a regulator in an rEEA country in relation to compliance with the directive for funds managed or marketed in rEEA countries (the guidance and approach to application and interpretation of the directive by the regulator and local rules in the member state of reference may well differ from that of the FCA);

  • it would be necessary to establish a legal representative in the member state of reference in order to be the contact point between the manager and rEEA regulators, and the manager and rEEA investors. The legal representative would be required to perform the compliance function relating to funds managed or marketed in rEEA countries; and

  • disputes with rEEA investors in a fund managed/marketed by a manager using a non-rEEA manager passport would need to be “settled in accordance with the law of and subject to the jurisdiction of a Member State”—this would preclude the use of UK courts as a forum for disputes with investors.

UK AIFMs should also note that the AIFMD does not provide for a non-rEEA manager passport to cover the provision of MiFID investment services on a cross-border basis. Accordingly, even if the AIFMD were to be extended to the UK so that UK AIFMs could use a non-rEEA manager passport to manage and/or market AIFs in the rEEA, in the event of the UK not remaining in the EEA, UK AIFMs providing cross-border MiFID investment services within the rEEA (e.g. discretionary management/advisory services for separate account clients) may need to think about where the services are in fact being provided and whether local authorisation would be required to continue the provision of those services. For the provision of MiFID investment services, this would re-establish the position prior to the implementation of the Investment Services Directive (the precursor of MiFID) in the mid-1990s.

Undertakings for Collective Investment in Transferable Securities Directive (UCITS)

A UCITS fund must by definition be EEA domiciled, as must its management company. Currently, both UCITS funds and their EEA managers benefit from the passport. UCITS funds are passportable into any other member state for the purposes of being marketed locally to the public and management companies can set up branches and/or provide services cross-border into other member states (e.g., a UK-based management company can provide management services to a UCITS fund based in any other EEA country such as, for example, Ireland or Luxembourg). UK UCITS funds and management companies established pre-Brexit would no longer qualify as UCITS post-Brexit. UK-based UCITS funds would no longer be automatically marketable to the public in the rEEA and would therefore become subject to local private placement regimes. Conversely, a UCITS fund established, say, in Ireland or Luxembourg, would no longer be marketable in the UK to the general public, and a management company based in Ireland or Dublin would no longer be entitled to provide management services to a UK-based UCITS fund.

Accordingly, consideration would need to be given to migrating UK UCITS funds to an rEEA country. Otherwise, UK UCITS funds would become subject to the AIFMD regime instead of the UCITS regime and would be subject to additional restrictions and unavailable to most types of retail investor. UK UCITS management companies would have to migrate to rEEA in order to continue to benefit from the passport.

The Markets in Financial Instruments Directive (MiFID)

MiFID gives EEA investment firms authorised in their home EEA country a passport to conduct cross-border business and to establish branches in other EEA countries, free from additional local authorisation requirements. MiFID prohibits member states from imposing any additional requirements in respect of MiFID-scope business on incoming firms that provide cross-border services within their territory, but does allow host territory regulators to regulate passported branches in areas such as conduct of business.

UK-regulated firms that undertake MiFID business would no longer be able to rely on the passport to undertake MiFID business in rEEA and might have to restructure accordingly. Conversely, rEEA firms that seek to undertake MiFID business in the UK would no longer be able to do so and might also have to restructure. However, in contrast to UCITS, that outcome is potentially leavened by the new third-country regime indicated by the recast Markets in Financial Instruments Directive (MiFID II).

The impact on the provision of cross-border MiFID investment services might be diluted by the regime under MiFID II permitting non-EEA firms to provide investment services to professional clients on a pan-EEA basis upon registration with ESMA, but this would not be an immediate solution, as it would be subject to ESMA making an equivalence determination under MiFID II in relation to the UK, and the timing would be highly uncertain (in particular, MiFID II seems unlikely to come into effect until January 2018, which will be 18 months after the UK referendum). The UK could implement an equivalent regime (in practice, largely by not repealing or amending its EU-generated legislative inheritance and “renationalising” it) to secure its status as an “equivalent” third country with which EEA firms can do business. However, it seems unlikely, given the technical difficulties and delays being experienced generally by ESMA in relation to MiFID II implementation, that an equivalence determination for any non-EEA firms will be high on the agenda until sometime following January 2018.
UK financial institutions would need to consider the regulatory perimeter in each rEEA country in which a financial institution wishes to undertake business. Conversely, rEEA financial institutions would need to consider the UK perimeter to identify what activities by them in the UK would engage a registration requirement locally in the UK.

On the other hand, equivalency considerations aside, the proposals under MiFID II for the unbundling of research and trading fees would fall away in the UK and remain in the rEEA. The unpopular cap on bonuses for systemically important banks and investment firms brought in by the Capital Requirements Directive (CRD) would also fall away in the UK but remain in the rEEA. Notably, the EBA has recently indicated that the bonus cap should be imposed on all firms subject to the CRD, which would implicate a huge increase in the number of banks and investment firms subject to the cap. On 29 February, it was announced that FCA and the Prudential Regulation Authority had decided to reject that advice on the basis of proportionality. Accordingly, even without a Brexit, the UK is already implementing a policy which should put it at a competitive advantage to other EEA countries that decide to follow the EBA’s guidelines.

Under MiFID, EEA countries must permit investment firms from other EEA countries to access regulated markets, clearing and settlement systems established in their country. Post-Brexit, UK investment firms would no longer be able to rely on those provisions, but nor would rEEA firms looking to access the UK. It is precisely this possibility of “mutually assured destruction”—combined with the UK’s status as Europe’s leading financial centre—that could drive some hard bargaining post-Brexit by both sides towards a constructive outcome in favour of continuing integrated financial markets and services.

The European Market Infrastructure Regulation (EMIR)

EMIR applies to undertakings established in the EEA (except in the case of AIFs, wherever established, where it is the regulatory status of the manager under AIFMD which is key) that qualify as “financial counterparties” or “non-financial counterparties.” Since, post-Brexit, a UK undertaking would no longer be established in the EEA, under EMIR, UK undertakings that are currently financial counterparties or non-financial counterparties would become third-country entities (TCEs) for EMIR purposes.

Post-Brexit, UK undertakings—along with other TCEs—would not be able to avoid EMIR altogether, as a number of its provisions have extraterritorial effect, including in relation to key requirements such as margin for uncleared trades and mandatory clearing. The trade reporting obligation, however, does not apply to TCEs. The UK government would need to consider whether to introduce similar reporting requirements domestically, particularly given the size and importance of the UK derivatives market. If UK undertakings became TCEs, they would be required to determine whether they would be financial counterparties or non-financial counterparties if they were established in the rEEA, an exercise which would be straightforward.

In any event, UK undertakings subject to the clearing and margin requirements of EMIR pre-Brexit would remain subject to such requirements when entering into derivatives transactions with rEEA firms post-Brexit. Importantly, the exemption from the forthcoming mandatory clearing requirement for UK pension scheme trustees would cease to apply post-Brexit. Accordingly, a UK pension scheme would no longer be able to rely on the EMIR exemption when entering an OTC derivative contract with an rEEA counterparty.

The City of London boasts some of the world’s largest clearing houses, and at least three of them are currently permitted under EMIR to provide clearing services to clearing members and trading venues throughout the EEA in their capacity as ESMA-authorised central counterparties (CCPs). Post-Brexit, however, a UK CCP would become a third-country CCP. Under EMIR, a third-country CCP can only provide clearing services to clearing members or trading venues established in the EEA where that CCP is specifically recognised by ESMA. This would require, among other things, clearing houses operating out of London to apply to ESMA for recognition, the European Commission to pass an implementing act on the equivalence of the UK’s regime to EMIR, and relevant cooperation arrangements to be put in place between the rEEA and the UK—a lengthy process overall. Financial institutions based in rEEA will certainly want to continue to access UK regulated markets and CCPs.

Article By Simon Currie & William Yonge of Morgan, Lewis & Bockius LLP

Copyright © 2016 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

The UK Psychoactive Substances Act 2016: An Example of Poor Drafting and Unintended Consequences for Food?

The UK has enacted new legislation to address the issue of so-called ‘legal highs’ following a number of cases of paranoia, seizures, hospitalisation and even death after consumption of certain psychoactive substances.  The Psychoactive Substances Act 2016 (the “Act”) was granted Royal Assent on 28 January 2016.  It is expected to come into force on 6 April 2016.  The Act makes it an offence to produce, supply, offer to supply, possess with intent to supply, possess in a custodial institution, import or export psychoactive substances.

A psychoactive substance is defined very broadly to cover “any substance which is capable of producing a psychoactive effect in a person who consumes it”.  A substance produces a psychoactive effect in a person if it affects the person’s mental functioning or emotional state  by stimulating or depressing the person’s central nervous system.  There are a number of specific exemptions, including controlled drugs, medicinal products, alcohol, nicotine and tobacco products, caffeine and food.  However, the definition of food has left a number of questions since it does not align with the legal definition of food set out in EU Regulation 178/2002.  Rather, the Act defines food as:

Any substance which—

            (a) is ordinarily consumed as food, and

            (b) does not contain a prohibited ingredient (emphasis added).

In this paragraph—

  • “food” includes drink;

  • “prohibited ingredient”, in relation to a substance, means any

psychoactive substance—

            (a) which is not naturally occurring in the substance, and

            (b) the use of which in or on food is not authorised by an EU instrument.

The authorities have stated that the Act is not intended to capture foods with a “negligible” psychoactive effect, such as chocolate and nutmeg, but concerns were raised during the legislative debates that the Act could capture inadvertently a much broader range of food substances, including energy drinks and certain botanical ingredients used in foods and dietary supplements.  It is hoped that guidance from the enforcement authorities will make clear exactly which foods and drinks are exempted.

Article By Brian Kelly of Covington & Burling LLP

Lucie Klabackova, paralegal, also contributed to this article.

© 2016 Covington & Burling LLP