Brexit – planning for the year ahead

Debt Issuance from 2020: Themes for the year ahead

With a no-deal Brexit in January 2020 almost certain to be avoided, the focus of mainstream DCM market participants will now be on the practical and documentation implications of the UK entering the transition period and beyond.

The UK is expected formally to leave the EU on 31 January 2020 (“exit day”), however the practical impact of this will be limited during the transition period which will follow pursuant to the EU-UK Withdrawal Agreement. This is expected to apply until 31 December 2020 absent any extension.

What is the impact of the transition period?

From an EU law perspective, whilst the UK will no longer be part of the EU, it will nevertheless be treated as if it were a member state (except for political/decision-making purposes).

From a UK law perspective, the European Union (Withdrawal) Act 2018 (“EUWA”) will repeal the European Communities Act 1972 (“ECA”) on exit day. However, notwithstanding this repeal, the legislation will operate such that during the transition period, for most practical intents and purposes, the ECA will still apply until the end of the transition period (dubbed “IP completion day”). The UK and EU may agree to extend the transition period for 1 or 2 years under the Withdrawal Agreement, but such an agreement must happen before 1 July 2020.

This means that the next real “crunch time” on EU-UK negotiations will be the end of June 2020, as that is when the EU and UK would have to agree any extension to the transition period.

For financial services, it is worth noting that under the Political Declaration, the EU and UK have agreed to “start assessing equivalence with respect to each other under these frameworks as soon as possible after the United Kingdom’s withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020”. It remains to be seen whether meaningful progress on this front will be made in this timeframe.

If no extension is agreed, and no equivalence is agreed, then from a financial services perspective a “no-deal” Brexit will effectively occur on 31 December 2020.

What does this mean for contractual documentation?

Whilst EU and UK law will continue to operate as if the UK were still a member of the EU during the transition period, contracts and other documents referring to the “EU” or “EEA” and related terms will need to mention explicitly the UK if it is intended that they should apply to the UK/UK persons.

ICMA has produced draft versions of its EEA public offer and PRIIPs selling restrictions and MiFID II product governance legends to reflect a transition period and a no-deal Brexit. The drafting prepared for a transition period will be relevant following exit day and it may therefore be prudent to start implementing these changes now for any new transaction documentation which will straddle or go beyond exit day. Aside from the ICMA language, market participants will need to consider updating other contractual or documentary references to “EU” or “EEA” and related terms to refer to the UK, where appropriate, including, for example, screen announcements and other deal related communications.

What happens to the “no-deal” preparations for on-shoring EU law?

The EUWA will be amended so that EU legislation will be saved into domestic UK law on IP completion day. Government powers to make Statutory Instruments (“SIs”) under the EUWA will be modified to allow for further SIs to be made to reflect the end of the transition period.

As a result of all the above, we should expect to see the UK Government release new SIs and update previous transitional provisions to reflect the envisaged end to the transition period in due course. The preparatory work for a no-deal Brexit will therefore likely not have been in vain and documentation will need to be amended to reflect the UK domestic versions of key EU legislation applicable to debt capital markets following IP completion day.