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UK General Election – What does it mean for Brexit?

UK General Election – What does it mean for Brexit?

  • United Kingdom
  • Brexit
  • Competition, EU and Trade - Brexit


On 9 June 2017, the UK woke up to the latest twist in the Brexit process with the announcement of a hung Parliament. Although the Conservatives won the majority of the seats in the House of Commons, it did not secure the 326 seats needed for an overall majority. The Prime Minister, Theresa May, has confirmed that she will be forming a minority Government and that she has reached an arrangement with the Democratic Unionist Party (DUP). No details have yet been given on the way in which this arrangement will operate. If the DUP supports the Conservative Party on its proposed laws, this will enable the Government to meet the overall majority in the House of Commons. But what does this all mean for Brexit? Will it still go ahead? Will there be a softer Brexit? Will the start of the negotiations be delayed? In this briefing, we provide our view on these issues.

Will Brexit still go ahead?

Almost a year ago, the majority of the British public voted to leave the EU. That majority was reached by voters that supported different political parties. Therefore, the general election result does not change the decision to leave the EU.

How likely is it that the Article 50 letter from Prime Minister Theresa May to the European Council will be revoked?

As the outcome of the EU Referendum is not affected by the general election result, we consider it very unlikely that the Article 50 letter will be revoked.

What is the DUP’s position on Brexit?

The DUP’s main priority is the border between Northern Ireland and the Republic of Ireland. It wants to ensure that the soft border with the Republic of Ireland is not threatened. Both the UK and the EU also want to avoid a return to a hard border between Northern Ireland and the Republic of Ireland.

Will the general election result affect the Brexit timeline?

The European Commission is ready to commence the Article 50 negotiations, having had its negotiating mandate approved by the Council of the EU on 29 May 2017. The negotiations are expected to begin on 19 June 2017 and Mrs May has made clear that she intends to stick with that date.

Any delay will, of course, eat into the negotiation time. Donald Tusk, the President of the European Council, has highlighted that any delay in the Brexit negotiations could hinder a deal being reached. Furthermore, any delay could hamper Mrs May’s goal to reach an agreement on the future relationship with the EU alongside the negotiations on the withdrawal agreement. The EU’s position, as set out in the European Council’s negotiating guidelines, is that discussions on the UK’s future relationship with the EU will only commence once the “European Council decides that sufficient progress has been made in the first phase towards reaching a satisfactory agreement on the arrangements for an orderly withdrawal”.

Will the two-year negotiating period stipulated in Article 50 be extended?

The two-year negotiating period can only be extended with the unanimous consent of the European Council and the UK. We do not expect this timeframe to be extended at this stage. The EU has made it clear that it will be pushing for a withdrawal agreement to be concluded before the European Parliament elections which will take place in May 2019.

Will the general election result affect the Government’s Brexit negotiating position?

Mrs May’s Government intended to leave the Single Market and the EU’s Customs Union. The general election result may mean that the Government reconsiders its approach, and puts the Conservative Party’s plan to exit the Customs Union and Single Market in doubt.

Could the UK remain in the Single Market?

The new Government could reconsider leaving the Single Market. One option would be for the UK to remain in the European Economic Area (EEA). The EEA is an area composed of all of the EU Member States, as well as Iceland, Liechtenstein and Norway, which are three of the four States in the European Free Trade Association (EFTA). The EEA was created and is governed by the EEA Agreement, a trade agreement which was signed on 2 May 1992 and entered into force on 1 January 1994. Each of the EU Member States (including the UK) are parties to the EEA Agreement in their own right, as well as through the EU.

The EEA Agreement enables Iceland, Liechtenstein and Norway to be part of the EU’s Single Market. As with the EU Treaties, the substantive scope of the EEA Agreement includes, at its core, the four freedoms (goods, services, people and capital). It does not, however, cover certain EU policies including the Common Agricultural Policy, the Common Fisheries Policy, the Customs Union or Common Trade Policy. Remaining in the EEA would, therefore, enable the UK to continue trading goods and services freely within the EEA (to the extent covered by the EEA Agreement) but, in return, it would continue to have to pay into some EU budgets (but to a lesser extent than it currently does), accept the free movement of workers and abide by EU law in the areas covered by the EEA Agreement. As the EEA States are not in the EU’s Common Trade Policy, the UK could enter into its own free trade agreements.

Does the UK have to be in the EU to be in the EEA?

Mrs May’s Government was of the view that once the UK leaves the EU, it will automatically leave the EEA. However, is this correct?

Article 126 of the EEA Agreement provides that the EEA Agreement shall apply to the territories establishing the European Economic Community (now the EU) and to Iceland, Liechtenstein and Norway. The UK Government, therefore, seems to be relying on this provision to argue that once the UK leaves the EU, the EEA Agreement will no longer apply in the UK. This is not, however, explicitly stated in the EEA Agreement. Furthermore, there is no expressed provision in the EEA Agreement to ask an EEA State to leave the EEA if they cease to be a member of the EU or of EFTA.

Will the UK automatically leave the EEA once it leaves the EU?

According to Article 127 of the EEA Agreement, each contracting party “may” withdraw from the EEA Agreement “provided it gives at least twelve months’ notice in writing” to the other contracting parties. The UK will not, therefore, “automatically” leave the EEA once it leaves the EU and separate notice will need to be given.

The decision to leave the EEA is a voluntary act and the UK will need to give at least twelve months’ notice to the EEA States of its decision to leave. Some, however, view this as a tick box exercise, as notice could be given during the course of the Article 50 negotiations with the EU so that the UK leaves the EEA once it leaves the EU.

Could the UK join EFTA?

Mrs May’s Government dismissed the UK joining EFTA once it left the EU. EFTA is an association which was established in 1960 to promote economic cooperation, integration and free trade for the benefit of its States which, at that time, included the UK. It was an alternative association for European countries that were either unable or unwilling to join the then European Economic Community (EEC). In 1973, the UK left EFTA to join the EEC which later became the European Community and is now known as the EU. Today, EFTA consists of 4 members: Iceland, Liechtenstein, Norway and Switzerland.

EFTA and its members are governed by the EFTA convention which provides the legal basis for the organisation. It does not, however, create any significant level of supranational government.

Being an EFTA State does not provide access to the Single Market. However, currently three (Iceland, Liechtenstein and Norway) of the four EFTA States are also members of the EEA and, therefore, have access to the Single Market on this basis. Switzerland has negotiated access to the Single Market by means of bilateral agreements with the EU.

Unlike the EU, EFTA is not a customs union and does not have its own tariff setting mechanism. It does, however, have a coordinated trading policy and concludes free trade agreements on behalf of its members. To date, EFTA has concluded free trade agreements with over 35 jurisdictions including Canada, Hong Kong (China), Israel, Republic of Korea, Mexico, Singapore and the UAE. It is also in negotiations with a number of other countries including India, Indonesia, Malaysia and Vietnam.

The free trade agreements normally grant duty-free access for all industrial products (including fishery products) and agricultural products. Furthermore, they include trade remedies as well as provisions on competition, the protection of intellectual property, and on payments and transfers. In addition, many of the free trade agreements contain substantive rules liberalising trade in services, investment and public procurement, as well as provisions on trade facilitation and sustainable development. In addition to the EFTA free trade agreements, EFTA States are able to negotiate their own free trade agreements with other third countries.

What could the general election result mean for financial services?

For international banks located in London planning for Brexit, the general election result creates a new wave of uncertainty.

Although it is difficult to construe the result as a rethink on whether Brexit should happen, it raises a question over the type of Brexit which the Government advocates. To the extent that a "softer" Brexit may now be a possibility with the chance of some form of mutual access rights, this is significant. It raises the possibility that banks passporting from the UK into the EU and banks passporting from the EU into the UK may not have to alter their business models as much as currently anticipated.

At first glance, the general election result raises the hope of a more orderly transition to a post-Brexit world. On reflection, however, the banks may take the view that this throws up more uncertainty and the need to consider and stress-test even more scenarios. This could create, at best, further inconvenience and, at worst, more cost.

Outside of the Brexit question, it is unclear whether the City regulators, such as the Prudential Regulation Authority and Financial Conduct Authority will take the view that there is a need to delay the publication of new rules and initiatives, which have been on hold during the general election campaign. Perhaps ironically in light of Brexit, there will be pressure on them to press ahead with implementing EU laws, such as MiFID II, to meet the deadlines set by the EU. Even with the political uncertainty, the regulators have to progress with regulating the City.


Mrs May called the general election with the intention that it would result in her Government having a greater majority in the House of Commons ensuring a smoother process in the Brexit negotiations. In fact, the general election has resulted in creating more uncertainty for businesses and raises questions about what kind of Brexit the Government will now be seeking.

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