UK: Boardroom Brexit 2 August

Last Updated: 7 August 2019
Article by Paul Hardy, Valerijus Ostrovskis and Richard Bonnar

Welcome to the latest issue of Boardroom Brexit, covering developments since the election of Boris Johnson as leader of the Conservative party and, as a consequence, his replacement of Theresa May as the UK's new prime minister.

In this issue we:

  • outline the new government's Brexit strategy;
  • run through the possible outcomes to the Brexit negotiations, and estimate the chances of each; and
  • provide a checklist for no-deal scenario planning, given the increased likelihood of this outcome, and suggest actions you should take.

Recap of the last four months

On April 11, the UK and EU agreed to extend the negotiation deadline until October 31, 2019. Under UK law, exit day has been amended to reflect the new departure date.

  • The subsequent talks between the government and Labour for a cross-party compromise broke down.
  • Theresa May's plans to reintroduce the draft Withdrawal Agreement in the Commons for a fourth time, including making provision for a possible second referendum, were largely opposed.
  • Under mounting pressure, Theresa May announced her departure as UK prime minister.
  • The new European Parliament met for the first time on July 2, 2019, under its new president, Italian MEP David Sassoli. The new European Commission takes office on November 1, 2019, and will be led by Ursula von der Leyen. The new president of the European Council will be Charles Michel, the Belgian prime minister. He will take office on December 1, 2019.
  • Boris Johnson won the Conservative leadership race and entered Downing Street as UK prime minister on July 24, 2019.

The UK's Brexit strategy: No deal unless the Irish backstop is dropped

The UK's new prime minister has outlined his government's Brexit strategy:

  • The UK will prepare in earnest to leave the EU on October 31, 2019, "no ifs, no buts."
  • The preference is to leave with a deal, but on terms radically different to the current Withdrawal Agreement. This includes the abolition of the Irish backstop.
  • If the EU is not open to such changes, the UK will leave without an agreement.
  • The UK will not negotiate with the EU until the latter indicates that the Withdrawal Agreement can be amended. This has led to a standoff in negotiations.

The appointment of key Brexiters to the new cabinet (comprising the highest-ranking ministers and the central decision-making body of the UK government) reinforces the impression of a renewed commitment to leaving the EU on October 31, 2019. All cabinet members have had to accept this as a possible outcome in taking a cabinet appointment.

The UK prime minister has also appointed Dominic Cummings as his de facto chief of staff. Vilified and celebrated in equal measure, he was the architect of the Vote Leave campaign in the 2016 referendum, and is known as an effective but ruthless operator.

Crisis planning begins in the UK

  • The Cabinet Office will begin immediate preparations for a no-deal exit, under the leadership of Michael Gove. Two new emergency cabinet committees have been established to streamline decision-making across Whitehall:
    • A six-person exit strategy committee, chaired by the UK prime minister, will meet twice a week to take the crucial decisions on the UK's Brexit policy over the next three months. The other members will be the foreign secretary, the Brexit secretary, the chancellor, the attorney general, and Michael Gove, who will deputize for the prime minister in his absence.
    • A separate daily operations committee, chaired by Michael Gove, will meet every day until (at least) October 31, 2019, to oversee the detailed implementation of the UK's Brexit policy.
    • Dominic Cummings will attend both these committees – an indication of his importance.
  • The new chancellor, Sajid Javid, will spend GBP100 million on a public information campaign to inform householders and businesses of the preparations necessary for a no-deal Brexit. A further GBP2.1 billion will be made available to "turbo boost" the UK's no-deal contingency planning, on top of the current GBP4.2 billion. Funding will include:
    • an extra 500 border force officers, meaning the government will have added up to 1,000 officers this year;
    • boosting capacity to process UK passport applications this year, helping avoid delays;
    • doubling the support made available for customs agents to train new staff or invest in better IT so businesses can get the support they need to complete customs declarations;
    • improving transport infrastructure around ports and additional funding for Operation Brock to manage traffic disruption in Kent; and
    • enhancing support available on government helplines.
  • In announcing this new funding, the chancellor said: "We want to get a good deal that abolishes the anti-democratic backstop. But if we can’t get a good deal, we’ll have to leave without one. This additional GBP2.1 billion will ensure we are ready to leave on October 31 – deal or no deal."

The view from Europe

The EU is in a state of transition after the election of a new European Parliament and the appointment of a new president of the EU institutions. The message, however, remains the same: the Withdrawal Agreement will not be renegotiated, but the Political Declaration may be amended.

Michel Barnier, the chief EU Brexit negotiator, has described UK prime minister Boris Johnson's first speech as "combative," and his demand to abolish the backstop as "unacceptable." The current president of the Commission, Jean-Claude Juncker, exchanged his personal mobile number with the new UK prime minister so that they can discuss matters at any time, but reiterated that "the Withdrawal Agreement is the best and only agreement possible." The Irish taoiseach, Leo Varadkar, repeated the same message to Boris Johnson in a terse call this week.

The president commissioner-elect, Ursula von der Leyen, has said she is open to a future extension should the justification be sufficient. Some of the EU-27, notably France, are skeptical of this. In the EU Council, a growing number of Member States are willing to close the process (with or without a deal) on October 31, 2019, in order to allow the new EU Commission (taking office on November 1) to focus on other policy and regulatory priorities.

Analysis of the possible outcomes

Note that the possibilities below are not mutually exclusive. For example, it is feasible that a general election may occur with a no-deal scenario.

a) A general election: 35% chance

Under the terms of the Fixed-term Parliaments Act 2011 (FTPA), the next general election is scheduled for May 5, 2022. However, Boris Johnson may wish to call an early election, or the Commons may force one. There are strict preconditions under the FTPA for achieving either of these outcomes:

  • The government can call an early election if two-thirds of MPs vote in favor of the motion.
  • The Commons can call an early election if:
    • a majority of MPs support a vote of no confidence in the government; and
    • after a 14 day period, a majority of MPs do not support a vote of confidence in the government.

In either case, Parliament is dissolved (not necessarily immediately) and a general election takes place 25 working days from the date of dissolution.

Parliament rose for summer recess on July 25, 2019, and will return on September 3, 2019. Jo Swinson, the new leader of the Liberal Democrats, tabled a vote of no confidence before the recess but the Labour party declined to support it. It is likely that a no confidence motion will be tabled by opposition parties in September as a means of trying to stop the UK leaving the EU without a deal. Given the government's slender majority of one, it would take only a few MPs from the Conservative party to rebel for a no confidence motion to be successful. It is, however, less likely that a general election could take place before October 31, 2019, given the time periods that need to elapse under the FTPA. To be certain of this, the no confidence motion had to be tabled before the summer recess and voted on on September 3, 2019. It is also far from certain that the dissolution of Parliament will prevent the UK leaving the EU without a deal on October 31, 2019 – see below.

Alternatively, Boris Johnson may decide to call an election on the premise that progress cannot be made with the current Parliament and that he requires a new mandate to fulfill his pledges. The indications are certainly there. His first week in office resembled a campaign, the Conservatives are ahead in the latest YouGov poll, and Johnson would rather fight Corbyn in that election rather than a replacement Labour leader. The key question is whether this election would be before or after October 31, 2019, as the prime minister has publicly committed to delivering Brexit before another election.

b) A no-deal Brexit on October 31: 45% chance

The chances of a no-deal Brexit have risen significantly since the new UK government took office, for the following reasons:

  • The UK's demand to remove the Irish backstop, rather than, say, put a time limit on it, is unlikely ever to be accepted by the EU.
  • The EU heads of state meet only once before the deadline on October 31, 2019, so there is little opportunity for detailed renegotiation.
  • With neither side willing to make the initial approach, the current standoff does not bode well for a deal being agreed.
  • The UK government should be taken at its word that it is preparing for the UK to leave the EU without a deal if agreement cannot be found.
  • No-deal is the default outcome. Positive interventions both in the UK and EU are required to stop it:
    • In the UK, exit day is October 31, 2019, under UK law. Further legislation would be needed to amend that date. Without government support, it's not easy to see how MPs can propose legislation to amend this date, unless the Commons Speaker, John Bercow, intervenes and rules that they can.
    • In the EU, exit day is October 31, 2019, as a matter of EU law. All EU Member States have to agree extend that date, including the UK. Even were the EU willing to offer an extension, it would require Boris Johnson to agree to it.
  • The UK attorney general has said that he does not think the holding of a general election would affect exit day under UK law.

c) An extension of the deadline: 10% chance

The new UK government has made multiple public commitments to leaving the EU on October 31, 2019. The stated reason for doing so is to regain public trust in national politics. Were the prime minister to agree to a decision to extend the negotiations, it would undermine the main thrust of his Brexit strategy, and risk losing him significant credibility. We therefore think an extension is currently highly unlikely.

d) A second referendum: 10% chance

A second referendum would require a significant extension of the negotiating period. The only situation in which the government might agree to a second referendum would be as an alternative to a general election – i.e. as a means of avoiding a no confidence motion. Again, we think this prospect is currently unlikely.

A checklist for no-deal planning

October 31, 2019, will be upon us very quickly, so now is the time to review your Brexit planning. In so doing, it's important you don't miss less obvious risks. Check your planning against this list of issues, and ask us for any additional help with your review:

  • New barriers to exports of goods or services – customs clearance, tariffs, additional regulatory approvals – from the UK to the EU?
  • New barriers to exports of goods or services – customs clearance, tariffs, additional regulatory approvals – from the UK to countries with an EU trade agreement?
  • New barriers to imports of goods or services – customs clearance, tariffs, additional regulatory approvals – from the EU to the UK?
  • New barriers to imports of goods or services – customs clearance, tariffs, additional regulatory approvals – from countries with an EU trade agreement to the UK?
  • Changes in labelling requirements
  • Changes in data protection legislation – EU-UK restricted data flows?
  • Changes in immigration legislation – impact on talent retention, attraction and business travel?
  • Changes to tax legislation – VAT, withholding tax?
  • Changes in the scope of intellectual property protection?
  • Contracts – Brexit-proofed? Choice of law, pricing ratio, material adverse changes?
  • Changes in funding sources?
  • Impact of 2018 EU Withdrawal Act – any UK regulatory changes?
  • Sterling exchange-rate fluctuations – treasury/hedging policy?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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