Who decides on Brexit: financial services make it complicated

At least 30 different entities, plus the United Kingdom, will get to decide on the shape of the UK’s relations with the EU after Brexit. This figure is made up of the 27 Member States, the Commission, the Council and the European Parliament (these last three institutions represent the decision making bodies of the EU). If decision-making in each Member State is broken down into executives and parliaments (with some Member States having two decision making chambers and even the possibility of a referendum in some other Member States), the number of entities becomes very large indeed.

This note is a brief introduction to the complexities of the EU’s decision making in international relations. It discusses the problem of ‘mixed’ agreements (agreements between the EU and third countries which contain commitments in which the EU has competence and the Member States have competence), and the rules for decision-making within the EU.

Article 50 of the Treaty on European Union (TEU, as opposed to the Treaty on the Functioning of the EU, TFEU) provides that any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements. Court cases in the UK will determine whatthe UK’s constitutional requirements are. Judgements are expected before year end. The legal issue: can the executive trigger Article 50 or must parliament decide?

Article 50(2) TEU provides that the withdrawing Member State must notify the European Council (the 28 Member States) of its intention to withdraw. Guidelines are then to be drawn up by the Council and, on the basis of these guidelines, the Council and the UK will negotiate the arrangements for the withdrawal. The UK will not participate in the drawing up of the guidelines.

Article 50 provides that the withdrawal negotiations must ‘take into account’ the framework for the UK’s future relationship with the Union. The UK’s future relationship with the Union will be negotiated under Article 218(3) TFEU (a different Treaty from Article 50). The phrase ‘take into account’ means that there should be one overall agreement between the EU and the UK or that there should be two distinct agreements: one, the withdrawal agreement; two, the future relationship agreement. This is a constitutional question facing the EU and despite the inclusion of provisions on withdrawal in the Lisbon Treaty, this problem was not addressed.  It is likely that this question will be resolved politically but any decision on the issue will be vulnerable to review by the EU Courts in Luxembourg.

Article 50 seems to indicate that the agreement on the future relationship must be a separate agreement because it has to be negotiated within the terms of Article 218 TFEU. But Article 218 is about negotiating with third counties, i.e. countries that are not a part of the EU. While Article 50 does seem to allow a blurring of the distinction between the withdrawing Member State and a Third Country, it does seem to provide for at least two agreements. The blurring is only in relation to the timing of the different negotiations. Thus it looks like at least two agreements are needed and the withdrawal agreement comes first.

If Brexit really means Brexit (i.e. exit), this means that the UK will be a third country for the purposes of EU law. Articles 207 and 218 TFEU set out how the EU negotiates with third countries, what the subject of those negotiations can be, and what EU decision making procedures must be followed (unanimity or majority voting in the Council, approval of the European Parliament etc.).  It is worth reading these two articles to see how complex it might become.

What will the content of the future relationship agreement be? We know the UK wants the same access to the EU’s financial markets (and the single market as a whole) as it has today. This means that the decision-making must inevitably be complex.

Financial services are just that: services. And the competence of the EU in services is not complete or exclusive. Member States retain some competences of their own. Where Member States retain competence for a sector but where the EU also has competence, the agreement with third countries is known as a ‘mixed’ agreement. So both the EU and the 27 individual Member States must agree. To make things more complex, unanimity is required in the Council for certain aspects of trade in services such as cultural and audiovisual services or health and education and intellectual property.

So for the more complex aspects of Financial services unanimity will be required in the Council and the approval of the individual Member States will be required. The rule of thumb is: the more complex and innovative the service, the more likely the need for unanimity and the approval of the agreement by the 27 Member States in their domestic law. Getting unanimous agreement will come at a price.

Are there examples of mixed agreements today? CETA, the EU/Canada agreement is a mixed agreement. TTIP will be too. These agreements are not as comprehensive as the agreement the City of London will want with the EU. In the middle of September, the EU Court of Justice will hear arguments whether the draft EU/Singapore agreement is mixed or not. One of the key issues in that case is foreign direct investment. Is portfolio investment EU or Member State competence? Portfolio investment is a fairly low level financial tool. If that is shared competence it can be imagined that many other financial services are mixed. A ruling is not expected before mid 2017.

These complexities arise independently of the more tabloid and hot-topic issues that have emerged in relation to TTIP such as dispute settlement, ring-fencing health and education and general regulatory autonomy. Add to these topics the sorts of UK specific topics such as the free movement of people and it all points to a rather difficult set of negotiations.

The conclusion is stark. There are at least 30 entities that must be in agreement for a deal that is worth doing. The first agreement, the withdrawal agreement, is the easy bit. That can be done in two years. It’s the future relationship agreement that will take time. And today’s international negotiation climate is not auspicious. We have failed to reach agreement in Doha and today TTIP is not looking good. The only significant recent international deal that has been done is on Climate Change. But there lies another problem. It’s a mixed agreement. And it looks like the Netherlands will need a referendum before being able to ratify it.

The UK has decided to take time before launching the withdrawal agreement process. Maybe this is wise. Because a lot of time will be needed to negotiate a future relationship agreement that allows UK financial services to operate in the EU as they do today.