Brexit and EU Regulatory Agencies

Introduction

International trade is now as much, if not more, about rules and standards as about tariffs.  Much of the regulatory framework for UK business and commerce is governed by EU law, which sets the rules and standards for trade throughout the Single Market.  In some specific sectors this EU law is administered and/or applied by EU regulatory agencies (as opposed to national authorities applying EU law).  In others the agencies supply expert advice to underpin policy and decision-making.  These EU agencies are also in some cases responsible for granting the authorisations (i.e. permissions) both for products to be traded and for businesses to operate within the EU.  The purpose of EU agencies in the Single Market is to ensure consistency and high standards so as to facilitate cross-border trade within the EU and thus grow EU GDP.  These arrangements have been developed during the UK’s 40 years of membership and disentangling the UK from them will be complex, costly and difficult.

This paper looks at the most important EU Single Market regulatory agencies; it considers the implications of Brexit in each case and the options for the UK.  The Government’s European Union (Withdrawal) Bill will incorporate the relevant EU law into UK law, at least for the time being, but that still leaves important questions about the role of the agencies unanswered.  These questions include:

1. Will it be possible for the UK to remain within the scope of these agencies – either fully within the scope or affiliated via, for example, an association agreement?  Would such arrangements enable UK products and businesses to continue to trade and operate throughout the EU?
2. Even if such participation could be negotiated, what are the implications of such arrangements; in particular, how would disputes be adjudicated?
3. Will the UK in addition, have to set up its own UK agency for the sector concerned to ensure UK business is governed by appropriate rules and then negotiate access separately?
4. How much regulatory independence will the UK have after Brexit?  Put simply, what scope will there be for UK rules to diverge from EU rules in future?  Or will companies wanting to trade with the EU have to follow EU rules anyway?
5. If UK rules do diverge, will it be possible to have mutual recognition agreements with the EU so that the products and services meeting slightly different UK rules can be deemed to be equivalent and thus still trade freely with the EU?

In addition to the EU’s regulatory agencies, there are some Single Market sectors where the application of EU cross-border regulation is still in the hands of national authorities; this paper also considers some of those sectors.

EU Regulatory Agencies

A list of the EU’s Single Market regulatory agencies with a brief description of their role and their web address is attached as an annex.   This paper looks at the key Single Market agencies by sector.  Three issues concerning the agencies are not dealt with: the agriculture and fisheries agencies are not mentioned– with the exception of EFSA –as they are referred to in other SEE papers on Brexit; the financial services agencies are excluded; and the paper does not deal with the relocation of those agencies currently situated in the UK.

Aviation & Transport

The European Aviation Safety Agency (EASA)

EASA is the expert body on EU aviation safety legislation and ensures uniform implementation of European aviation safety legislation through inspections, training and standardisation.  The UK is a very active participant in its work; it has been estimated that the UK and France provide two-thirds of all input into European aviation safety regulation and that between them they undertake almost 90 per cent of EASA’s outsourced activities.¹

EASA is solely responsible for the type-certification of aircraft and other aeronautical products (engines and parts) although Member States’ national authorities issue, under EASA monitoring, individual certificates to aircraft and organisations and personnel located in their territories.  Thus, when an aircraft is certified in one EU Member State, it is certified for all other EU Member States.  EASA also issues certificates for aircraft design organisations located in third countries and authorises third-country (non-EU) operators.

Clearly, post-Brexit, high aviation safety standards will need to be maintained in the UK.  In addition, UK aircraft flying in the EU will have to meet EU safety rules and standards or, subject to agreement, their equivalent. The main options open to the UK appear to be:

1. Negotiate an agreement with the EU whereby the UK can still participate in EASA.  The UK would therefore still adopt and apply EU law (as Norway, Iceland, Liechtenstein and Switzerland do now).  In other words, the existing regulatory environment would continue.  But this would mean acceptance by the UK of a role for the European Court of Justice (CJEU) in dispute settlement; or
2. Set up a parallel UK safety certification and inspection system and seek a bilateral aviation safety agreement with the EU whereby mutual recognition of certificates applies (in much the same way as, for example, now exists between the EU and the US authorities).  This would be costly – involving a major expansion of the Civil Aviation Authority (indeed some UK manufacturers and airlines might choose to re-locate part or all of their business in the EU to avoid double regulation).  The Civil Aviation Authority has said that “it makes no sense to recreate a national regulator”.²  Moreover the UK’s ability to diverge significantly from EU rules would be limited, not least because they are in line with world rules.  And the UK’s influence would be much less than under option (i), not just in EU but potentially more widely in global bodies such as the International Civil Aviation Organisation, where the EU plays a major role.

European Maritime Safety Agency (EMSA)

The UK’s international obligations as regards maritime safety are met through its membership of EMSA but most maritime agreements are global, through the International Maritime Organisation and the International Labour Organisation.  The EU generally transposes such global agreements into EU law.³  EMSA’s remit was expanded in 2016 so that it can co-ordinate with the Frontex and the European Fisheries Control Agency to exchange information concerning the protection of the EU’s borders but the UK opted out of this measure.⁴

Member States are part of the Single Market in shipping services and EMSA is the safety authority that maintains common standards across the EU.  As it allows third countries to belong to it, albeit not as full members, the UK would potentially have the option to remain a member if it wished to do so.  Norway and Iceland are members and have representatives on EMSA’s administrative board because they are in the Single Market as members of the European Economic Area.  As with EASA, the ultimate authority for settling disputes is the CJEU.

European Railways Agency (ERA)

The ERA is largely concerned with interoperability of railways in the Single Market.  Cross-border train services, for both passengers and freight, have long been inhibited by a wide range of obstacles including different power and signalling systems, national protectionist measures and national requirements for rolling stock certification.  EU railway legislation has opened up services across Europe to competition and the most recent legislation (the fourth railway package) continues that process and gives further responsibilities to the ERA.  Several British companies have won contracts to operate train services in other Member States.

As the UK will wish to maintain freight and passenger services through the Channel Tunnel, it will need to reach agreement with the EU about interoperability.  Third countries can participate in the work of the ERA but, again, disputes are ultimately resolved through the CJEU.

Chemicals

The European Chemicals Agency (ECHA)

Under the EU law known as REACH (Registration, Evaluation, Authorisation and restriction of Chemicals) only chemicals that are registered with ECHA can be sold in the EU.⁵  This applies to chemicals sold by third country companies as well as EU ones.  Chemicals are a major export for the UK.  According to the Government’s White Paper of February 2017, chemicals are the second largest manufacturing export from the UK to the EU, worth nearly £15 billion a year in 2015.⁶  Over 6,000 British companies have registrations with the ECHA, the second largest number in the EU after Germany.⁷

Post Brexit, since UK exporters to the EU will anyway have to register their chemicals with ECHA, the main issue is what rules will apply in the UK.  It is clear there will need to be rules for UK chemicals both for reasons of public safety and because without rules the UK could become a dumping ground for chemicals illegal in the EU.  REACH registrations by UK companies also reflect the fact that many third country businesses register with the ECHA via a subsidiary in the UK; these businesses could have to relocate to the European Economic Area after Brexit to maintain their registration.⁸

The main options seem to be either:

1. Follow the same model as Switzerland and set up a UK register which replicates all of ECHA’s decisions thus ensuring the same standards apply in the UK.  In other words, the existing regulatory environment could continue including the role of the CJEU.  This would avoid UK firms having to face two sets of rules, one for UK domestic use and another set for exporting to the EU; or
2. Set up a completely new UK chemicals agency.  This would be costly and difficult since the UK would have to establish its own database rather than rely on that of ECHA, and the expert staff required are within ECHA.  And, to the extent UK rules diverge, it could pose regulatory burdens on UK companies who could face one set of product rules for exports and possibly different rules for UK domestic sales.  (In reality the position would be more complex as, with supply chains closely entwined throughout Europe, products often cross borders several times).   It would therefore be preferable to have “mutual recognition” of UK and EU rules, which would require them to be similar or identical.

Energy

Agency for the Cooperation of Energy Regulators (ACER)

The EU Internal Energy Market (IEM) has been established through a series of EU legislative measures between 1996 and 2009 establishing common regulatory frameworks for market access, transparency, and consumer protection.  It also supports interconnection between Member States and includes measures to strengthen security of supply.  UK energy policy has been very influential in both promoting liberalisation and developing the EU regulatory framework.  ACER is the body which coordinates the work of national regulatory authorities underpinning the Energy Single Market.  It is also a source of expert advice and can, under certain conditions, take binding decisions relating to cross border infrastructure.

Two key energy policy issues posed by Brexit are first, rights of access to, and the regulatory framework for, interconnectors and second, the developing Single Electricity Market for Ireland.  There are currently three electricity and three gas interconnectors linking the UK and the EU with a further eight anticipated for completion by 2022.⁹  Currently the UK is a net importer through the interconnectors although flows the other way also provide valuable security of supply back-up for the EU.  As more energy is generated from renewables, interconnectors will be of increasing important in balancing the intermittent nature of renewables.¹⁰

The all-Ireland Single Electricity Market (SEM), which is jointly regulated by the Northern Ireland and Irish authorities, is important to ensure security of supply, both north and south of the border.  The Government’s recent position paper on Northern Ireland¹¹ recognised the strategic importance of the SEM to domestic and business consumers and proposed that “the new framework relevant to the energy market in Northern Ireland and Ireland” should:

• Facilitate the continuation of a single electricity market covering Northern Ireland and Ireland; and
• Facilitate the continuation of efficient electricity and gas interconnection between the island of Ireland and Great Britain.

The paper also said these principles “highlight the need to continue the operation of a single electricity market”, which is “by far the best option for the electricity market in Northern Ireland in the medium term at least”.

The options post Brexit would appear to be:

1. Continued full membership of the IEM with the UK thus continuing to apply and comply with the EU IEM rules and benefitting from the security of supply “solidarity”.   This appears to be in jeopardy at present given that it would include accepting a role for the CJEU in any disputes.  However, the UK Government’s recent position paper on Northern Ireland suggests that the all-Ireland SEM might be (another) candidate for a special Northern Ireland/Ireland arrangement, which could either leave the all-Irish market subject to EU law or, if such can be negotiated, seek a solution which leaves Northern Ireland outside the jurisdiction of EU institutions; or
2. Negotiate a separate bilateral agreement to cover such matters as access to, and the regulatory framework for, interconnection and market coupling (a mechanism for cross-border electricity trading).  The disadvantage is that the UK would have much reduced influence on EU interconnection policy.  It is also doubtful if the UK could still benefit from EU solidarity mechanisms for security of supply.  The UK might be able to negotiate membership of ACER as a third country.

Food

European Food Safety Authority (EFSA)

EFSA provides independent scientific advice on food-related health and environmental risks to underpin EU decisions on food policy, including the approval of pesticides, food additives and genetically-modified organisms (GMOs).  In addition, DG Health in the Commission has a direct role inspecting food suppliers across the world to ensure that they are compliant with the EU’s health and hygiene rules.  Commission staff, often supported by colleagues from Member State agencies, carry out up to 240 inspections a year in as many as 130 countries.¹²  This process requires specialist staff, including vets, of which there are already shortages in the UK.  Ensuring high standards in food imports isn’t just important for UK consumers.  The EU will want to be satisfied that the UK’s exports are compliant with EU food safety standards and it could only be certain of that if the UK could demonstrate it has proper checks on its food supply chain, including imports.

The Government has already undertaken to maintain equivalent food safety standards after Brexit in the EU (Withdrawal) Bill.  Indeed, as the debate in the summer of 2017 about allowing more foodstuffs from the USA into the UK as part of a future free trade agreement (FTA) demonstrated, any suggestion that the UK might be willing to adopt lower standards to facilitate such FTAs would be controversial and might threaten UK exports to the EU.¹³  However, it is by no means clear the Government will wish to follow the EU in every respect, for example over the approval of GMOs and pesticides.

The best option for the UK would be to apply to participate in the work of the Authority – which third countries can do if they have an agreement with the EU.  The extent to which this would allow the UK to benefit from its work would have to be negotiated.  A separate negotiation would be required to determine the extent to which the UK might be able to benefit from Commission checks on food suppliers in third countries.

The Food Standards Agency is undertaking an audit of food safety needs after Brexit and will need to be prepared (with its Scottish counterpart) to take on additional monitoring duties after Brexit.  Given the shortage of time until March 2019 in which to put alternative arrangements into place, it would be expected that the Government would seek to maintain the existing arrangements with the EU during any transitional period.

Pharmaceuticals

The European Medicines Agency

The EMA (currently located in London, which it is expected to leave post-Brexit) plays an important role in facilitating patients’ safe access to new medicines.  For medicines to be legally marketed in the EU they must be licensed in a Member State.  The EMA, employing nearly 900 staff, acts as a one-stop-shop for scientific evaluation of applications for marketing new treatments and monitoring the safety of drugs and veterinary products across the EU.

The UK pharmaceuticals sector is an important contributor to UK exports – the fifth largest manufacturing exporter to the EU in 2015, with a value of over £10 billion.¹⁴  The UK-based pharmaceutical and health care sectors account for almost half of all UK business research.¹⁵

Post Brexit, key questions to be answered include:

1. whether medicines currently licensed in the UK can continue to be sold in the EU
2. can medicines currently licensed in the EU continue to be sold in the UK?
3. will UK pharmaceutical manufacturers continue to be able to access the EMA’s evaluation service?
4. will medicines licensed in the UK post-Brexit be able to be sold in the EU?  If not, will drug companies prioritise access to the larger EU market, thus potentially meaning that new medicines reach UK patients months or years later?

The risks in this sector have been recognised by both the Government and the pharmaceutical industry.   In July 2017 the Secretaries of State for Health (Jeremy Hunt) and Business (Greg Clark) wrote an open letter saying that they want “to find a way to collaborate” with the EU’s drug regulatory system post-Brexit.  They said: “our aim is to ensure that patients in the UK and across the EU continue to be able to access the best and most innovative medicines and be assured that their safety is protected through the strongest regulatory framework”.¹⁶

While the Secretaries of State did not spell out specific arrangements, the main possibilities seem to be:

• an agreement whereby existing authorisations of medicines are mutually recognised by the UK and EU, thus avoiding potential disruption of already existing products; and/or,
• an agreement whereby the UK’s Medicines and Healthcare Products Regulatory Agency (MHRA) would continue to participate in the EMA’s assessments.  Under this approach separate but identical proposals could be sent to the UK authorities and to the EU Member State licensing authority with mutual recognition of such authorisations.  In effect, the UK would remain part of the EU system but would still have some input.  But such arrangements would involve a role for the CJEU in handling disputes;
• adopt the position of Norway, Iceland and Liechtenstein who accept EMA recommendations on new drugs without any input;
• establish a separate UK assessment system and seek to negotiate a mutual recognition arrangement whereby the EMA and the UK would recognise each other’s assessments. This would be costly even if the necessary expertise is available in the UK.  The ability for the UK to diverge from EU rules would be very limited as the continued co-operation the two Ministers say they seek can only be achieved while the UK and EU regulatory systems remain closely aligned.

Trademarks and designs

The European Intellectual Property Office (EUIPO)

EUIPO is the Agency responsible for the registration of the European Union trade mark and the registered Community design; two unitary intellectual property (IP) rights that are valid across the 28 Member States of the EU.¹⁷  Every year, it registers an average of 135,000 EU trademarks and close to 100 000 designs.In addition, in cooperation with national IP offices throughout the EU-28, the EU IPO supports the harmonisation of registration practices for trademarks and designs so that users receive a similar registration experience throughout the EU level.

Post Brexit, if no arrangements are made, neither EU trademarks nor EU designs will cover the territory of the UK, reducing the scope of protection of rights holders.  The Government’s White Paper was silent on this issue but there are important questions to be addressed: will owners of such EU rights be able to convert their EU registrations into national UK registrations and retain the original EU filing date?  Will new EU registrations be automatically entered into the UK register and vice versa?  Or will those seeking protection need to file in both the UK and EU?  There is no provision in EU law for non-Member States to participate in the work of the EUIPO.

The registration of patents through the European Patent Convention is not part of this system but the Unified Patent Court, which a group of EU Member States (including the United Kingdom) have agreed to, does come under the auspices of the EU.  For the UK to stay involved in the Unified Patent Court, the agreement establishing it would have to be amended.

EU regulation where no EU agency exists

This paper has focussed on those areas where the EU regulatory framework is supported by pan-EU regulatory Agencies.  However, there are numerous other sectors where a common EU regulatory framework, usually applied and operated by national authorities, is critical for both access to the EU market and effective operation of that market.  Three key sectors are:

1. Airline routes: The EU Aviation Single Market, created in the 1990s, provides the rights for EU airlines (those at least 49 per cent owned by EU nationals) to operate throughout the EU.  These rights of access allow a UK airline, for example, to pick up passengers in Rome and fly them to Madrid and also to operate routes within other Member States.   If the UK is outside the aviation single market these rights will no longer exist.  Without a new agreement, UK airlines will have to set up a subsidiary in another Member State (as Easyjet has done in Austria) thus moving economic activity from the UK.  The options open to the UK include becoming a member of the European Common Aviation Area (ECAA), to which the aviation single market regulatory framework applies and to which both EEA countries and eight South Eastern neighbouring states are parties.  This would mean applying EU rules in full and accepting a role for the CJEU.  The alternative would be to negotiate a bespoke bilateral agreement, possibly in two stages with an interim agreement to avoid disruption, with a bespoke “open skies” agreement to follow which would also give EU airlines reciprocal access to the UK market.  It is not clear whether such an agreement would give UK airlines all, or just a limited set, of the benefits of the aviation single market.  And other issues such as consumer protection, air traffic management (the Single European Sky), aviation security rules and emissions trading may also come into play.  A further complication is the position of Gibraltar where the airport has long been the subject of UK/Spain dispute which has blocked much EU aviation legislation being applied.
2. Broadcasting: EU law (the Audiovisual Media Services Directive 2010) established a “country of origin” principle of regulation which allows broadcasters to transmit across the EU provided they comply with the rules of the Member State where they originate.¹⁸  This means that broadcasters based in the UK and subject to oversight by the UK authorities can broadcast to the rest of the EU – and vice versa.  As a result the UK has become the EU’s broadcasting hub with many broadcasters making the UK their base, with an estimated value of £1 billion p.a. to the UK economy.  If this is not able to continue, these broadcasters will have to set up elsewhere within the EU.¹⁹
3. Telecommunications: Like energy, there is an extensive and long-established EU regulatory framework which sets the conditions for both operators in, and regulators of, the EU telecoms market.  And like energy the UK has been influential in shaping both this liberalised market and the regulatory framework.  After Brexit, it is clear there will need to be agreements between the UK and the EU.  One obvious example is roaming charges, which were finally abolished in the EU in June 2017.  Without such agreements UK customers could end up paying more than customers in the EU and UK operators might be exposed to unfair costs.  Equally fundamental questions concern the extent to which the UK might seek to depart from the EU rules and if so, whether that would impact on UK consumers and businesses.

Conclusions

Because international trade is now as much, if not more, about rules and standards than about tariffs, the arrangements to be negotiated on these matters are of vital importance to UK businesses trading in goods and/or services and to their customers.

The EU’s regulatory agencies have considerable expertise.  To replicate that capability would be an immense task, especially within a short period of time.  Such duplication of function would have additional costs, in both the short and the long-term, and might affect the ability of British businesses to continue to trade on a friction-free basis in the EU.  It would also be unlikely to lead to any improvement in quality as the EU agencies are widely regarded as providing a good service.

In several sectors, the scope for diverging from EU rules is in many cases very limited if the UK wants to maintain its exports to the EU and not have the complexity (and expense) of dual regulation.  In addition, the loss of UK influence over both EU policy decisions and the day-to-day operation of the agencies could have negative consequences for UK business.

The Government’s decision to agree in principle to an interim or transitional period after leaving the EU is a recognition that issues such as those posed by the EU’s agencies and the UK’s relationship with them will not be fully resolved by March 2019.  Continuing UK participation in the agencies beyond that period is likely to necessitate a role for the ECJ in dispute resolution.

ANNEX

EU Single Market regulatory agencies