When the U.K. voted strongly to leave the European Union two weeks ago, it marked a significant turning point for many of the EU’s member states and countries around the world. The shocking developments affected the British pound, which hit its lowest level in over 30 years while Europe suffered a deeper loss as France and Germany’s stock markets plummeted. In light of the turbulence and uncertainties, investors scaled back and turned to safer investments such as the American dollar and Japanese yen. Meanwhile, companies are starting to think about the profound implications of Britain’s divorce from the EU on their business.
“The U.K. will inevitably modify its regulatory framework over time, and this may affect key compliance areas such as data privacy, antitrust and money laundering, as well as some sector-specific regulations such as medicine-related directives,” said one European Compliance and Ethics Director in the pharmaceutical industry. “Enforcement actions will change … the European Union authorities will no longer have jurisdiction to investigate and sanction infringements, as this will be entirely in the hands of U.K. regulators.” In turn, this will have a profound impact on compliance programs in the European Union, where special provisions will have to be made for the U.K., “which will have to be treated as a third-party country, such as Russia,” the Compliance and Ethics Director added.
Regulatory change may start taking shape from 2018 (the “separation” process is expected to take at least two years). After that, compliance and governance practitioners should prepare to operate in a different environment. “The biggest long-term compliance question relates to which regulations and what approaches the U.K. government and authorities will adopt from the broad quantity of European Union rules and regulations,” said Peter Susser, Chair, International Employment Law Practice Group, Littler Mendelson P.C. “Will they adhere to all or the vast percentage of requirements established up to now by EU directives and regulators (to make continued access to markets across the region easier to negotiate), or will they exercise the flexibility to pursue a distinctive path when formally separated from the EU?” Regulatory passporting, for instance, (widely utilized in the financial sector and certain other areas of business), has provided the ability for companies in one regulatory jurisdiction within the European Union to ‘passport’ their licenses to other member states. Those practices are likely to be greatly affected—unless the U.K. negotiates treaties or other arrangements with the EU to allow continued broad access. “Additional compliance efforts beyond a single authority is something that may need to be considered for future business activity; looking ahead, further complexities could be added if some members in Continental Europe try to renegotiate elements of their relationships with the EU.”
Following the referendum vote to leave the EU, the U.K. Financial Conduct Authority released a statement highlighting that companies must continue to “abide by their obligations under U.K. law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.” Moreover, the U.K. Financial Reporting Council, which sets the standard for corporate governance, said, “our regulatory framework is unchanged and we will continue to apply it.”
“Brexit could mean a number of substantial changes in legislation and how the U.K. ultimately deals with the European Union and the rest of the world,” said UK-based Viri Chauhan, Global Head of Governance, Risk and Compliance, International Compliance Training Ltd. The most recent Corporate Governance Code (CGC), released on April 27, 2016, for example, complies with current European Union requirements. This particular version was an update amid the European Union’s Audit Regulation and Directive. “The CGC is updated normally every two years, and the 2014 CGC focused on appreciation of risk at all levels within a business, and the next update is scheduled for 2019, but this could be brought forward if there are any corporate governance implications as a result,” added Chauhan.