BY: JOSIE STEER

After the public referendum held on 23rd June 2016, it appeared certain that the UK would exit the European Union (EU) after nearly 52% of voters elected to leave. This outlook soon turned out to be somewhat naïve however, as the intricacies of Britain and its relationship with the EU became exposed. The Prime Minister indicated ‘Brexit’ would happen as soon as the Government invoked Article 50; however, on 3rd November 2016 the High Court ruled that the Government does not have the power to do so without approval from Parliament. This case, brought forward by Gina Miller, has received mixed reactions from the public, and raises interesting yet complex issues from both a legal and political perspective. So how does this decision impact the UK, Brexit and the future of the financial industry?

What is Article 50?

Article 50 of the Treaty of Lisbon permits a member state to inform the European Council of its intention to leave the EU, resulting in a negotiation between the two parties of a ‘withdrawal agreement’. The British Prime Minister at the time of the referendum, David Cameron, stated Article 50 is ‘the only way to leave’[1], and it was expected to be triggered immediately once the vote was cast as ‘leave’.

Why has Article 50 not been triggered as expected?

The UK’s membership within the EU has historically provided many advantages to British citizens, such as free trade, movement across borders, and moreover human rights guaranteed under the European Union Charter. Interestingly, it is these rights of British citizens which form the basis of the case brought before the High Court. When negotiating the withdrawal agreement under Article 50, the Government can choose which EU rights it will retain, if any, and it is inevitable that the rights provided under the 1972 European Communities Act (the piece of legislation that brought the UK into the EU[2]) would be lost. Furthermore, if no agreement is reached at the end of the two-year negotiation process, it is likely that the rights of British citizens under other EU treaties will be removed completely.

The second aspect of the case brought forward concerns UK constitutional law – examining the sovereignty of UK Parliament and the extent of the Government’s prerogative powers (their executive authority). Parliament is held at the highest power within UK constitutional law, as Lord Bingham of Cornhill said ‘the bedrock of British constitution is… the supremacy of the Crown in Parliament’[3]. On the other hand, although UK constitutional law allows the prerogative powers of the Government to make decisions involving international affairs, it cannot make decisions which will impede upon the rights of citizens without involving Parliament. From a legal perspective, the decision to trigger Article 50 does not lie in the hands of the British Government but is a decision for Parliament.

How does this affect the outcome of the Referendum?

Fundamentally, the Prime Minister made the decision to hold a referendum and implied that the outcome of the vote would be rightfully binding. In doing so, however, decades of constitutional history and the authority of Parliament were ignored. The verdict reached by the High Court on 3 November 2016 was that the Government cannot trigger Article 50 without gaining the consent of Parliament first; hence the next steps would be for Parliament to legislate on invoking Article 50. Parliament is required to listen to the referendum decision made by British citizens, however it is not legally bound to take their advice. The uncertainty of the terms to be negotiated through the invocation of Article 50 lends the argument to Parliament that this is not in the best interest of the British public. The structure of Article 50 could force the UK to accept the EU’s exit terms, which may be unfavourable to UK interests.  MPs and peers may take this into account when making their decision and there is a chance Brexit could be rejected, though most consider that the chance of this is marginal. During the case, the judges emphasised that the referendum was never intended to be binding on parliament, however this was never expressed to the British public.

What is next for Article 50, Brexit and the UK financial industry?

The Government appealed to the Supreme Court against the decision, and on 5 December 2016 presented its arguments to an unprecedented 11 justices with a court ruling expected on 24th January 2017. Some commentators believe the Government will lose again, and as the Lord Chief Justice – who ruled against the Government in the first case – called it a ‘pure case of law’[4], it is difficult to see how this could be argued against in the appeal. If the verdict indeed gives the MPS a vote before triggering Article 50, it will slow down Theresa May’s Brexit plan and cause even more unpredictability about Parliament’s behaviour. Additionally, a new set of legal challenges have been lodged at the high court, with a group of anonymous claimants asserting that separate parliamentary approval is required to leave the European Economic Area (EEA). The government currently maintains that the UK will quit the EEA as soon as it leaves the EU, however the argument has been brought forward that Article 127 of the EEA agreement requires a separate departure process to Article 50.

It is clear that this extended uncertainty cannot be beneficial to the economy, with the risk of continued underlying pressure on the pound and rising inflation negatively impacting living standards. The implications for the financial industry must also be considered, as non-EU financial institutions located in the UK will likely be forced to relocate to gain access to EU markets, impacting UK jobs and the economy. The City is keen to safeguard passporting rights which will give it access to customers in the EU, however a ‘hard’ Brexit could put those rights at risk. (On a positive note, if Parliament were to shape the Brexit process, this significantly increases the chances of Brexit being ‘soft’ rather than ‘hard’[5].) The UK has always held the reputation of a global financial hub, however if operations were to relocate, this could be severely undermined. Consequences could be loss of jobs, and the UK may lose its influence in areas such as the development of the EU financial services framework.[6]

What is evident is that leaving the EU is going to be a complex process, particularly when one considers that the UK has been inextricably linked to the EU for 40 years, which poses significant legislative challenge since many regulations have not been enshrined in UK law. It appears naïve to have thought that a simple ‘leave’ vote would be just that without taking into account legal implications. A concern for all is that continued uncertainty will impact negatively on Britain’s economy, with the British public being subjected to the consequences. If recent economic and political events are anything to go by, unpredictability is all that can be expected.

1 http://openeurope.org.uk/today/blog/the-mechanics-of-leaving-the-eu-explaining-article-50/

2 https://www.instituteforgovernment.org.uk/brexit/brexit-brief-1972-european-communities-act

3 https://www.judiciary.gov.uk/wp-content/uploads/2016/11/judgment-r-miller-v-secretary-of-state-for-exiting-the-eu-20161103.pdf

4  http://www.bbc.co.uk/news/uk-politics-37857785

5 https://www.theguardian.com/politics/blog/live/2016/nov/03/article-50-high-court-ruling-high-court-set-to-rule-on-whether-mps-should-vote-on-triggering-article-50-politics-live

6 http://www.allenovery.com/SiteCollectionDocuments/AO_06_Brexit_Specialist_paper_Financial_services.pdf