Can the UK retain access to the single market without allowing free movement of workers? Let’s rephrase the question

Posted on 26 Jul 2016 by Brick Court

Professor Derrick Wyatt QC

The UK is embarking on a project which will preoccupy government and public for months and years to come – the negotiation of a future trading relationship with the EU. On the UK side, access to the single market is said to be the aim of these negotiations. Prominent voices on the EU side have said that the UK cannot expect to leave the EU while retaining all its benefits. Their stated position is that the single market is indivisible, and that the UK cannot remain part of that market while denying freedom of movement of persons.

The UK might seek to maintain access to the single market through a variant on the “Norwegian option”. Norway, Iceland and Liechtenstein are outside the EU, but inside the EEA. This means that they comply with EU rules on the single market, including the free movement of persons, and on competition and state aids, and that they comply with EU “flanking policies” such as equality, consumer protection and the environment. They also make financial contributions to the EU. If the UK seeks this route, negotiations will focus on the extent to which the UK will be able to impose unilateral restrictions on immigration. There would be other issues, such as financial contributions to the EU, and accepting EU legislation carte blanche, but the issue of immigration would be a central one.

The “Norwegian” route might lead to an impasse, for political reasons, or it might not be pursued very far at all.

A different approach might come to the fore.

The UK might seek to negotiate a free trade agreement with the EU which would make no provision for the free movement of persons, and would not replicate the legal provisions of the EU or EEA treaties, but would contain effective provisions on (essentially) free trade of goods and services (including financial services), and freedom of investment.

But could such an approach produce the outcome which the UK government says it wants – access to the single market? And would this approach also hit the buffers of EU insistence that the single market is indivisible?  This raises two key questions. The first is what “access to the single market” actually means. And the second is whether the EU actually treats the single market as indivisible when it engages in trade negotiations with third countries.

What access to the single market clearly does mean is legal entitlement to a package of rights which covers the free movement of goods, persons (employed, self-employed and companies), services (including financial services) and capital (including direct and portfolio investment). This package of rights is secured by a mix of treaty guarantees and EU secondary legislation.

What is distinctive about being a Member of the EU (or EEA) is entitlement to the entire package. But that does not mean that the EU is unwilling to bargain away trade access rights which are very similar to component parts of that allegedly indivisible single market package. I shall refer briefly to one or two important elements of single market freedoms, and to comparable arrangements for trade between Canada and the EU in the Comprehensive Economic and Trade Agreement (“CETA”). The point is not that the CETA regime has the same scope as the single market, but to show that elements of single market freedoms are the subject of trade negotiations between the EU and third countries.

The fundamental freedom which usually receives first mention is the free movement of goods. Elements of this fundamental freedom are clearly divisible from single market membership, in that they feature in trade agreements between the EU and third countries. For example CETA provides for tariff-free trade in most products, and contains provisions to address technical barriers to trade, which build on WTO rules. It will be noted that in any future trade agreement between the UK and the EU the starting point for the parties would be total convergence on product standards and specifications. An agreement between the UK and the EU which provided for across-the-board tariff-free trade, combined with a national treatment guarantee, would in practice give the UK market access to the EU equivalent to single market access, as far as goods are concerned.

The free movement of capital within the EU is valuable for UK businesses and for EU based investors in UK businesses. The free movement of capital includes the right of an economic operator based in one Member State to acquire a controlling stake in a business based in another. This latter right is certainly a single market feature which the EU is willing to include in free trade agreements with third countries. CETA contains provisions on equal treatment of investors and on investment protection. Some options to block foreign acquisitions are maintained. The UK might itself wish to reserve such a power in a future trade agreement with the EU. The Prime Minister recently referred to the possibility of the UK government wishing to block unwelcome foreign take-overs of UK companies.

The EU has made considerable advances in the mutual recognition of qualifications, but in only a handful of cases has this led to EU harmonisation of the content of qualifications. For the most part, EU rules provide a framework for assessing the practical equivalence of qualifications. The legal basis for EU rules of this kind is the right of free movement of employed and self-employed persons. Yet the EU has been willing to negotiate mechanisms for establishing equivalence of professional qualifications as part of free trade agreements with third countries. CETA provides a framework for mutual recognition of qualifications in regulated professions. In any future negotiations between the UK and the EU, a similar framework could be agreed, and a good starting point for the workability in practice of such a framework would be the fact that a number of mutually recognised professional qualifications in regulated professions already exist.

It should be added that CETA is the first third-country agreement in which the EU has agreed to open market access in the services sector on the basis of a negative list, meaning that all service markets are liberalised except those explicitly excluded. This would provide a promising basis for negotiations between the UK and the EU on freedom to provide services.

In discussions of the aim of UK negotiators to retain access to the single market, the importance of “passporting” of financial operators is a recurring theme. This is not surprising. A financial services provider such as a bank or insurance company capitalised and regulated in an EEA country in accordance with EU wide rules can provide its services in any other EEA country directly or through a branch and without setting up a further capitalised and regulated subsidiary.

Brexit would on the face of it see UK financial services providers unable to rely on their UK capitalised and regulated corporate bases but would have to set up a further capitalised subsidiary within an EU country, in order to provide services directly or through branches in the whole EU.

However, some recent and still evolving EU regimes could mitigate this, since they provide for recognition of third country regulatory regimes and access for third country financial operators.

For example, UK banks otherwise losing “passporting rights” after Brexit might find some mitigation under the new rules in MiFID II and MiFIR (the Markets in Financial Instruments Directive 2014/65/EU and Regulation (EU) No 600/2014).  The mitigation would result from likely recognition of the equivalence of the UK’s regulatory regime with EU regulatory standards.

MiFID II / MiFIR rules will allow third country banks and asset managers to passport wholesale investment services within the EU. Retail services would still face country by country authorisation. UK hedge-fund managers would also expect to benefit from passporting for third country operators under AIFMD, the Alternative Investment Fund Managers Directive 2011/61/EU, after authorisation by the European Securities Marketing Authority (“ESMA”).

Developments like those I have just mentioned indicate that “passporting” rights for financial service providers cannot be said to be tied to the status of EU/EEA membership, or conditioned on the free movement of persons, or confined to financial operators with some special link to the single market. Some “passporting” for third country financial operators, potentially including UK businesses when the UK withdraws from the EU, will be available as the result of unilateral EU measures. Further “passporting” for UK financial operators could in principle figure in a trade agreement between the UK and the EU, without involving any great departure from current EU practice. The starting point for discussion would be the known reality that the UK fully complies with all EU financial regulatory requirements.

It is too early to say which sort of agreement the UK will seek to negotiate, or be able to negotiate, with the EU. An agreement based on the “Norwegian model”, modified to allow the UK control of free movement of persons, perhaps to reduce UK financial payments to the EU, and perhaps to limit otherwise carte blanche acceptance of EU law, would be readily recognised as providing the access to the single market that the UK government has indicated that it seeks, and which provides proven benefits to UK businesses.

But the alternative model referred to above, covering free trade in goods and services, and freedom of investment, might be designed in such a way as to deliver economic benefits comparable to those which would result from full participation in the single market, even if the legal framework would not be identical to that of the EU Treaty or the EEA Agreement. The right test for negotiators to apply would be a commercial test of practical commercial equivalence, or near equivalence, to that enjoyed under the status quo, rather than defining the aims of the negotiation in terms of maintaining precise adherence to any particular legal framework.

It is the right time for businesses and government to identify, from amongst the single market access rights which economic operators currently enjoy, those which are in practical commercial terms indispensable to doing profitable business with partners in Europe.  It is also the right time to identify any elements of EU market access rights which do little in practice to facilitate market access. There is no point the UK wasting negotiating effort to retain advantages which are more theoretical than real.