PM Boris Johnson is under political pressure over a number of issues, including the UK’s response to Covid and the potential for the NHS to become overwhelmed; the looming cost of living crisis (a combination of tax rises, inflation and rising energy costs); and disquiet over allegations of sleaze and corruption that have recently bedeviled his Government. The loss of two recent by-elections and a succession of poor opinion polls mean rumblings of discontent have begun to sound like a potential Conservative Party leadership challenge – though no one wants to be seen to be scheming to seize the reins of power in the midst of a pandemic, especially not with local elections looming in May.
There appears to be an ideological split over what the future of the UK outside the EU should look like. Many ‘traditional’ Conservatives viewed Brexit as offering the UK an opportunity to redefine itself as a small State, light tax, light regulation jurisdiction which would unleash the entrepreneurialism they argued had been held back by over-regulation from Brussels. On the other hand, the 2019 intake of Conservative MPs from traditional Northern Labour seats (the so-called ‘Red Wall Tories’) were elected not just on the promise of ‘Get Brexit Done’, but the ‘Build back better’ mantra with ‘levelling up’ at its core. With investment in schools, hospitals, policing, roads and other infrastructure, ‘levelling up’ will require a larger, not smaller State. But both sides of the Party want the UK to start demonstrating the benefits of Brexit.
The Government shares that aim and has already made clear it is focused on delivering the benefits that Brexit promised to offer. In a speech to the House of Lords in September 2021, Lord Frost, when he was Minister of State, set out the Government’s objective of undertaking a thorough-going review of Retained EU law with the objective of repealing or amending it.
In reviewing that legislation, the UK will seek legislative divergence from the EU in those sectors where it feels it already has (or could quickly build) a competitive advantage.
This blog looks at some of these areas.
Last week saw the introduction of the new agricultural subsidy regime, which aims to change the way in which agricultural subsidies are distributed. Many Conservatives felt that the EU Common Agricultural Policy scheme awarded subsidies to farmers based solely on the size of their farms: the larger a farm, the larger the subsidy, which risked driving smaller farmers out of business.
The new system is intended to reward farmers, instead, for their environmental stewardship of the land – funding is available to farmers who restore wildlife habitat, including making significant land-use changes such as creating nature reserves, woodlands or wetlands or restoring flood plains. Farmers will also be eligible for subsidies to encourage landowners to cut fertiliser use, or restore peatland.
These changes already represent a major change in the way that UK farmers can/will use their land, but there is potential for the UK to go further. The UK Government’s September 2021 response to the gene editing consultation demonstrated its willingness to go beyond the EU in this area. The official response set out how the UK plans to change its regulation of genetic technologies to take into account new technologies and scientific discoveries; facilitate research and development; and enable gene editing to breed crops that are more nutritious and productive and more resistant to pests and disease – hence reducing pesticide use.
Although researchers will still need to register their study plans with the UK Government, department, those who want to conduct field trials of gene-edited plants will no longer need to submit risk assessments. Accelerated approval pathways for gene edited crops would encourage greater international investment in the sector and create a potentially significant market advantage for the UK, building a new base for biotech and agri-science, with the opportunity in the future for greater flexibility on research into genetic modification.
On 4 January, the National Security & Investment Act came into force. Taken alongside changes to the Takeover Code, this is a major shake-up of the UK investment regime with implications for M&A and other transactions – not least, the introduction of mandatory filing requirements for transactions occurring in 17 core sectors. The UK Government now has broader powers of oversight of transactions that have the potential to threaten national security in the UK – see our blogs for more detail. The Act seeks to balance encouraging FDI against a desire to prevent more UK companies in certain sensitive sectors falling into ‘foreign’ control and ownership.
State Aid & Subsidy Control
The UK government has brought in a Subsidy Control Bill to replace the existing EU-wide state aid rule (the ability to allocate subsidies was a major point of contention in the UK-EU post-Brexit trade negotiations). The Bill is still making its way through the Parliamentary process and is likely to enter into force later this year.
The Bill is one of the most significant post-Brexit legislative changes yet made. The Bill establishes the Competition and Markets Authority (CMA) as the UK’s subsidy regulator and moves the subsidy authorisation from pre-grant permission to a self-assessment of the subsidy against a list of nine principles (including whether the subsidy makes a positive contribution to specific public policy objectives; remedies identified market failures; delivers good value for money; and helps hit decarbonising targets). Devolved Administrations and Local Authorities are given the ability to allocate subsidies to companies to support the Government’s ‘levelling up’ agenda and create more equal economic growth across the whole of the UK, whilst avoiding ‘bidding wars’ that could cause an inefficient relocation of businesses and jobs from one part of the UK to another.
Immigration and Asylum
The UK has introduced a new Nationality and Borders Bill (currently making its way through Parliament). This Bill includes new provisions on immigration, asylum and nationality as well as sanctions against people smugglers. The Bill is partly intended to demonstrate that the Government is making good on the Leave Campaign’s ‘Take Back Control’ slogan, which was focused, at least in part, on the control of borders.
Another major area of policy change is the UK’s new chemical safety regime. In a Policy Paper released last month, the UK set out how its regulation of hazardous chemicals would diverge from the EU’s REACH chemical safety regime. Key areas of difference include a two-year transition period for UK companies to register chemicals on the UK equivalent list; shortening the list from that in use in the EU; reducing the amount of chemical data required; and relying partly on evidence voluntarily provided by industry to assess chemicals.
The UK’s has stated its ambition to become a global trading nation, targeting trade deals with a range of with new jurisdictions from the USA to Singapore, many of which will seek to include free cross-border data transfer. This global strategy does not sit easily with the EU adequacy decision, which assumes EU nationals’ data will continue to receive adequate protection even if the data are transferred to a third country. The UK will eventually need to decide on the relative importance it places on its EU data transfer capability.
Currently, the UK’s ability to diverge from EU data laws is constrained by the need to preserve its European data adequacy certification, the loss of which would have significant cost consequences for UK companies operating in the EU. However, Lord Frost’s September House of Lords speech noted GDPR reform; and the appointment of the New Zealander John Edwards to lead the UK’s Data Protection Authority are indicators of the direction of travel: maximum possible divergence – stretching EU adequacy to its limits. The UK Government will have noticed that the EU’s decision is limited to four years and may calculate that the importance of the EU decision will decline as the UK begins to trade in increasing volumes with other markets and the UK and EU drift inevitably apart. In time, the UK Government may come to assess that the political compromises necessary to maintain the EU adequacy are too great, leading to the decision that its loss is simply an unavoidable consequence of increased trade with other, digitally-enhanced global economies.
Financial Services Sector
The Treasury is known to be keen on reform to the Solvency II Regulations to ease capital requirements, since it would give insurers greater flexibility to invest in UK infrastructure and business. Although progress on this reform has slow, commentators expect some movement this year.
The Kalifa review on Fintech is also expected to report later this year, with anticipated proposals for reform to create conditions for the widespread adoption of financial technology, and incentivise innovation in the sector to promote the integration of new technologies across financial services.
The Treasury and FCA accepted Lord Hill’s Report into Listings Reform and will be bringing in changes to implement his recommendations later this year.
Medicines and Medical Devices
In 2022, the Government is likely to use the provisions of the 2021 Medicines and Medical Devices Act to make changes to the UK’s clinical trial frameworks with the intention of boosting the UK’s R&D sector and accelerating the route to market for new treatments and medicines. It is likely that the UK Government will try and promote growth in the use of data, artificial intelligence and machine-learning in the health sector. In this context, it is worth noting that one of the major reasons for the UK-Japan Trade Agreement was UK access to Japanese robotics and Japanese access to UK AI expertise.
The above are but a few areas where Brexit divergence will make significant changes to the UK’s legislative system. It is certain there will be more and the process of divergence is likely to accelerate through 2022 and beyond.
Covington will continue to monitor those changes and to write regularly on those which seem of greatest importance.