By Mark McKeown, Associate and Hannah Starritt, Solicitor

In recent weeks, we have read much about the UK Government’s plan to invoke Article 50 and the approach to its ‘Brexit’ negotiations with the European Union (EU).

In the media, two possible Brexit scenarios have been portrayed: “Hard Brexit” and “Soft Brexit”. Whilst such binary scenarios are perhaps more attractive to headline-writers than to the wider public, and the Prime Minister has indicated that she finds such a distinction unhelpful, there is, undoubtedly, more than one possible result to the Brexit negotiations. Some of these results might involve a complete severance in relations between the EU and UK, and others a continuation of certain aspects of the existing relationship between the two. Where on the scale the final agreement will land is unknown.

What are the options?

The possible consequences of “Hard Brexit” and “Soft Brexit” on Scotland’s economy have recently been examined in a report commissioned by the Scottish Parliament’s European and External Relations Committee, published by the Fraser of Allander Institute on 6th October. The conclusion is that under all modelled scenarios, Brexit is predicted to have a negative impact on Scotland’s economy, and that the stronger the UK’s post-Brexit economic integration with the EU, the smaller the negative impact. The text of the report can be found here.

Here, we review what “Soft Brexit” and Hard Brexit” might mean.

Soft Brexit

In this scenario, the UK might apply to become a member of the European Economic Area (EEA) in an arrangement similar to the European Free Trade Association (EFTA) states of Norway, Iceland and Liechtenstein, to a large extent staying within the Single Market but not being obligated under the Regulations of the Single Market.

European Free Trade Agreement

The Agreement on the EEA, which came into force on 1st January 1994, brings together the EU Member States and the three EFTA states in the Single Market. The Agreement provides for the inclusion of EU legislation covering the four freedoms – the free movement of goods, services, persons and capital – throughout the 31 EEA states. In addition, it covers cooperation in other important areas such as research and development, education, social policy, the environment, consumer protection, tourism and culture. Importantly, it does not cover common agricultural and fisheries policies, a customs union, common trade policy, common foreign and security policy, justice and home affairs, or monetary union. In return, these countries implement EU laws covering goods, services and capital, and allow the free movement of people.

While Switzerland is not part of the EEA agreement, it has a bilateral agreement with the EU, allowing it access to the Single Market.

What are the requirements?

The three EFTA countries currently have access to the Single Market without being members of the EU – might the UK follow suit? Or, might it attempt to put in place a bilateral agreement with the EU, like Switzerland?

For the UK to join the EEA, it would require agreement from the EFTA states and all EU Members. One major concern which might make the UK’s joining of the EEA unlikely is that freedom of movement of persons is key to membership of the EEA, this freedom having been a cornerstone of the ‘Leave’ Campaign’s agenda during the Referendum. The question of whether the UK can have one without the other is therefore raised.

Whilst the EEA agreement allows for “safeguard measures” in the event of “serious economic, societal or environmental difficulties, which allows for a temporary suspension on parts of the EEA agreement including the free movement of people, this does not provide for a long term suspension of the freedom of movement of people. Liechtenstein has a very specific system in place due to its geographical situation and is allowed to issue residence permits, to Norwegian, Icelandic and EU Nationals as a result, but it is the only EEA member which is allowed to impose such restrictions on the freedom of movement of people.

Given the importance of immigration to the EU Referendum vote, the question is whether or not membership of the EEA would in fact be deemed to satisfy the majority which voted for Brexit.

Hard Brexit

This scenario might mean that the UK left the EU after Article 50 was triggered with no trade deal with the EU in place, and relying on the World Trade Organisation (WTO) to trade with it. Such an arrangement would mean that the UK no longer had to make any financial contribution to the EU, though some tariffs would be levied on trade with the EU.

The consequence of such a decision would be first of all to decide the UK’s legal status as regards the WTO. The UK is already a member, but its membership terms are linked to the EU’s. The UK would need to re-establish its status with the WTO in its own right, meaning further negotiations with another supranatural organisation. The WTO operates by consensus, and there are currently 162 member countries, which means that reaching decisions can take a long time.

“Financial Passporting”

In this scenario, so-called “financial passporting” for London based banks might cease. At present, by virtue of the UK’s membership of the EU, British banks and other financial companies may be authorised to do business in one member state of the EU, or in the EEA, and then trade across the entire region without the need to have a base in each country, or indeed to have separate financial conduct authorisation in each country. Typically, such banks would base themselves in London and use that as their headquarters for doing financial business across the Single Market. As far as the UK is concerned, not being part of the EU or the EEA would mean that such financial institutions would inevitably need to consider moving out of the UK, as the passporting might no longer apply. There is, however, an argument by Leave campaigners that such passporting arrangements might continue after Brexit given London’s importance as a financial centre. The position, however, at this stage is far from clear.

There would be, evidently, scope in this scenario for the UK to decide entirely its own immigration policy were it not to be a part of the EU or the EEA. Whilst the UK Government has not yet announced its proposed approach to immigration post-Brexit, this particular area of the Brexit process is one which has received much media attention and which stirs much debate.

Recent statements by members of the UK Government and the devolved Governments of Scotland, Wales and Northern Ireland show very different views to how the Brexit negotiation process ought to be approached. The UK Government, it should be pointed out, has yet to announce its approach and aims in the EU exit negotiations. Whilst the Scottish Government appears to favour a “soft Brexit” result, there are others who have either not yet expressed a view, or which have come down on the side of “hard Brexit”. The recent announcement by the UK Government, therefore, that a “new official forum” will be created, chaired by the Secretary of State for Exiting the European Union David Davis, aims to take this into account by giving the devolved administrations the chance to engage with the Brexit negotiation process. What the result of these views and this new forum will be remains to be seen, but nonetheless the UK Government must formulate its approach prior to its self-imposed deadline for the invocation of Article 50 by the end of March 2017. It must be borne in mind that the scenarios outlined here are merely illustrative and speculative. More updates will be provided as matters proceed.