Brexit: What does the UK Supreme Court judgment mean for offshore funds?

The Brexit rollercoaster is showing no signs of nearing the end of the ride yet following the UK Supreme Court’s judgment[1] on Tuesday this week. As has been widely reported, the Supreme Court confirmed that the UK government doesn’t have the power to give notice to withdraw from the European Union under Article 50 of the Lisbon Treaty without an act of Parliament authorising it to do so. The government can’t simply serve notice to leave, as it had hoped and argued before the UK’s highest court, and so it now has to put draft legislation before Parliament, which it published today, to give the government the authority it needs to serve notice.

Opposition parties have already made it clear that they may try to amend the draft legislation, which, with only one section authorising the Prime Minister to serve Article 50 notice, must win the prize for being one of the shortest pieces of legislation in recent years. Although it looks unlikely they’ll de-rail Brexit itself at this stage or even delay the government’s 31 March target deadline for serving Article 50 notice, MPs could try to take Theresa May’s strategy in a different direction from the principles she set out in her speech last week or make the government involve Parliament more in the negotiations, not just give them a vote on the final deal struck.

So what does the Supreme Court judgment mean for offshore funds?

The Prime Minister set out in her speech last week that she plans to take the UK out of the EU’s single market and aim for a bespoke deal on financial services as part of the exit terms. This would mean that current passporting rights for UK based financial services firms (including investment managers of offshore firms) and products, would only be available if and to the extent they were agreed as part of the exit terms.

After last week’s speech, managers may have taken some comfort from at least having some more details of the UK’s likely opening negotiating position, with an increased expectation that the UK is therefore heading for a hard Brexit. This has led to more discussions on whether firms can still stick to a “wait and see” approach when planning their future operations or if they should now be considering more seriously alternative structures or even setting up in another EU jurisdiction where  EU passporting will still be available once the UK leaves the EU. The court’s judgment may now throw the government’s plans up in the air again though, with further ongoing uncertainty over what Brexit is actually going to mean for investment managers and their funds, if the government’s Brexit strategy ends up being changed during the next few weeks of Parliamentary debate. As negotiations with the other 27 member states of the EU haven’t even begun yet there can still be no real idea of what the final exit terms will be and how the financial services industry, including offshore funds and their managers, will actually be impacted.

It’s also worth bearing in mind that the parties to the Supreme Court case assumed that any Article 50 notice could not be revoked after it’s served by the UK government. There are reports that a case is being brought in Ireland on whether any Article 50 notice served under the Lisbon Treaty is revocable, with a view to the European Court of Justice passing final judgment on this point as a matter of EU law. The UK government has no political appetite for a referral to the ECJ, given that much of the Leave campaign’s focus was on the UK courts being the final judge of laws impacting the UK. It will be interesting to see whether and how that case progresses but if it did confirm that notice could be revoked that could change the dynamics of Brexit and the government’s strategy yet again.

For now, unpredictability and uncertainty over Brexit seem here to stay over the months ahead, including for offshore funds. What is fundamentally reassuring in an uncertain world though is that the rule of law remains alive and well in the UK following the Supreme Court’s judgment on Tuesday.

[1] R (on the application of Miller and another) (Respondents) v Secretary of State for Exiting the European Union (Appellant) on appeal from [2016] EWHC 2768 (Admin); 2016 NIQB 85

Fiona Chandler
Experienced funds and corporate lawyer, loves to travel. Fiona lives in the UK.

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