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What does the Draft Brexit Withdrawal Agreement mean for the Professional Services Sector?

The UK government published the much-anticipated draft withdrawal agreement (“Agreement”) between the UK and the EU on 14 November 2018, as well as a political declaration on the future relationship with the EU after Brexit which, at the time of writing, has subsequently been updated and leaked to the press (“Declaration”). Whilst the political uncertainty following the publication of the draft Agreement continues unabated, we set out below an initial assessment of the implications of the draft Agreement and Declaration for the professional services sector.

The key points to note are:

• the proposed transition period to 31 December 2020 will provide a much-needed grace period during which professional firms will need to restructure their EU operations where necessary;

• UK qualified professionals working in other EU member states and EU qualified professionals working in the UK before the end of the transition can continue to rely on the mutual recognition of their professional qualifications under the current regime, even after the end of the transition;

• UK qualified lawyers representing a party in proceedings before the Court of Justice of the European Union (“CJEU”) or any procedure before the EU Intellectual Property Office will remain able to do so in proceedings or procedures that commenced before the end of the transition period; and

• the non-binding Declaration on the future UK/EU relationship recognises the need to agree market access and non-discriminatory treatment for services providers and appropriate arrangements on professional qualifications.

Transition period

The draft Agreement includes a 21-month transition period, ending on 31 December 2020, during which the UK will continue to apply the entire body of EU law, but it will be outside of the EU’s political institutions and decision-making.

Currently, the professional services industry relies on two key EU Directives for the purposes of establishing and providing services in other EU member states:

• the EU Services Directive (2006/123/EC), which makes it easier for businesses to establish themselves in other EU member states, and to provide services cross-border on either a temporary or permanent basis; and

• the Mutual Recognition of Professional Qualifications Directive (“MRPQ Directive”), a reciprocal arrangement enabling EEA nationals to have their professional qualifications recognised in an EEA State other than the one in which the qualification was obtained.

In addition, the legal services sector is able to operate relatively seamlessly across EU jurisdictions under the Lawyers’ Establishment Directive (Directive 77/249/EEC), which allows specified lawyers to provide legal services on a temporary basis in a member state other than the one in which they are qualified, and the Lawyers’ Services Directive (Directive 98/5/EC), a reciprocal arrangement which allows specified lawyers in one member state to establish and practise permanently in another member state.

The above arrangements will continue to apply during the transition period along with EU laws on free movement etc.

Under the draft Agreement, the UK and EU can extend the transition period, as a one-off for a currently undefined time. To trigger this extension, the two sides must agree to do so by 1 July 2020. An extension of the transition would require the two sides to agree a new financial settlement.

Mutual recognition of professional qualifications 

Crucially, the draft Agreement provides for the continuation of recognition of professional qualifications in respect of individuals who are established or frontier workers (i.e. persons resident in one but working in another EU member state) in another EU member state.

Continued recognition will cover the European Professional Card (an electronic procedure for the recognition of a regulated profession (nurses, pharmacists etc.) in another EU country), qualifications recognised under the MRPQ Directive for the purpose of establishment (but, not for the temporary and occasional provision of services), lawyers practising under host state title, approved statutory auditors, and persons engaged in the trade and distribution of toxic products.

This will mean that, for example, specified UK qualified professionals established in France, whose UK professional qualification is recognised or who applied for recognition in France before the end of the transition period, will still be able to carry on their profession in France on the same basis even after the end of the transition period. It would be the same if the UK professional is working in France but residing in, for example, Belgium. The professional will still be able to work in France using his/her UK qualification as a frontier worker after the expiry of the transition period if their professional qualification was recognised, or they applied for recognition, before the end of the transition period.

Representation before the EU courts

A UK lawyer who represents or assists a party in proceedings instituted before, or in relation to requests for preliminary rulings made to, the CJEU prior to the expiry of the transition period, can continue to represent or assist his or her client following the end of the transition period. This right will apply to all stages of the proceedings (including appeals and referrals) until a final resolution of the case in accordance with EU rules.

Under the terms of the Agreement, it will be possible to bring certain cases relating to the UK before the CJEU for a decision according to EU law for up to four years after the end of the transition period. In such instances, UK qualified lawyers will still be able to assist or represent a party in those proceedings even after the end of the transition period.

UK qualified lawyers can also assist or represent the UK in proceedings pending before the CJEU where the UK is permitted to intervene or participate under the terms of the Agreement.

Representation before the EU Intellectual Property Office

UK lawyers authorised to represent or assist their clients in an administrative procedure before the EU Intellectual Property Office will remain able to do so in procedures that commenced before the end of the transition period, and this right will apply to all stages of the procedure.

Future UK/EU relationship 

In contrast to the nearly 600 pages of the Agreement (which attempts to disentangle over 40 years of UK/EU integration) the draft Declaration, which sets out the parameters for the future trade relationship between the UK and EU, initially ran to only seven pages, with the latest leaked version being 26 pages. Furthermore, the Declaration only sets out a statement of intent and will not be legally binding (unlike the draft Agreement).

The Declaration states that the parties intend to “develop an ambitious, wide-ranging and balanced economic partnership” between the UK and EU.

The movement of goods between the UK and EU is quite clearly prioritised in the Declaration – the stated aim being the agreement of a “trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade”. This indicates an intent on both sides to create a level of co-operation and integration which is not too far removed from the current arrangements for the free movement of goods.

However, the language in the Declaration is much more circumspect when it comes to the services market, with the objective being “ambitious, comprehensive and balanced arrangements on trade in services …

There does appear to be some effort in ensuring professional services firms can continue to operate across the EU as the Declaration goes on to state the UK and EU will endeavour to agree “provisions on market access and national treatment under host state rules, ensuring that services providers… are treated in a non-discriminatory manner, including with regard to establishment” and “appropriate arrangements on professional qualifications which are necessary to the pursuit of regulated professions”.

It remains to be seen whether the above provisions in the Declaration can be turned into a binding agreement, and it is unlikely that we will know the details of any deal that is struck until close to the end of the transition period on 31 December 2020 (or a later date if both parties agree to an extension).

Next steps

Many UK headquartered professional services firms operating cross-border in the EU have yet to take any concrete steps to prepare for Brexit, primarily due to a general expectation (amongst the business community as a whole) that political leaders will agree some form of transition period which will give businesses the time to put in place the structures and arrangements that will allow them to continue providing services in the EU post-Brexit.

However, if the UK crashes out of the EU without agreeing any withdrawal arrangements or transition period, the professional services sector (along with most other UK businesses) will be faced with a “cliff-edge” situation, whereby the current EU regulatory framework allowing them to provide services and/or establish and practise in other EU member states will fall away on 29 March 2019.

Whether or not a transition period is agreed, professional firms who have not done so already, should review their operations in the EU to ensure that their existing structures conform with national laws in each EU member state in which they are established regarding corporate structure and ownership and professional rules for non-EU professionals in that country.

For example, if a firm operates in another EU member state through a branch of a UK corporate entity (e.g. a limited liability partnership), it will need to consider whether it can continue operating in that EU member state under its existing structure post-Brexit (whether on 29 March 2019 or following the end of the transition), or restructure to become a national corporate entity/partnership or a branch of a firm headquartered in another EU member state. In particular, firms will need to consider whether national rules permit local professionals to practise together with non-EU professionals, as well as the potential impact on equity, profit sharing, limitations of liability and taxation. For example, in certain EU member states, local lawyers are prohibited from practising with, or sharing profits or equity with, non-EU lawyers. In some EU member states, lawyers are also prohibited from practising through a limited liability vehicle.

If transition arrangements are not agreed, firms will also need to think carefully about the status of their UK qualified professionals currently based in EU jurisdictions and vice versa, to ensure individuals are permitted to practise under local professional regulations and that they have the appropriate immigration status going forward.

If you have any queries regarding any of the issues discussed above or any other matter, please contact Zulon Begum. Zulon has extensive experience of advising professional services firms on international structures, mergers and acquisitions, governance and partnership issues.