Uncertainty. That has been the most immediate consequence of the United Kingdom‘s decision to leave the European Union (EU). Britain’s exit from the EU – or as everyone calls it, ‘Brexit’ – certainly has the potential to change the way businesses operate and, in the long term, it could impact not only the British and European markets, but our global economy as a whole.
The reasons to worry are many, notably because no one knows what the EU-UK relation will look like or what it will mean for businesses. One thing is certain: until the withdrawal negotiations are concluded, nothing changes and the UK remains a full member of the EU. Businesses should think ahead and begin to assess vulnerabilities and identify clear priorities regarding the desired outcome of the negotiations which could last more than two years.
For US businesses, Brexit is like Trump’s election: it can be a complete game changer. Brexit means uncertainty and possible alterations on all business conditions in Europe that could require the review and adaptation of any company’s multinational structure – from costs of trade, investment conditions, market access and functioning of value and supply chains, to rules on contracts, employment, intellectual property, taxation, mergers, competition and innovation. It also entails the need to recalibrate their strategy and public affairs efforts to retain a good position in the UK and wider European market after the dust has settled. For all businesses, now is the time to understand what Brexit may mean exactly for them and to what extent they need to brace or take action.
State of play
Formally, the procedure to withdraw from the EU is clear, as outlined in article 50 of the Treaty on the EU – but, paraphrasing its very author, it was never meant to be used. The reality is quite different. After the vote it was immediately evident that nobody had a plan for the ‘leave’ scenario. This remains true today.
The result of the exit process is anything but straightforward. Brexit has fostered division both between and within the EU and the UK:
- The EU is pushing the UK to trigger article 50 as soon as possible, while the UK is buying time to devise a feasible strategy with realistic objectives, as well as to put together the necessary bureaucratic structure.
- Some EU countries would like the process and consequences to be as tough as possible on the UK as a deterrent to other members, while others are keener on keeping Britain close mindful of London’s importance for trade, investment and foreign policies.
- In the UK, some (including a majority of Parliament) want to maintain close ties with the EU by remaining in the single market. Others (now including the Conservative party-led government, but not necessarily the whole party majority in the Parliament) pursue a neat severance from the EU and a strong UK sovereignty by refusing EU legislative powers, the European Court of Justice’s jurisdiction (which delivers interpretations of all EU rules binding on all members states), and freedom of movement – all essential elements of the EU single market.
The main problem is there is no clear best solution for all parties as it seems that any type of Brexit will be a lose-lose scenario. The most pressing issue, given the negative effects of uncertainty on the markets, is agreeing on an approach and a timeline for the negotiations. This is why most parties/people/involved welcomed UK’s Prime Minister Theresa May’s statement saying that negotiations will start by the end of March 2017, and many await the UK Supreme Court’s decision on whether the government can start the negotiations without an authorisation from Parliament – the London High Court already said it cannot.
How we got here and what to look out for
Whilst some may think that Brexit was a sudden surprise, the possibility of the UK leaving the EU was always there. In 2013, to co-opt a rising Eurosceptic sentiment, then Prime Minister David Cameron promised that if re-elected, he would renegotiate the UK’s relationship with the EU, and possibly call for a referendum on its membership. It worked, as Cameron’s Conservatives won and the Eurosceptic UK Independence Party (UKIP) got only one seat in Parliament, but it fractured the ruling party, forcing Cameron to keep the promise after winning the 2015 elections, renegotiate the EU-UK relation in an agreement in February 2016, and call a referendum on membership.
Now the main hurdle is that there is no clarity on the agreed scope of the negotiations, the possibility for a transitional agreement, or the timeline for their conclusion. The whole process would need to be concluded before the May 2019 European elections and the 2020 UK general elections, so as not to be held hostage – or worse the main object – of the relative campaigns and respective results. However, should the UK government need Parliament’s green light to start negotiating, issues may arise: the ruling party has a tight majority in the lower house, no majority in the upper house, and both houses were against Brexit before the vote. If and when article 50 is triggered, the UK and the EU will have two years to negotiate a withdrawal agreement which needs approval by the EU Council and the European Parliament. This leaves 15 to 18 months for the actual negotiations to conclude in time for ratification. Until then, nothing changes. After that, EU law will no longer apply to the UK.
Facing uncertainty for months, if not years throughout the negotiations, medical devices business should begin mapping how fur UK companies are integrated in its supply chain; whether UK entities act as legal manufacturer of the medical devices and hold the CE-mark (as well as the technical documentation supporting the CE-marking), if they act as authorised representatives of non-EEA (European Economic Area) manufacturers, or whether UK-based notified bodies have been involved in the CE-marking process; and finally whether UK entities made pre-launch registrations of devices of non-EEA manufacturers as authorised representative or manufacturers.
Direct impact of Brexit on the medical devices industry
Regulatory divergence on EU Medical Devices legislation
New legislation regulating medical devices within the EU will be adopted by the end of 2016, and will take effect three years later. They cover the design, manufacturing and clinical testing of medical devices and in vitro diagnostics, and will affect manufacturing and sales in the EU.
The UK’s contribution in the development of the European regulatory framework has been extremely influential. Brexit could result in the loss of this influence and the possible development of a parallel regulatory system, requiring companies to file separate applications to access the UK and the EU markets.
At present, medical devices can be marketed throughout the European Economic Area (EEA), once they have a CE mark issued by any Notified Body, which are overseen by national regulators. It is likely that the UK will seek to keep medical devices regulation as harmonised as possible, potentially allowing for the mutual recognition of UK and EU Notified Bodies. If the UK regulations were to diverge from those of the EU, this would result in increased costs and divergence in standards for medical devices manufacturers, making the UK a less attractive market to launch medical devices.
The Impact on intellectual property
Developing and placing a medical device on the European market requires consideration of Intellectual Property (IP) clearance and protection. IP laws are largely harmonised across the EU, and most of the UK legislative framework is composed of EU Regulations and transposed Directives. Should relevant EU rules on IP fail to be transposed into UK law before the UK’s withdrawal, there is a risk of regulatory vacuum, whilst any IP-related agreement applicable in the EU could change scope depending on whether it includes the UK in its territorial application.
Whilst the UK would still be a signatory to the European Patent Convention (EPC), which provides an autonomous legal system according to which European patents are granted, it is unlikely to be able to participate in the new Unitary Patent and Unified Patent Court system, which is exclusive to the EU Member States. This means that the industry would need to go through another hoop to seek pan-European patent protection.
Registered and unregistered community designs and EU trademarks, known as community rights, are unlikely to have effect in the UK following Brexit. Any applications for these rights will not cover UK and it is unclear what will happen to the rights obtained in the UK prior to Brexit, but sale of goods purchased in an EEA/EU country might result in trademark/design infringement when exported to UK. The UK will need to negotiate an agreement with the EU as part of the Brexit process to address the issue. However, until Britain leaves the EU, UK rights holders can continue to enforce their IP in all Member States.
Obligations related to clinical trials
Brexit comes at a time of major change in the EU clinical trial legislation. The EU Clinical Trials Directive is currently being replaced by an EU Regulation including new rules to improve transparency of clinical trials and their results. It is expected to come into effect by the end of 2018 at the latest, when the new EU Clinical Trials portal and database will be fully functional.
In the UK, clinical trials are currently conducted under the EU Clinical Trials Directive rules. The UK may then simply apply the new EU Regulation once it comes into force – as national legislative implementation is not required for Regulations. Clinical trials in Europe will be largely shaped by the timing of the transposition and the results of the Brexit negotiations. If the UK is not within the system this could pose extra administrative burdens on companies wishing to conduct multi-centre clinical trials in the EU and the UK, as separate centralised and national clinical trial authorisation procedures may need to be followed.
Furthermore, with regard to privacy protection, transferrals of data between scientists in the UK and in the EU would require compliance with the General Data Protection Regulation, which will be directly applicable to EU territory starting in May 2018 and will require the UK to uphold the same standards as the EU.
No considerable change is expected in legislation for at least five years. Given the long-term nature of clinical trials, the medical devices industry may wish to minimise the risks of uncertainty by running clinical trials in other EU Member States. Outside the EU/EEA and its harmonised processes, the UK will surely constitute a less attractive market for clinical research.
Finally, the UK is a full voting member of the European Committee for Standardisation (CEN), which is unlikely to change, no matter what the UK’s new relationship with the EU looks like.
Overall impact of Brexit and possible indirect effects on medical devices
The impact of Brexit on businesses with strong relations with the UK or integrated in supply chains involving the UK will be substantial if the UK exits the single market completely. It will only be possible to evaluate the extent and intensity of this impact once the EU-UK relationship is more defined. However, examples of the issues that many businesses could face include the following.
Economic distress and reduced public UK National Health System (NHS) funding
A declining UK economy may have a negative impact on public expenditure on health and on new device reimbursement approval rates. Procedure volumes may also be affected as the system would be forced to reduce costs of treatments. Opting for less expensive devices, the UK medical device market could take a dive.
From a regulatory perspective the UK would lose influence over the European Medicines Agency, which approves drugs for use in the EU, so the UK and the EU would have separate databases on pharmaceutical products therefore incurring in more spending and fuelling the NHS’s budgetary constraints that Brexit is already causing to the UK budget – notably due to the fall of the British Pound.
Employment and Research & Development
The UK Medical Device market relies heavily on foreign physicians and medical doctors. Brexit could result in a lack of professionals involved in emerging medical technologies. Once reimbursement is established, specialists follow, often from other countries. The National Health System is set to face a shortage of roughly 16,000 physicians, and 100,000 nurses by 2022. Finally, with regard to research, as the UK also gains disproportionately from EU funding streams for medical research it will incur substantial losses.
More broadly, businesses would need to be in a position to retain talent by preparing to face possible variations of employee’s rights to reside and work in the UK. EU nationals may no longer be free to live and work anywhere in the UK without the need to obtain a visa or other sort of permission. An audit to assess which employees would be affected and the cost of guaranteeing their rights could be a first step. In the long run there would be costs associated to the reduced options and increased costs to employ a non-UK national. The UK will also be a ‘third country’ under EU data protection rules, hence UK businesses operating in the EU will have to protect employees’ rights whose personal data is transferred from the EU. The UK is likely to still be an EU member when the General Data Protection Regulation comes into force in 2018.
Increased costs for integrated businesses
The main effects will be an overall increase of costs due to tariffs as well as requirements and delays for the clearance of custom duties and compliance. Regulatory and documentation requirements might change too. This means additional costs and burdens for both outgoing and incoming products/materials – which may need to be charged on other parts of the supply chain. EU rules set no government pre-market review or regulation of supply chains, and national device regulators focus on post-market monitoring and information sharing. Integrity of medical device supply chains is then a matter for the manufacturer and the device quality system that it defines.
Contractual relations should not be immediately affected, as EU members apply EU rules to determine governing law and competent courts, which require respect of parties’ choice. Antitrust and competition should not be impacted substantially, but the UK will no longer enjoy the EU’s “one-stop-shop” for mergers control, which will increase costs and burden of clearances. The UK’s competition authorities and Courts will not be bound by EU jurisprudence and rules may diverge in the long run, but companies doing business in the EU will still be subject to antitrust investigations by the European Commission, which would also increase regulatory burden. The UK may no longer be subject to the EU State-Aid rules, so it could give subsidies to UK companies without notifying the EU, which could distort competition. Finally, the UK could allow territorial restrictions on resale into the EU27, reducing sales volumes, and UK companies will no longer be bound by the rules prohibiting import/export bans to protect their production.
Finance and tax implications
The main tax impact could be customs duties and documentary requirements for goods crossing the UK/EU border. In the single market goods move freely without customs declarations, duties or import VAT being paid. In a customs union no duties are payable but declarations are still required and import VAT is due. In a WTO scenario all of the above would apply, plus custom duties. This will be the case also for all those products being traded under FTAs the UK will no longer be a part of. The UK may also lose the benefit of the parent/subsidiaries and interest and royalties Directives, which allow withholding tax waivers on payments between EU resident companies that are associated and meet other conditions, so companies may need to review their multinational structure. Should euro clearance be not allowed in London, practical issues could arise, especially for large complex projects and investments. Financing from the UK will be affected, and probably costs will increase. Finally, Brexit will likely favour the EU push for harmonisation of corporate tax via a Common Consolidated Corporate Tax Base (CCCTB) without the UK, which in turn would join a uniform response to the OECD recommendations.
Looking at possible scenarios can help identifying vulnerabilities regarding the negotiations and their outcome. Trade relations should not be part of the negotiations but they will likely be discussed in parallel and affect the talks.
After the separation process is completed, the EU and the UK will have an agreement (separate from the withdrawal agreement) governing their relations, which may take different forms depending on the level of integration. In this unprecedented situation, it is reasonable to expect that the UK will get a tailored treatment. The latest rumours refer to a sectorial carve-out, although nobody sees how it could work. It is very likely that any final agreement would also need a transitional period (or separate agreement) before becoming effective.
EFTA and EEA membership: This is the so called Norwegian Model, whereby the UK retains access to the single market by paying into the EU budget and joining the European Economic Area (EEA) and European Free Trade Association (EFTA). This option implies UK membership of the two agreements and its respect of their rules, which would include the EU medical devices legislation already subject to the EEA Agreement (Active Implantable Medical Devices Directive 90/385/EEC, the Medical Devices Directive 93/42/EEC; and In Vitro Diagnostic Medical Devices Directive 98/79/EC). The UK would also be required to implement the EU medical devices and in vitro medical devices regulations once they are adopted and replace existing directives also with regard to the EEA. These address pre-market conformity with requirements, post-market oversight, and traceability of devices throughout the supply chain, amongst other things, and could be approved by 2016 with enforcement in 2020. This option however does not address any of the key political concerns raised during the referendum so it is very unlikely to be accepted.
EU-UK bilateral treaty: A so-called Swiss model, whereby the UK and the EU define their relation through a free trade agreement and a complex web of bilateral agreements that de facto grant access to the single market with a ‘guillotine clause’ (if one fails, all are suspended). This would allow the EU or UK authorities to mutually accept devices lawfully marketed in the other territory, as well as the EU to recognise conformity assessments of UK notified bodies, such as the British Standards Institution (BSI). A UK manufacturer could continue to act as the legal manufacturer for the purposes of the MDR and would not need to designate an authorised EEA representative. This option gives substantial equivalent access to the single market, but without a quasi-automatic application of EU law – so most new EU legislation could be an endless bargaining. This option seems very unlikely as it would address only some of the issues raised by the referendum and would still not grant access to services.
A Custom Union: The so-called Turkish model, whereby the UK and the EU form a customs union. Trade is eased by absence of duties and reduced tariffs and regulatory compliance requirements. Services, investment, establishment or any other part of the internal single market are not there. EU27 could impose on the UK some EU product laws (e.g. CE Marking Directives to ensure that a product placed on the market is not submitted to differing, UK-specific product standards). This model is unlikely as it would not fit neither the EU nor the UK’s needs.
Free Trade Agreement: The so-called Canadian Model, whereby the EU and the UK sign a comprehensive FTA, which would see preferential tariffs levied, technical barriers lifted, and some regulatory convergence although the level playing field and freedom of circulation of goods, services, capital and labour would be incomparable with the single market. Many see this as the most desirable and politically acceptable option, but while it would be easier to negotiate an FTA with the UK than with anyone else, the setbacks with Canada are a good example of how much the process can become hostage of internal politics and dispute settlement would be an issue.
The WTO fall-back option: This is the so-called ‘Hard Brexit’, whereby the UK leaves the EU and becomes a third country in all respects. This is the worst case scenario, which would imply transforming most EU law into UK law just to keep the country running, and a fall back on WTO scheduled tariffs for trade (which might need to be re-negotiated with other WTO members). Businesses would suffer from tariffs, reintroduction of customs procedures and certification of origin requirements. Manufacturers in the UK would need to comply with EU device rules and appoint an EEA authorised representative to distribute in the EEA, who would need to hold the technical file of the CE-mark (even if the UK, like many other non-EEA jurisdictions, are adopting this approach). Pharmaceutical companies may stop importing into the UK by asserting their IPR (patents or trademarks) against parallel importers. This does not tackle issues like the fact that much (framework) legislation does not make sense outside the single market (e.g. REACH or its review), it provides no framework for UK-EU relations (i.e. takes away UK’s leverage to negotiate its position as a member state), but it is what can happen unless another agreement is found.
“Bremain”: There is another potential scenario that should not be excluded a priori. If the UK fails to get an internal or EU approval of the withdrawal agreement before triggering article 50 and the political situation shifts towards a more pro-EU sentiment, Brexit may be shelved. If this happens after triggering article 50, it is unclear whether the situation can be reversed or the country could remain in a legal limbo. This will likely be one of the main arguments in the campaigns for the 2020 elections riding on likely economic stagnation and hardship – perhaps transitorily apply EU law while applying again for membership. Looking at the current political landscape, both possibilities – especially the latter – are highly unlikely.
It is critical to understand that while the technicalities of the negotiations will be managed by the Commission and its taskforce, led by former Commissioner Michel Barnier, the main guidelines, objectives and red lines regarding the future relationship will be set at Council level by the EU27 leaders. This means that each and every one of the following events could have an impact on the negotiations and the path towards or against fragmentation.
- 1 January 2017 – Maltese Presidency of the EU Council starts
- January 2017 – New mandate of the next European Parliament President
- 15 March 2017 – General elections in the Netherlands
- 31 March – Possible deadline to trigger article 50 and start negotiations (if UK Parliament consent not needed)
- 23 April and 7 May 2017 – Presidential elections in France
- May 2017 – New term of EU Council President (Mr Tusk or his successor)
- TBC June 2017 – Legislative elections in France
- 1 July – Estonian Presidency of the EU Council starts
- TBC, August/October 2017 – General elections in Germany
- TBC, 2017 – General elections in Italy
- 1 January – Bulgarian Presidency of the EU Council starts
- 1 July – Austrian Presidency of the EU Council starts
- TBC, 2018 – General elections in Austria
- 1 January 2019 – Romanian Presidency of the EU Council starts
- March 2019 – Deadline for withdrawal agreement negotiations
- Spring 2019 – European elections (new Parliament and new Commission)
- 7 May 2020 – UK General elections
Written in collaboration with Tunheim