The impact of Brexit for Ethics and Compliance Officers

With the transition period rapidly ending—and no deal in sight—what is the predicted impact of Brexit for ethics and compliance teams?

As we approach the end of the Brexit transition—less than a month away—several significant issues remain unresolved, perhaps unsurprisingly. After more than 40 years of UK membership in the European Union, the Brexit negotiations were never going to be straightforward. Clearly, the approaching deadline has a potentially significant impact for Ethics and Compliance Officers—irrespective of their industry and sector.

Read on to learn how your team may feel the predicted impact of Brexit for ethics and compliance.

Background

In June 2016, the United Kingdom (UK) held a referendum to ask the electorate whether the country should remain a member of, or leave, the European Union (EU). The referendum resulted in 51.9% of the votes cast being in favour of the UK leaving the EU – commonly referred to as ‘Brexit.’

Since the referendum, extensive negotiations between the UK and the EU have taken place, which resulted in the UK formally ceasing to be an EU Member State on 31st January 2020, and moving into a transition period until 31st December 2020. During this transition period, the status quo prevails while the terms of the future EU/UK relationship are negotiated, including a trade agreement.

Brexit as of now

In the EU, the UK was a member of the EU’s single market and customs union, which enables its Member States to function as a single trading area with no tariffs or border checks, and with a combined VAT (tax) system. Clearly, the UK wants to establish a trade deal with the EU that retains many of these advantages, but it is a deal that no one else outside the EU has, and that is largely at the heart of the delays. Negotiations continue to decide how the movement of goods, services, people and capital across the UK/EU borders will be processed following the end of the transition period on 31st December.

Additionally, one of the most difficult remaining issues is that of the so-called ‘level playing field’ rules, which govern how far the UK must follow EU laws in the future.

Brexit: Some Practicalities

At a practical level post-Brexit, UK passport holders may no longer be able to use the EU immigration channels when travelling, although discussions continue— and it is possible that some EU Member States will apply different rules. Similarly, there will be changes and new requirements for UK passport holders when hiring a car in the EU and also how state-provided travel/health insurance—such as the European Health Insurance Card (EHIC)—will operate, resulting in private and company insurance becoming even more essential.

Arrangements for roaming in the EU with a UK-registered mobile phone are also expected to change progressively.

After the Brexit transition is complete, the UK will increasingly utilise Electronic Travel Authorisations (ETA) for EU (and other) citizens who want to visit the UK, as part of the UK government’s strategy to regain greater control of its borders.

EU, European Economic Area (EEA) or Swiss citizens who wish to remain resident in the UK will usually need to formally apply (with their families) to continue living in the UK after 31st December 2020.

What are the implications of Brexit on business?

Post-Brexit, importing or exporting goods will likely require more extensive border checks and paperwork, which will slow freight across the EU/UK borders. In a ‘no-deal’ scenario, the UK will not have reached a trade agreement with the EU by the end of the transition period on 31st December 2020, with the result that the UK would have to trade with the bloc on World Trade Organisation (WTO) terms, leading to tariffs being introduced on many imports and exports—which could result in increased prices and costs, both for businesses and consumers

Irrespective of the outcome of any trade agreement, the UK will take on what is termed ‘third country’ status in the eyes of the EU. A ‘third country’ is defined as one that is not a member of the EU, as well as a country whose citizens do not enjoy the EU right to free movement. However, if a free trade agreement is reached, this will mean some of the trade friction points relating to tax, customs, the movement of goods and people may be eased or not be required. Whatever the outcome, significant changes for companies will be required immediately as of 31st December 2020.

There are a number of aspects of business that will likely have to be revised for either the new regulations that the UK and EU will agree, or for a no-deal scenario should agreement not be reached. Clearly, this is because the UK will no longer recognise institutions that oversee these activities, or will no longer be a part of the EU free trade area. These aspects include, for example, EU licensing, copyright, trademarks and patents, environmental standards, mutual recognition of qualifications and licences and, clearly, the transfer of data between the EU and UK. It should be noted, however, that the UK is expecting to become a ‘favoured nation’ via an ‘adequacy decision’ on behalf of the EU, which should facilitate the free transfer of personal data without the need to implement additional safeguards.

What is the predicted impact of Brexit for Ethics and Compliance Officers and their teams?

The general consensus is that Brexit will result in a significant period of uncertainty for Ethics & Compliance Officers, as they face a myriad of competing short- and long-term challenges, potentially compounded by Covid-19 and related issues— such as extensive Working From Home, high levels of employee ‘churn’ (turnover), and increased use of contractors. Against this, the requirements for good governance, ethics, compliance and regulatory risk management will continue, with the consequence that Ethics & Compliance Officers will need to remain as determined, resourceful and agile as ever.

However, it must be stressed that a number of laws and regulations that represent the core responsibilities of many ethics and compliance officers and teams will not change (or change immediately) once the UK leaves the EU. For example, the UK Bribery Act will be unchanged, as will other international bribery and corruption laws, and law enforcement co-operation will continue.

Brexit and anti-trust law

By comparison, given the role historically taken by the EU in competition (anti-trust) law, there are likely to be practical changes in roles and responsibilities, but the laws themselves will remain—albeit in a potentially slightly different guise. In the Brexit negotiations, the EU has continued to express its concerns over the prevention of anti-competitive subsidies by the UK, and this issue remains unresolved.

Brexit and the EU Whistleblower Protection Directive

It is worth noting that under the EU Whistleblower Protection Directive, companies and organisations with more than 250 widely-defined ‘workers’ must comply with the legislation by 17th December 2021, and those with between 50 and 249 by 17th December 2023. Whilst the majority of EU Member States have provided some degree of protection for whistleblowers, the EU did recognise that the UK already had comprehensive legislation in place in this regard, known as the Public Interest Disclosure Act, or PIDA. As a consequence, the UK Government has confirmed that it does not propose to adopt the Directive into UK law given its impending departure from the EU. That said, companies and organisations operating in both the UK and EU will still need to implement the Directive, which—as it is a Directive—will be implemented with some variations across the EU’s 27 Member States. The Directive establishes for the first time a ‘reverse burden of proof’ on employers to prove that they did not retaliate against whistleblowers, and this will require far more active use of data to genuinely identify and prevent retaliation.

Brexit and Privacy Shield

The recent ‘Schrems II’ judgement invalidated Privacy Shield as a mechanism for EU/US data transfer and the EU will no doubt continue to negotiate a Privacy Shield replacement with the US authorities; clearly, the UK will no longer necessarily automatically come under ‘Privacy Shield II’ (or whatever it is termed), but is most likely to follow a similar path.

At a more practical level, post-Brexit, there will be likely be increased requirements for policies and policy updates (ranging from minor to major) and the associated training and learning, reflecting the new legislative environment. Clearly, some industries and sectors will be more affected than others; for example, the food industry as a whole is likely to be near the top of that list.

Overall, uncertainty over the detail of Brexit has clearly made some aspects difficult to plan, and that issue continues. There is clearly no ‘Brexit blueprint’ available to companies and organisations and their ethics and compliance officers and teams, and so it is likely that some time will need to be taken in establishing what needs to be done, updated and changed through research, events, networking and similar activities.

The Overall Impact of Brexit for Ethics and Compliance

Put simply, there are few companies and organisations, if any, that operate or undertake business within the UK that won’t need to make changes now in preparation for the end of the transition period and a post-Brexit world. Even a UK domestic company servicing household appliances or vehicles may need parts manufactured and/or warehoused in the EU, which will almost certainly expose them to the consequences of Brexit.

However, during a pandemic, the impact of Brexit for ethics and compliance teams is potentially compounded. Employees and others may well have been furloughed, away from work, partially disengaged and/or under limited supervision as a consequence of Covid-19. As a result, the usual drivers of team behaviour, standards and engagement may be limited, diminished or even largely decayed.

This situation will require ethics and compliance officers to, potentially, take a three-phase approach to (i) get back to pre-Covid levels of ethics and compliance capability and performance, (ii) enhance those levels to reflect the new challenges that, for example, extensive Working From Home and Brexit may have created and (iii) update employees and others on new legislative developments, particularly as the UK and EU diverges over time. For example, many Codes of Conduct contain sections on differences between EU and US legislation, and those may now have to be extended to also reflect legislative differences with the UK.

In general, times of change create the environment for greater risk, where people are uncertain, cut corners to keep their jobs, or are simply overwhelmed or consumed with fear and do the wrong thing. Also—crucially— the gig-type economy will likely result in new ethics and compliance risks. For example, annual employee ‘churn’ in major companies can be around 4%—but contractor turnover can be more than 30%, with all the challenges that that brings for training, learning and skills retention.