State aid in the UK after Brexit: CMA to take the lead, but questions remain

Posted in Antitrust and competition WTO and international trade

The question of how state aid will be dealt with post-Brexit has received relatively little attention to date. State aid is the regime under which the EU currently approves or prohibits aid granted to companies through EU Member State resources, but post-Brexit, the UK Government would no longer be subject to these EU rules in granting aid to companies (British or otherwise). 

It is widely assumed that the UK would adopt some kind of parallel state aid regime – indeed, this may well be required under many of the trade deals (including with the EU) that the UK will seek to enter. However, how this new regime might work throws up some interesting political issues and challenging legal questions.

In evidence to the House of Lords Select Committee on the EU, Lord Currie, the Chairman of the Competition and Markets Authority (CMA), was asked about the possibility of the CMA’s remit expanding to include state aid.  Lord Currie replied that the CMA was “not pitching for extra work”, but he could see that it was a task that might have the CMA’s “name on it”.[1]

The Government apparently agrees. In a recent letter (28 March) to the Select Committee, the Minister for Small Business, Consumers & Corporate Responsibility confirmed that the CMA is likely to be the appropriate body to enforce state aid rules in the UK after Brexit.[2]

The letter also gives more clarity on the form that the UK state aid regime is likely to take after Brexit. The Government has confirmed its intention that the existing EU rules and regulations will continue to apply for the transitional period until the end of 2020.  During this period, the European Commission will continue to be responsible for approving and monitoring UK state aid.  From 2021, the Government’s intention is that a new UK regime will take effect:  this will be based on the transposition of the existing EU regime, including existing exemptions.

However, even without substantive changes to the rules, the move to a UK system throws up various questions. One advantage of the current EU regime is that an independent body, the European Commission, has the power to investigate and enforce the state aid system outside the influence or direct control of any of the Member State governments which are alleged to be giving the state aid.  When the European Commission finds aid that it cannot approve, it orders the Member State concerned to recover it from the recipient – and will take enforcement action against the government of that country if needed.  It would be much more awkward for the CMA, as a UK Government agency, to make the same order of the UK Government.  The Government does not consider this to be an insurmountable hurdle, referring to the CMA having the necessary “independence of its decision-making from Government” – and in CMA’s defence, it is already called upon to make decisions which are politically unpopular in a range of contexts (e.g. when asked by the UK Government to carry out market investigations).

However, this difficulty is further heightened by the politically sensitive nature of state aid. Often, aid is granted to companies that are seen as nationally important and/or are in financial difficulty, often when jobs and livelihoods are at stake.  The CMA could become a very unpopular body if it is seen to be blocking job-saving rescue packages, although the EU’s state aid regime does allow for “one time” restructuring aid to rescue beleaguered companies.

Further, the UK Government’s statements to date do not grapple with the difficult issue of how a domestic regime would work legally. It could be arranged so that, as under the EU rules, aid needs prior approval before it is granted.  But how to deal with a situation where aid has already been granted?  In such a case the CMA would need some sort of enforcement power.  One solution might to be legislate for any illegal state aid to be remedied within a given timeframe, in default of which the CMA would be empowered to go to court and obtain a mandatory injunction against the Government – in effect, a form of expanded judicial review.  Whilst this approach might work well in many circumstances, a more thorny problem might arise if the CMA were to find that a piece of legislation infringes the state aid rules.  It would be very difficult for the CMA to be empowered to strike down incompatible legislation as this would cut across the sovereignty of Parliament.  A possible alternative solution might be to adopt the model under the Human Rights Act, under which the courts (possibly in this case at the application of the CMA) are invited to indicate when legislation is incompatible with the Act, but the ultimate decision to amend or repeal the legislation rests with Parliament. 

It also remains to be seen how the issue of standing will be addressed – should every member of the public be entitled to challenge a grant of state aid or should this be confined to those likely to be most affected, such as the competitors of an aid recipient? The European Commission accepts anonymous state aid complaints – however, the Government might well decide to follow the judicial review path, reserving the right to initiate complaints to “interested parties”.

State aid complaints can be complex and resource-intensive. If the CMA is to assume the mantle of UK state aid monitor, it will need to build significant capacity well in advance of the transfer of functions – especially as the CMA does not currently deal with any state aid matters.  Some expertise might be sourced from state aid experts already working in Government departments but a significant recruitment drive will undoubtedly be needed.  This is especially the case if the CMA is empowered to actively seek out state aid violations (as the European Commission does) rather than waiting for complaints to arrive in its inbox.

It is clear that an effective state aid regime post-Brexit is an important pillar of the UK Government’s broader industrial strategy. The UK Government remains committed to competition driving innovation and economic growth, but there have also been signs of protectionism which may grow in the post-Brexit environment.  The state aid regime exists on the one hand to protect and foster competition and growth, but also has a system of exemptions and exceptions (which may or may not remain aligned with the EU post-Brexit) which allow strategic government investment in particular areas. 

With a year to go until Brexit and the subsequent transitional period, and given the Government has now signalled its clear intention to retain state aid law post-Brexit, expect to hear much more discussion about the CMA and the shape of the future UK state aid regime in the coming months.

 

[1] House of Lords European Union Committee: Brexit: competition and State aid, available at https://publications.parliament.uk/pa/ld201719/ldselect/ldeucom/67/67.pdf.

[2] Available at http://data.parliament.uk/DepositedPapers/Files/DEP2018-0337/280318_-_Letter_Andrew_Griffiths_to_Rt_Hon_Lord_Whitty.pdf.

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