The Draft Withdrawal Agreement – UK and EU institutions to work closely together on competition and state aid after Brexit
The Draft Withdrawal Agreement (the Agreement) sets out in some detail how the competition and state aid rules apply in the UK in the period after the UK leaves the EU – and, in particular, after the end of the transition period currently intended to finish on 31 December 2020. The current EU rules are effectively extended in the UK during the transition period but the important detail provided in the Agreement relates to: (i) how jurisdiction over the UK aspects of cases that are “live” at the end of transition period is determined; and (ii) the rules applying under the “backstop” mechanism designed to avoid the need for a hard border between Ireland and Northern Ireland. The key points are:
- The European Commission will retain jurisdiction over ongoing cases initiated before the end of the transition period and, for a period of four years after the transition period, the Commission will be able to initiate new state aid cases regarding UK aid granted before the end of the transition period.
- The backstop mechanism will keep the UK in the EU customs union until an alternative is agreed. For this to work, certain EU rules – including on state aid – need to remain in place for the duration of the backstop. The Agreement sets out how this will work in detail, with the UK and EU rules on competition and state aid being very closely linked for at least the backstop’s duration.
- In respect of state aid, under the backstop arrangements there will be close, ongoing cooperation, with the Competition and Markets Authority (CMA) enforcing state aid rules regarding measures affecting trade between Great Britain and the EU, but the Commission continuing to enforce the rules where measures affect trade between Northern Ireland and the EU.
- The backstop arrangements also include provisions to deal with anti-competitive behaviour that has an effect on trade between the EU and the UK – addressing a gap that may exist after Brexit given the EU competition rules apply to anti-competitive behaviour that has an effect on trade between EU Member States, and the UK rules to behaviour that has an effect on trade in the UK.
Whether the backstop ever comes into play remains uncertain for now – not only must the Agreement clear the (not insubstantial) hurdle of UK Parliamentary approval, but the EU and UK have a “best endeavours” commitment to reach a different future agreement by 31 December 2020. But while the UK Government has stated the backstop position is not the preferred or expected outcome, a continuing close relationship between the UK and EU competition and state aid rules remains the likely outcome in any final deal and is provided for in the Outline Political Declaration published at the same time as the Agreement.
The provisions of the Agreement in this respect are considered in more detail below.
The UK already plans to apply EU state aid rules within the UK following Brexit, with the CMA stepping into the enforcement role currently taken by the European Commission. The Agreement deals with state aid affecting trade between the UK and the EU during the backstop period. EU state aid rules will continue to apply in these cases while the backstop is in place, with the CMA taking the lead on enforcement regarding measures that affect trade between Great Britain and the EU, and the Commission retaining responsibility to enforce measures that affect trade between Northern Ireland and the EU. The Agreement provides for the CMA to be appropriately resourced to undertake this enforcement, and makes clear that decisions of the CMA should have the same legal effects as those of the Commission.
The Agreement also provides for close, ongoing cooperation between the CMA and the Commission: including information sharing and a right for the Commission to give an opinion before the CMA reaches a decision on a state aid matter affecting trade between Great Britain and the EU – and an obligation for the CMA to take “utmost account” of that opinion. The Commission will also have the right to intervene in state aid cases brought in the UK courts. The agreed dispute resolution procedure under the backstop arrangements also includes the possibility of the EU adopting interim measures (pending a final resolution) if it considers the UK’s application of the state aid rules threatens to seriously undermine competition between the parts of the single customs territory.
Unlike state aid, we already have a set of competition rules in the UK (under the Competition Act 1998) which mirror those in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). As a result, there is no need to set up a new UK competition regime. However, the Agreement deals with a potential enforcement gap that could arise after Brexit.
The EU competition rules apply to anti-competitive behaviour that has an effect on trade between EU Member States, and the UK rules apply to anti-competitive behaviour that has an effect on trade in the UK. Under the backstop arrangements, the Agreement contains new provisions to deal with anti-competitive behaviour that has an effect on trade between the EU and the UK. These are the same in substance as the existing UK and EU rules, and are to be interpreted by both the EU and the UK consistently with the EU provisions. The UK and the EU are obliged to take all appropriate measures to apply these provisions and therefore fill any gap, and are required to enforce them in their respective territories. In addition, the competition authorities in the UK and EU will endeavour to cooperate – particularly where they are working on parallel or related cases – and may enter into a separate agreement or framework on how they will do this.
This is likely to address an issue that has previously been a point of discussion, around whether the UK and EU will continue to apply the same rules to parallel imports following Brexit. Given this proposed approach to trade between the EU and the UK, it seems very likely that parallel imports between the EU and UK will still be protected after Brexit.
The backstop arrangements also provide that concentrations between undertakings – i.e. M&A transactions – that are notifiable to the UK, the EU, or one or more EU Member States and raise serious competition concerns will be declarable incompatible in so far as they affect trade between the EU and the UK, meaning such transactions will be blocked absent acceptable remedies. Given national merger rules tend to focus on national competition concerns, it will be interesting to see how this develops in practice and whether further guidance emerges before the end of the transition period.
Outside the scope of the backstop, the Agreement also sets out more details on how the transition from EU to UK competition and state aid rules will work in practice. The Agreement confirms that the Commission will continue to have jurisdiction over any competition or state aid matters that were formally initiated by it before the end of the transition period – this avoids the need for messy handovers or duplicate processes.
In the case of M&A transactions, the EU will retain jurisdiction where a transaction has been “notified” to it before the end of the transition period (subject to certain more specific trigger events for transactions not meeting the turnover-based thresholds for an EU review but referred to the Commission under its referral mechanisms). In contrast to the “no deal” scenario, the Commission would therefore retain jurisdiction having commenced a formal Phase 1 review but not yet reached its decision.
In addition, the Commission will have the ability to open new investigations into state aid granted by the UK during the transition period for up to four years following the end of the transition period.
The provisions of the Agreement are complex – particularly around the operation of the backstop. But the clear message is that the UK and EU competition authorities will remain in close cooperation following Brexit.