The new UK state aid regime – what will change after Brexit?

Posted in Antitrust and competition WTO and international trade

One of the consequences of the UK leaving the EU is that the UK will no longer be subject to EU state aid regulation. However, as we reported in an earlier post, the UK Government has made clear that it will put in place a domestic state aid regime whether the UK leaves under a negotiated deal or with no deal. Under the new regime, the Competition and Markets Authority (CMA) will be tasked with carrying out state aid monitoring and compliance in the UK (a role which is currently undertaken by the European Commission).

On 21 January, draft regulations were laid before Parliament which will establish the UK state aid regime in the event of a ‘no deal’ Brexit. The State Aid (EU Exit) Regulations 2019 (Draft Regulations) provide for large swathes of substantive EU state aid rules and guidance to be carried over following Brexit. For the time being, the most notable changes for UK public authorities and companies are the new procedures for notifying state aid to the CMA and the CMA’s new monitoring and enforcement powers.

In this post, we provide a brief outline of some of the most important provisions in the Draft Regulations. In a series of posts to follow, we will explore the Draft Regulations’ provisions in greater detail: (i) the procedure for notifying aid measures to the CMA, (ii) the CMA’s functions in relation to non-notified aid and aid in legislation and (iii) appeals and the CMA’s enforcement and monitoring powers.

Rules on notifying new aid measures

The procedures for notifying new aid measures to the CMA will be similar in many ways to the European Commission’s existing processes – although there will be some important differences.

In broad terms, the CMA will first examine the measure and, if it is “not satisfied” that it can approve the aid following that initial examination, it must open an in-depth investigation. There is no provision in the Draft Regulations for pre-notification discussions to take place, although the CMA has previously stated that this will be a feature of the new regime.

There would appear to be a number of differences between the respective CMA and European Commission initial examination phases which may become significant in time:

  • The test for opening an in-depth investigation is different under the new UK regime (if the CMA is “not satisfied” it can approve the aid, while the European Commission is required to open an in-depth investigation if it has “doubts” that the aid can be approved). It is not yet clear what impact, if any, these different tests may have in terms of the numbers of notifications which are ultimately investigated.

  • The Draft Regulations appear to suggest that the CMA will be able to issue “conditional” approval decisions at the initial examination stage – under the EU regime, the European Commission can agree to accept undertakings from Member States, but it cannot impose its own conditions at the initial examination stage.

In relation to the investigation of more complex aid measures (i.e. those which cannot be approved following an initial examination), CMA guidance published shortly after the Draft Regulations states that it is working to ensure that it will have in place the necessary decision-making structures and processes. The CMA states that separate guidance concerning these processes will be published in the event of a no deal Brexit.

Little change to “substantive” state aid rules

The Draft Regulations envisage minimal changes to the rules which the CMA will apply in deciding whether a measure contains state aid and if, if so, whether it can be approved:

  • The Draft Regulations adopt with only minor modifications state aid provisions in the Treaty on the Functioning of EU – so, for example, the CMA must approve aid of “a social character” or to deal with “damage caused by natural disasters”.

  • For other measures, the CMA will have to decide whether “any adverse effects on trade and competition are justified by the objective of the aid”. In doing so it must have regard to any relevant guidance in CMA “statements of policy” – importantly, the CMA is required to publish as statements of policy the various European Commission state aid frameworks and guidance documents dealing state aid rules in different sectors.

  • The “exemptions” from notification will stay largely the same – the General Block Exemption Regulation; the Commission Decision on Services of General Economic Interest; and the De Minimis Regulation will all be brought into UK law as “retained EU law” under the European Union (Withdrawal) Act 2018. The Draft Regulations do however make some minor amendments to those instruments to “correct deficiencies” arising from the fact that the regime will be domestic and enforced by the CMA, rather than the European Commission.

It is also worth noting that decisions in which the European Commission has, prior to Brexit, approved or rejected UK state aid measures will continue to apply as retained EU law.

This means that we can expect the substantive state aid rules to be the same for all intents and purposes in the event of a “no deal” Brexit. Importantly, however, there is provision in the Draft Regulations for the CMA to revoke, amend or replace statements of policy, meaning there is a possibility of the UK diverging from EU state aid rules over time.

Aid in Acts of Parliament

Perhaps one of the more controversial aspects of the Draft Regulations is the provision for the CMA to issue an “advisory opinion” on whether a proposed Act of Parliament (or an existing Act) contains state aid. If the CMA is of the opinion that legislation does provide state aid, it must provide an opinion on whether that aid is “notifiable” and if it is “likely” to be approved if notified. An advisory opinion can be requested by a Minister of the Crown but the CMA will also have the power to provide an opinion on its own initiative.

It would seem these provisions are an attempt to account for the fact that the CMA, as an arm of the state, will not have the power to strike down primary legislation. Therefore, the intention appears to be that the CMA would pre-emptively identify legislation which risks being incompatible with the state aid regime, rather than investigating the measure once it has been brought into force.

Appeals and enforcement

The Draft Regulations do not contain specific provisions relating to appeals against CMA decisions. Absent any changes in the legislation, judicial review would appear to be the only recourse for a party wishing to challenge a CMA decision – and given the relatively high bar to success in judicial review proceedings, it may be difficult in practice to overturn CMA state aid decisions.

If the CMA finds that an aid grantor has provided unlawful aid, it must make a recovery order requiring the aid grantor to take “all necessary measures” to recover the aid and interest payable on the aid from the beneficiary. This makes clear that it will be the responsibility of the aid grantor – and not the CMA – to recover any unlawful aid. The CMA can also issue interim recovery orders, suspension orders and termination orders – we will look at these powers in more detail in a subsequent post.

In the case of a CMA examination into misuse of aid (i.e. aid which has been approved by the CMA which is suspected of being misused), the CMA will have the power in certain circumstances to obtain information on-site at an aid beneficiary’s premises, with and without a warrant. This is similar to the CMA’s “dawn raid” powers as part of its other functions; the European Commission also has such “on-site monitoring” powers under the existing state aid rules.

It is also worth noting that the EU’s limitation period of 10 years is replicated in the Draft Regulations – any older aid cannot be investigated or recovered.

Transitional rules

The Draft Regulation and CMA guidance clarify that, in the event of a no deal Brexit, state aid which was approved by the European Commission before exit day will not have to be notified again to the CMA. However, aid measures which are still under consideration by the European Commission on exit day must be re-notified to the CMA. It remains to be seen how ongoing Commission investigations and outstanding negative decisions in respect of the UK will be dealt with after the UK has left the EU.

Next steps

The Draft Regulations will be debated before Parliament in the coming weeks and, if approved, will come into force some time before 29 March. We will keep you informed on this blog on the progress of the Draft Regulations and on the various CMA statements of policy, notices and other guidance which are expected before March.

In the following post in this series, we will look in greater detail at the Draft Regulations’ provisions relating to the procedures for notifying new aid measures to the CMA.

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