Brexit – ‘Not enough time to provide IT systems for no deal scenario’

SUMMARY:

The House of Lords European Union Committee has examined whether a no deal Brexit scenario is better than a bad deal – the answer is no it’s not.

Is a no deal Brexit scenario better than a bad deal for the UK? That’s certainly been the judgement that’s been touted by our Prime Minister and many senior Conservative MPs. In fact, it’s become one of the most popular catchphrases associated with the whole Brexit saga.

However, unsurprisingly, having received evidence from a broad spectrum of stakeholders, including industry and government, the House of Lords European Union Committee has unequivocally found that a no deal scenario would in fact be very, very bad for the UK. Much worse than a bad deal scenario, in fact.

The Committee’s latest report comes as the British government’s negotiations with Brussels have fallen apart, following a backlash from the DUP (which is propping up Theresa May’s government) over the details of Northern Ireland’s future alignment with the EU – in order to avoid a hard border with the Republic of Ireland.

The Prime Minister had hoped to secure an agreement with the European Commission on the three sticking points thus far – the Irish border, the divorce settlement and the rights of EU citizens residing in the UK – to allow negotiations to move on to phase two, the all important trade deal talks.

The UK is hoping to achieve an unprecedented trade deal with the EU – to govern a number of important factors, such as the sharing of data, and reduced tariffs – to avoid a cliff edge upon its exit from the Union.

Securing a trade deal is a long and complicated process, one that we’ve covered extensively here on diginomica, and time is running out between now and the March 2019 deadline, for when Britain is set to leave the trading bloc.

The Committee’s report provides a broad range of evidence for why a no deal is likely to be incredibly harmful to the UK. In particular, it notes that there is not enough time for the government to get the IT systems in place for a ‘cliff edge’ scenario and that industry is likely to be severely impacted by losing its current data sharing arrangements within the single market.

Equally, given the UK’s economy relies heavily on services, many of which are digital, a no deal scenario will result in many negative consequences for trading.

The Committee doesn’t hold my hope for a comprehensive trading deal being in place by March 2019. It’s report states:

This report explores the consequences of ‘no deal’—the failure of the UK and the EU to reach agreement on either withdrawal or future relations. The overwhelming view of witnesses was that ‘no deal’ would be deeply damaging for the UK.

It would not just be economically disruptive, but would bring UK-EU cooperation on issues such as counter-terrorism, nuclear safeguards, data exchange and aviation to a sudden halt. It would necessitate the imposition of controls on the Irish land border, and would also leave open the critical question of citizens’ rights.

The UK is leaving the EU, so a substantial change in UK-EU relations is unavoidable. Against this backdrop, the Government’s assertion that ‘no deal is better than a bad deal’ is not helpful. It is difficult to envisage a worse outcome for the United Kingdom than ‘no deal’.

An early and comprehensive agreement would, in our view, be the best solution for all sides. But precedent, and the overwhelming weight of evidence, suggests that it will not be possible by March 2019, and that negotiations on future relations will need to continue beyond that point.

The impact

The report attempts to include a section on the positive consequences of a no deal scenario, but ultimately finds that there are very few examples to include.

However, the negative consequences are extensive. One important point, raised by John Longworth, co-chairman of Leave Means Leave, avid advocates of Britain opting for a hard Brexit, which means leaving the single market and the customs union, is that there is little time left for HMRC to get its new customs system – CDS – upgraded in time to huge increase in custom declarations.

It has been noted that HMRC is under significant pressure to get the system in place in time for Brexit, with the Public Accounts Committee have issued a stern warning that they are extremely concerned about the lack of funding, progress and contingency plans in place.

Longworth told the House of Lords Committee:

If the UK Government were serious in pursuing a no-deal option, they would look at taking practical measures very soon to implement it. It is not enough simply to plan it on paper, because to be ready to have a reasonably smooth exit without a deal by March 2019 we need to be doing stuff now … It is unfortunate that the Government did not crack on and start to upgrade the HMRC IT system quickly enough. That has delayed that process and wasted time.

However, it’s not just HMRC that has to get new systems in place. We’ve heard stories about departments that are closely integrated and impacted by EU regulations, that have systems hosted in the EU and will need to get everything up and running by the time Britain departs the trading block.

For example, we recently heard how Defra is preparing for a March 2019 deadline, but said that this short time frame will mean more risks for new systems. The report out this week highlights the challenge facing the government, particularly with a no deal scenario. It states:

The wider economic impact of an abrupt departure from the EU single market and customs union, and the adoption of WTO conditions for trade, would be felt across a range of sectors, including financial services, the agri-food sector, and aviation. It would have a particularly disruptive impact on cross-border supply chains.

The short-term impact on trade in goods would also be grave: the UK’s ports would be overwhelmed by the requirement for customs and other checks. There is simply not enough time to provide the necessary capacity, IT systems, human resource and expertise to deal with such an outcome.

Finally, as we have noted time and time again, when modern-day business relies heavily on digital services and the international exchange of data, a hard Brexit and a no deal scenario would likely create a nightmare situation for many businesses in the UK.

The UK is hoping for data adequacy status upon leaving the European Union, which should mitigate the risks. Data adequacy is granted when the European Commission feels that a territory that is not part of the EU has data protection laws and practices that are aligned to the EU’s high standards.

Currently ten countries have been granted the status, including Israel and New Zealand. The USA and Canada have only been deemed to be partially adequate, and the data sharing with the USA is governed by the 2016 Privacy Shield agreement.

The British government has been warned that it faces a ‘cliff edge’ on data exchange with the EU after March 2019, when it officially withdraw from the European Union. Whilst the UK has committed to complying with the EU’s upcoming General Data Protection Regulation (GDPR), this is no guarantee that it will gain adequacy status upon exit.

The financial services sector in particular had words of warning for the House of Lords Committee. The report states:

Lloyd’s predicted that the transfer of personal data from the EU to the UK would also be more difficult for UK firms doing business in the EEA. London based firms would therefore have to establish EEA subsidiaries or cease to write EEA insurance.

The Association of British Insurers agreed, and argued that a system where UK insurers had to abide by dual or multiple regulatory systems in order to transfer data internationally would create inefficiencies, legal uncertainty, and risks, damaging the global competitiveness of UK insurance.

My take

The government should stop spouting that ‘no deal is better than a bad deal’. It’s likely that this is being used as a negotiating tactic with the EU – giving the impression that we are willing to walk away from anything not deemed as satisfactory. But in reality, it’s a false tactic. The evidence is so overwhelmingly clear that a no deal is far worse than any bad deal – so let’s just get on with securing the best deal possible.

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