A £174 billion hit to the UK data-centric economy - the price of a No Deal Brexit?

A new study from University College London (UCL)suggests that revenue of around £174 billion generated for the UK as a key hub in the global movement of data will be almost instantly at risk in the increasingly likely event of a No Deal Brexit. 

And not only will it affect the revenue from being a data-hub, especially for time and security sensitive financial transaction data, but it is likely to hobble both the majority of development of new business opportunities and, perhaps more importantly, the one post-No-Deal-Brexit business opportunity of becoming a low corporate tax haven, conveniently parked just off-shore from (and hopefully for) the EU.

`EU-UK Data Flows,  Brexit and No-Deal:  Adequacy or Disarray?’ has been written by Oliver Patel, Research Associate and Institute Manager at the UCL European Institute and Dr Nathan Lea, Senior Research Associate at the UCL Institute of Health Informatics.  Dr Uta Staiger, Executive Director of the UCL European Institute, and Anton Gromoczki, Research Intern at the UCL European Institute, also contributed.

One of its key findings is one that might be considered reasonably obvious – but it is no less important for all that. Basically, once a no-deal Brexit is arrived at the UK is outside of EU control systems and service, and therefore nothing about its data handling regime can be guaranteed. Therefore, so far as the EU is concerned it cannot be used for any data demanding any form of regulation.

All that legal small print

It points out there could be potential incompatibilities between the UK’s Investigatory Powers Act 2016 and EU Law. The UK’s place in the Five Eyes intelligence-sharing alliance would also be in doubt. As the UK is not retaining the EU Charter of Fundamental Rights there will, post Brexit, be no fundamental right to data protection in the UK, while there will also be no protection against the onward transfer of data held in the UK. The authors particularly cite the USA as a possible recipient of such data transfers, a factor which could then trouble both EU countries and others that use the UK as a major hub for data traffic and sensitive data transfers.

Once outside the EU without a deal, the UK would require the EU to issue an Adequacy Decision. Without this, the UK would be excluded from the EU data protection governance framework. The UK Government expects this to occur during the transition period that follows the ratification of the Withdrawal Agreement. But a No Deal Brexit will have no Withdrawal Agreement, just a unilateral declaration by the UK Government.

This brings into play some other aspects of a possible No Deal, including the threatened non-payment of the so-called `divorce bill’, estimated as being between £20-£39 billion. There are some imponderables around this issue, including the actual amount, whether a date exists after which it need not be paid, what the long term consequences of not paying it might be, and how long it might be before the EU and UK start negotiating any form of withdrawal agreement. It is reasonable to assume however, that any no deal Brexit departure will, for the UK, mean that an adequacy decision.

Another complication here is that, because the UK would be outside the EU jurisdiction, Brussels could withdraw an Adequacy Decision at any time, either by having it revoked by the European Commission, or invalidated by the Court of Justice of the European Union.

This would not mean that data flows to and through the UK would be terminated, as the study makes clear. There is a significant caveat, however.  The authors suggest that the level of disruption would be significant due to the costs, resources required and the bureaucracy that each organisation would have to establish and manage on a on-going basis so that any level of data transfer could continue to function.

In addition, they suggest that each organisation would have to set up the necessary alternative legal arrangements before they started transferring data, otherwise they could risk facing enforcement actions, coupled with large fines from external regulators. This would almost certainly be the case with EU-UK transfers. It would also require some renegotiation with the USA over interaction with the US-EU Privacy Shield regulations.

And then what?

So where, in practical terms, does this leave enterprises? It is impossible to say with certainty, of course, but all businesses are going to require, at the least, additional resources committed to setting up and maintaining the needed legal and administrative services. It will probably require them to re-plan long term business budgets, for this is a problem that is not likely to go away quickly.

Submarine cable maps suggest that the vast majority of trans-Atlantic cables land in the UK, with only a minority in France and the North East European coast. Given the strategic importance of data transfers, especially between financial centres, it would not seem unreasonable, in a post-No Deal Brexit environment, that the major telco carriers make the investment in either re-routing some of those cables to EU member states, or laying new cables that service them directly. Given the numbers involved, it would seem likely that the return on such Investments could be quite aggressive and worthwhile.

If that proves to be the case, it is possible to see that the UK could end up low on the investment priority list, especially if the added costs and disruptions from greater bureaucracy and legal hassles reduce the viability of operating businesses here. For example, M&A consultancy Livingstone is suggesting that the devaluation of sterling means that UK manufacturing industries will get a boost from greater access to new markets. This may be possible, but it will certainly be hampered by any disruptions and extra costs that come from communicating with those markets and transferring data to and from them. In addition, many of the larger manufacturing businesses in the UK are now foreign-owned, and any negative impact on communications will be a key factor in plans for any further investment plans.

This problem could also have a significant impact on one of the key post-Brexit plans widely touted about by Brexit supporters. Being a tax haven is, of course, predominantly a business of financial and legal manipulation across national borders. It is a process that could certainly add significantly to the gross revenue of UK Plc, though arguably the application of modern IT services would mean it would do little for local employment.

More to the point, it is a business based on the ability to move data quickly, securely and above all, reliably. As this study shows, the move to a No-Deal Brexit brings with it the possibility of terminally holing the tax haven prospects below the waterline, and if there are any doubts amongst any of the major players in the global financial markets, they simply will not play, and may well take their other businesses with them.

My take

It says much that, with only a couple of months to go till 31 October, there is still so much unknown, and with the side leading the charge for it all being the one least capable of enlightening anyone. This University College study of a post-No Deal scenario covering its impact on the UK’s role as a major global hub for data transfer is, at this late stage, at least unnerving. The vast majority of UK businesses must now make extensive use of IT and the internet for all aspects of managing their businesses, so the findings of this study could have an impact right across the board.

If businesses can’t communicate with customers or partners when they need to, or more important still cannot manage their money when they need to they will need to prepare for, at the very least a much more sedate pace at which to do business – with every implication that goes with that thought. It is one of the finer ironies that it may also have the result of making the much vaunted `tax haven-UK’ a non-starter as well