Brexit Director Peter Wilding looks at the major issues facing the automotive industry as the EU withdrawal deadline looms and answers some key questions.
Introduction: The legal landscape
Brexit has created uncertainty for many industries, and the automotive sector is no exception. The EU is one of the UK's largest automotive trading partners. The UK currently exports approximately 80% of all cars assembled here, with 53% of all UK vehicle exports and 94.1% of commercial vehicle exports going to the EU. Continued trade with the EU is vital for business stability in the automotive industry.
The automotive sector is largely dependent on just-in-time delivery systems where products are delivered directly to the assembly line with little or no requirement to warehouse stock, which minimises costs and maximises efficiency.
The current proposal put forward by the UK government would see the UK maintain ongoing harmonisation with EU rules for goods until December 31st 2020. If a trade deal has not been agreed by that date the UK government can seek a two year extension. After 2020, UK based manufacturers seeking to sell into the EU's single market will have to comply with EU regulations, unless a future trade deal allows for a degree of divergence.
In this event, delays at the border due to compliance checks are likely to result in added costs and a potential need to warehouse stock. Additional regulatory checks will be administratively cumbersome, time consuming and expensive. These checks will be needed to ensure that products being exported to the EU comply with EU environmental and product standards.
In the event of a "no deal" Brexit, the UK will be required to trade under World Trade Organisation (WTO) Rules where border checks and trade tariffs would apply. Clients cannot assume that, because all EU product and environmental laws may continue to apply in the UK, all products will also comply with EU standards.
The introduction of export taxes - 10% tariff on cars and a 4.5% tariff on components, in accordance with the WTO's rules - would add at least £1.8 billion to exports and £2.7 billion to imports annually. The list price of cars imported to the UK from the EU could increase by an average of £1,500 which may eliminate the profit that is made on an average car (as estimated at just £450 on a £15,000 car).
- So what is the automotive legal regime now?
- What will be the impact on technical safety requirements?
- What will be the impact on environmental standards?
- What will be the impact on chemical usage?
- What will be the impact on type approval?
- What about regulatory compliance when selling into the EU following Brexit?
- What will be the impact on intellectual property registration and compliance?
- What will the impact be on Investment?
- What about access to skilled workers?
- So what is the automotive legal regime now?
At present, UK automotive manufacturing is subject to a variety of EU regulations covering a range of issues including technical standards, safety, vehicle categorisation and environmental protection. The majority of these regulations stem from EU law, some of which directly apply in the UK and some of which have been incorporated into the UK's domestic legal framework.
These are the EU Regulations that are directly applicable in the UK:
- REACH Regulations (1907/2006) relating to the registration, evaluation, authorisation and restriction of chemicals.
- Noise Reduction Regulations (540/2014) affecting the sound level of motor vehicles to reduce noise by 25% over 10 years by 2026.
These are the EU Directives that have been implemented in the UK:
- Type-approval Directive (2018/858) setting out the safety and environmental requirements that motor vehicles have to comply with before being placed on the EU market. Type-approval authorities regulate various aspects of the performance of motor vehicles, such as CO2 emissions from cars and light commercial vehicles, pollutant emissions and safety standards.
- Car Labelling Directive (1999/94/EC) relating to information about fuel efficiency and greenhouse gas (GHG) emissions to be given to customers to encourage drivers to choose cars with low fuel consumption.
- Renewable Energy Directive (2009/28/EC) which provides that at least 10% of overall transport fuel consumption must come from renewable sources.
- Air Quality Directive (2008/50/EC) on cleaner air.
- Waste Framework Directive (2008/98/EC) setting out the basic definition of waste and principles of waste management.
These are the UK environmental laws:
- Climate Change Act 2008, which has set a target to achieve an 80% reduction in greenhouse gas emissions by 2050 compared to 1990 levels.
- The UK also has targets to ban the sale of new petrol and diesel cars by 2040 and to achieve zero emission cars and vans by 2050 in order to tackle air pollution.
2. What will be the impact on technical safety requirements?
The UK belongs to the United Nations Economic Commission for Europe (UNECE) and will continue to be a member in its own right after Brexit. This sets a number of technical standards at international level in relation to vehicles, systems, parts and equipment, primarily with respect to safety and environmental issues. UNECE safety regulations are adopted by the EU and apply through EU law. The good news is that there are unlikely to be any big changes to UK rules which ultimately flow from the UNECE regime, even where no trade deal with the EU is secured.
3. What will be the impact on environmental standards?
The EU currently sets limits for exhaust emissions of nitrogen oxides, total hydrocarbons, non-methane hydrocarbons, carbon monoxide and particulate matter from new vehicles sold in the EU. There are no UNECE-style harmonised international standards for a limit on car or van CO2 emissions. EU law seeks to reduce in CO2 emissions from new cars and vans sold into the EU's single market by setting fleet averaged targets for manufacturers accompanied by significant fines for non-compliance.
The Brexit negotiations are likely to focus on access to the single market rather than environmental protection. However, environmental policy is important and access to the EU market will not be granted without the UK agreeing to comply with EU legislation relating to environmental standards. This is a result of concerns that there will be a potential post-Brexit lowering of environmental standards and thus a vacuum where key EU environmental regulations would no longer apply. There have also been concerns as to who will enforce environmental law as this is currently the responsibility of the European Commission.
In fairness, in March 2017, the UK government stated in its Brexit White Paper that they would ensure that "the whole body of existing EU environmental law continues to have effect in UK law." Following the transition period, the UK has also agreed (in the European Union (Withdrawal) Act 2018) that all EU environmental law will be copied into domestic law. So there is a general consensus that environmental standards should not regress. On 2 May 2018, Theresa May announced that the UK would maintain environmental standards "at least as high as the EU's."
The fact that environmental standards will broadly be aligned will maintain competitiveness. It also means that the industry can manufacture products to common acceptable standards (emission standards, eco-design requirements and energy labelling systems).
The EU will want to see that industrial emissions standards and other pollution controls are maintained, to avoid UK businesses benefiting from a reduced production cost and consequent competitive advantage.
However, if, in the future, either the EU or the UK was to ban a specific chemical or product or implement more stringent environmental standards and product regulations, this might significantly hinder businesses' ability to trade within Europe.
4. What will be the impact on chemical usage?
The REACH Regulation regulates the import into, and use within, the EU of substances which could have an impact on human health or the environment. It places a range of obligations on automotive manufacturers at various points in the supply chain, including those that produce or import parts such as engines or bumpers, and those that import mixtures and substances such as engine oil or elemental magnesium into the EU. Such obligations include the need to register relevant substances with the European Chemicals Agency (ECHA) and the provision of information up and down the supply chain.
5. What will be the impact on type approval?
In order to be sold in the EU, vehicles must be approved through the Whole Vehicle Type-Approval System. Under this system an approval body, authorised by the EU, can test compliance of vehicles with relevant UNECE and EU environmental, safety and security standards. Once approval is granted by one approval body it is accepted throughout the EU without the need to undergo further testing by other national approval bodies. In the UK, the authorised approval body is the Vehicle Certification Agency (VCA). The VCA has powers to withdraw or suspend type approvals where vehicles are found not to conform to the approved type or deny approval where standards are not met such as road safety, environment or public health.
Whole vehicle type approval brings together all the individual system and component approvals for a vehicle into a single legal document enabling a manufacturer to demonstrate that it complies with all the relevant technical requirements. The manufacturer can then produce subsequent vehicles in conformity with the original approval, and issue a certificate of conformity for each vehicle.
Where automobile parts are manufactured or sold separately, generally, they must be tested for compliance with the vehicle to which they will be fitted. However, certain component parts can be tested for compliance in isolation (for example, seatbelts).
If we have a deal and a transition, the UK and EU would continue to recognise each other's type approval authorities (including whole type approval certificates and assessments of conformity of production processes); and UK agencies could be designated by EU approval authorities to authorise UK manufacturers.
After 2020, and subject to the terms of any future trade deal, following the transitional period, the EU has declared that the VCA will cease to be recognised as an EU type-approval authority. In addition, the VCA will no longer undertake market surveillance in line with EU requirements around type approval. VCA issued approvals will continue to be valid in the EU until the end of 2020. However, there is a question over whether any type approvals issued by the VCA during the transition period would be valid in the EU27. In April 2018, the European Commission published a proposed roadmap which would require manufacturers with a type approval from the VCA to seek a new approval from an authority in one of the EU27. However, the manufacturer would be able to re-use test reports where testing requirements had not changed. The EU27 approval authority would then conduct all necessary conformity checks going forward.
If no agreement is reached, a 'hard' Brexit would ensure that the UK's relationship with the EU would instead be governed by general international public law, including the basic rules of the WTO. In this case, movement of goods would be severely restricted by import and export formalities. Similarly, although UK manufacturers are already required to comply with the Whole Vehicle Type Approval System, goods would nonetheless become subject to conformity assessment procedures. The lengthy process of re-certification (possibly on a country-by-country basis) would likely result in the suspension of manufacturing activities until the requisite approvals were obtained, at a significant cost and to the great detriment of planning timetables.
6. What about regulatory compliance when selling into the EU following Brexit?
The UK's current negotiating position is to secure regulatory alignment with the EU so that manufacturers will not be faced with two conflicting sets of regulatory requirements that would mean different processes (and the costs that would bring) when selling in the UK and in the EU.
However, some of the details and processes may change to the extent the EU decides that any subsequent UK regulations are not the same as that in the EU. So where no future trade deal is reached with the EU which allows for acceptance in one jurisdiction of approvals and regulatory actions taken in the other, then companies may be faced with the administrative burden of complying with two sets of requirements to sell in both the UK and the EU.
During the transitional period, businesses will be able to continue to undertake compliance activity in the UK or overseas, which is overseen by UK-based authorities.
With respect to other areas of regulation, again everything will depend on whether the UK is able to secure a future trade deal with the EU in which the EU recognises the UK's regulatory regimes as being equivalent to its own. In this case, the UK would maintain existing EU regulatory rules, and keep those rules up-to-date as EU law develops in the future. Manufacturers could continue to rely on regulatory approvals granted in the UK when selling into the EU and potentially maintain EU product registrations such as the registration of chemical substances with the ECHA.
7. What will be the impact on intellectual property registration and compliance?
If a deal is reached ahead of Brexit, the transition period would preserve the status quo for intellectual property (IP) until the end of 2020. However, the rising importance of autonomy and mobility as a service is likely to require revised IP strategies. These strategic decisions must take account of Brexit.
Brexit will impact intellectual property regimes presently in operation in the UK; but exactly how depends upon the subsequent relationship between the UK and the EU.
In the absence of an agreement being reached, the UK Government has indicated that it intends to preserve the existing body of EU law in the national law of the UK. However, the UK cannot unilaterally preserve its involvement in pan-EU regimes concerning intellectual property.
At present, there are two patent systems: the national system, in which an application is made to the UK Intellectual Property Office (UK IPO); and the European system, in which an application is made to the European Patent Office (EPO). Questions of infringement or validity of a patent covering the UK granted under either system are litigated in the courts of the UK.
A no deal Brexit will not impact significantly the existing patent systems, both of which are largely outside the remit of EU law. However, a no-deal Brexit would be a considerable obstacle to the UK's involvement in the proposed Universal Patent Court (“the UPC”). This is because the UPC system draws upon aspects of the EU's legal system, such as the mechanism for reference to the European Court of Justice governing jurisdiction and enforcement.
There are two systems for registration of a UK trademark. Either system may be accessed via the Madrid international system. For a UK national trademark, an application is made to the UK IPO. Questions of infringement and validity are a matter for the courts of the UK. As the system is governed by national law (amended in order to comply with EU-wide harmonising legislation), a no deal Brexit will not impact significantly the UK national trademark system.
For an EU-wide ("unitary") trademark, an application is made to the EU Intellectual Property Office (EUIPO). Questions of infringement and validity are a matter for EU trademark courts around the EU (such as the High Court of England and Wales), whose judgments have effect for the whole of the EU. Jurisdiction is governed by the EU trademarks legislation and the Brussels regime.
Upon a no deal Brexit, the EU trademark system would cease to cover the UK. The UK government will introduce a mechanism to allow an EU trademark owner to become the owner of an equivalent national right covering the UK upon Brexit; questions of infringement and validity being a matter for the UK courts. The remaining EU registration would continue to be enforceable (including by UK owners) in the remaining EU. UK based brand owners should, however, be aware that after Brexit, issues regarding genuine use or acquired distinctiveness of the remaining EU trademark may be assessed without reference to activity in the UK or the perceptions of UK-based consumers.
In the meantime, brand owners relying upon EU registrations can file UK national trademarks now, in parallel with their EU protection. While this may lead to duplicate
protection in due course, in the short term it may assist with commercial certainty. A new registration also brings no proof of use requirement for the first five years.
There are four systems pursuant to which a design may be protected in the UK: the national registered and unregistered systems; and the EU (unitary) registered and unregistered systems.
Upon a no deal Brexit, both the Community design systems will cease to cover the UK. UK owners of Community registered designs, and of unregistered Community design rights that exist before Brexit, will still be able to enforce them in the remainder of the EU. As regards the UK, the Government has indicated its intent to enact national legislation to allow a Community design owner to become the owner of an equivalent national right. For Community registered designs, the mechanism is expected to track, broadly, that adopted for registered trademarks.
For unregistered Community design right, the position is a little more complex because the Community right protects slightly different aspects of a design than is protected under UK system. UK national legislation will have to provide for a UK national right of equivalent scope to unregistered Community design right.
In the meantime, for UK-based designers and business relying upon Community design right, it should be considered whether steps should be taken to ensure protection for existing and future designs; for example, by filing UK and Community registered designs or considering where the design should be first marketed.
Copyright and neighbouring rights are protected by UK national law, which has been framed to give effect to the terms of international treaties and shaped in order to implement harmonising EU legislation. A no deal Brexit would not significantly impact the regime in its present form.
8.5 Trade Secrets
The common law tort of breach of confidence protects information which has the "necessary quality of confidence", is communicated in circumstances importing an obligation of confidence and is used (or threatened to be used) in an unauthorised way to the detriment of the owner. In June 2018, legislation was introduced in this area for the first time, to give effect to the terms of the EU's Trade Secrets Directive. A no deal Brexit would in practice mean no change from the status quo for the protection of trade secrets in the UK.
8.6 Future divergence?
Across intellectual property law, a no deal Brexit would, in the longer term, provide some scope for divergence from the EU's legislation and the case law of the European Court of Justice. Where the interpretation of EU law continues to require references to the court, such as in some aspects of trademark law, the UK courts may reach a settled solution sooner following Brexit than would otherwise be possible. However, where the interpretation of EU law is settled, the preservation of the acquis will incorporate this and the scope for divergence with EU jurisprudence can be expected to be minimal for as long as the underlying legislation remains aligned.
8.7 Action: Transactional matters and other practical arrangements
All stakeholders should be aware of the impact of Brexit for transactional terminology, including in respect of intellectual property:
- Existing documents, including licences, distribution agreements and other transactional arrangements, should be audited to identify those in which unclear or inappropriate terminology is used. The parties should consider seeking a suitable clarification agreement now. For new agreements, care must be taken with geographical terms, for example listing by name the countries covered by the agreement, not simply the "EU".
- Brexit will not impact the need for parties to ensure that documentary records are kept on the existence and status of both registered and unregistered intellectual property rights. This facilitates timely review of scope of protection vs maintenance fee cost for registered rights and ensures that the subsistence and scope of unregistered rights can be established should a dispute arise, irrespective of whether the regime is UK national or EU-wide.
- A licence granted for the countries constituting "the EU from time to time" may not be fit for purpose following Brexit.
Finally, EU law includes provisions aimed at enabling the "digital single market" which will become more significant to the automotive sector if connected cars, mobility as a service, and in-car content and e-commerce consumption take off. The Commission's European AI Alliance is working on guidelines for AI; these may affect the algorithms used by AVs. The UK Government has stated that the UK's Centre for Data Ethics and Innovation intends to continue to participate in the Alliance. It is generally likely that for UK companies exporting to the EU, EU requirements will continue to be relevant. One practical concern is whether additional hurdles will be required for companies to move customer data between EU countries and the UK. This is a topic UK companies ought to watch.
9. What will the impact be on Investment?
9.1 Access to funding
The automotive sector has always invested in new technology and is estimated to have spent £12 billion on research and development between 2009 and 2015. The sector is increasingly committed to large investments to develop autonomous, connected and electrical vehicles and in experimenting with new models of shared ownership. Incumbents face existential threats from competition from electronics and internet companies and the pressure to be first to market with the winning "platform" for mobility as a service.
Brexit may impact UK companies' access to funding in at least the following ways.
- UK companies may lose access to EU sources of funding
- Horizon 2020 funding may be withdrawn from UK companies in the event of Brexit. The UK Government has announced its intention to guarantee such funding for UK companies and has set up a portal for applications.
- Funding from the European Investment Bank is also in doubt. The EIB has historically made considerable investments in UK companies (for example supporting UK automotive companies develop low carbon technologies). There are already reports that the EIB's equity investments in the UK fell from 27% in 2016 to 8% in 2017 because of the uncertainty of Brexit. UK companies should look for other sources of funding or consider creating presences within the EU to continue to access EIB funding.
9.2 Impact on investment decisions by carmakers
New tariffs on automotive components may lead carmakers to move manufacture away from the UK and to seek new local suppliers. The threat of such tariffs itself may divert carmaker's investment in the UK, which has fallen by 80% since 2017. The UK Government has sought to reassure specific carmakers and to increase investment in the automotive sector with the Automotive Sector Deal announced in January 2018, including targeted investment in supply chain competitiveness, low carbon vehicles, batteries and connected and autonomous vehicles. The UK Government intends to create a positive regulatory environment for key automotive R&D. It has produced guidance, for example for autonomous vehicle testing and for cybersecurity, and intends to implement a programme of "rolling" regulatory reform. These measures may help to keep R&D activity within the UK and UK companies should be aware of the sources of government funding and the advantages of the UK regulatory environment.
10. What about access to skilled workers?
Automotive companies are already competing with other companies for skilled workers. Specialists in artificial intelligence (AI) are in particularly high demand across all sectors. The UK Government has strategic plans to invest in AI research based around UK centres of excellence, such as the Turing Institute. UK companies competing for graduates should built up ties with centres of excellence and consider funding research programmes. Brexit may worsen the competitive environment for skilled workers by dissuading EU citizens from studying and working in the UK, though immigration rules may be more encouraging for skilled rather than unskilled workers. UK companies will need to audit their employers to check their continuing right to be here and prepare for additional visa procedures for recruitment of overseas staff.
If no deal is reached, for the purposes of ongoing compliance with EU regulation -
- EU product registrations will need to be transferred or re-registered to an entity in the EU27,
- Companies will also need to appoint a representative in the EU27 to take any actions that need to be conducted in the EU, and
- Testing must be carried out in an EU27 country.
- Companies should keep informed as to the state of play in the ongoing negotiations between the UK and the EU27, particularly in relation to the detail of the transitional period and whether there will be agreement on regulatory alignment in any trade deal coming into effect in 2021.
- In the meantime, companies should take steps to identify the regulatory approvals that they currently hold under EU law and map any regulatory actions or steps that must be taken in the EU which they currently undertake in the UK. Having done so, companies can then plan how they may move such activities to the EU27, if it becomes necessary, in order to secure compliance with EU law.
Remember, you are not alone in going through this process. Here at FBC Manby Bowdler we have a stellar team of experts who can help you take control of your business whatever the politicians decide.
If you would like to contact Peter Wilding to discuss any of the above please contact him on 01694 724440, 07901 008220 or email firstname.lastname@example.org.