Brexit divergence – what does it mean for tech?

16 July 2021 | Ed Cooke

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Ed Cooke

Blog Author | Guest contributor

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Ed Cooke, founder at Conexus Law, explains how and why Brexit continues to change the data centre industry

Making the most of Brexit

In the government’s commentary on May’s Queen’s Speech, the prime minister’s introduction refers to “making the most of our new-found Brexit freedoms” and to “grasping the opportunities of Brexit”. It goes on to state that: “The programme of reform enabled by our exit from the EU will provide new opportunities for growth, expand our horizons, reduce burdens on business and save taxpayers money while upholding workers’ rights and welfare standards.”

So, what does this mean for our sector?

The Queen’s Speech highlights how much potential there is for differences to emerge between how the UK and the EU legislate in a number of areas that will impact the data centre and tech sectors. Major differences are unlikely in the short term, but businesses should expect there to be divergence in the regulatory regimes over time despite the EU-UK Trade and Cooperation Agreement (TCA) setting out minimum standards which reflect the two sides’ overlapping interests.

In fact, it is worth noting that, to date, there have been at least 50 different initiatives across the government looking at changes to EU-derived rules.

The Queen’s Speech

Some of the legislative proposals announced in the Queen’s Speech would not have been possible before we left the EU, particularly those involving state aid restrictions. Coming so soon after the TCA, this pace of change suggests that we should expect more divergence, rather than less.

One of the key priorities of the EU during the TCA negotiations was to secure a “level playing field” on state aid, in order to ensure that EU-based companies would not be competing with UK businesses that were in receipt of subsidies that did not conform to the subsidy limitation rules imposed by the EU state aid regime. In essence, a half-way house has been agreed and so there is some room for manoeuvre by
the UK.

This has enabled the government to introduce legislation like the Advanced Research and Invention Agency Bill, which is about promoting scientific innovation in the UK, so that we attract people and business from across the world. It includes increasing public expenditure on research and development to £22 billion and a focus on funding high-risk, high-reward research and development. It is likely to provide a vehicle through which UK government can sponsor private business in the sector.

Life outside the EU’s state aid regime

This is promising news for the sector. The government has made it clear that it views digital transformation as a key driver for UK growth. It is planning to relaunch a UK digital strategy, positioning tech at the heart of the pandemic recovery. It has ambitions for more interoperability, storage and application of data in public services, as well as plans for building an enterprise regime that generates more ‘unicorn’ start-ups. Outside the EU’s state aid regime, the UK government could potentially provide greater financial support to the development of innovative technologies and the roll-out of digital infrastructure (a commitment to 5G roll-out nationwide was also in the Queen’s Speech).

Supporting sustainability

The same applies for the country’s green agenda. The government wants to demonstrate its role as a low emissions leader ahead of COP26. Brexit has provided an opportunity to accelerate funding, R&D and regulation for green technologies and the UK has set out its plan for a new green industrial revolution focused on green and blue hydrogen, carbon capture, usage and storage (CCUS), and electric vehicles.

If these are the areas to which they want to attract investors and direct consumption in the UK, Britain can now demonstrate a clear regulatory pathway, independent of the EU, and deliberately favouring UK energy priorities.

However, the scale of financial commitment will be key as the EU has already demonstrated a willingness to commit large sums to facilitate an increasing role for renewables and the UK may be tempted to do the same.

GDPR

In practice, there are few areas where the UK is likely to diverge significantly. The government has recently discussed reforming data protection law and diverging from the EU’s General Data Protection Regulation (GDPR). Digital secretary Oliver Dowden has signalled the UK will explore ways to diverge from the GDPR to find a “sweet spot” that will encourage growth in the post-Covid economic recovery.

This move is designed to allow information to flow more freely and drive growth in the global digital economy. This is good news for anyone dealing purely with UK data as it should make reaching adequacy agreements with other non-EU countries easier. However, anyone holding EU data will still have to manage their compliance with the EU regulation.

Those companies that hold both EU and UK data (and this is not always a simple question to answer) will likely need to run a dual system, which may be complex and time-consuming. Knowing which rules apply to your data sets and transfers will never have been more important.

Product standards

One area that starkly demonstrates the problems around divergence is that of product standards. The UK is in the process of switching from the Europe-wide CE marking for certifying product safety, environmental and health standards to the new UK-only UKCA marking.

It is currently in a transition period, which means both the CE markings and the new UKCA markings can be used until December 31 this year. But from January 1 2022, all products which previously required a CE mark will need to be retested to obtain the UKCA mark.

Along with the additional cost to businesses of having to have two certifications, there is also real concern over whether the new marking system will be ready in time and what the consequences of that will be. Many in the construction industry, for example, are already raising serious doubts over the speed at which these certifications will be issued, which compounds existing supply chain problems caused by factory shutdowns during the Covid-19 pandemic, Brexit-related changes to import tariffs and procedures, and the blocking of the Suez Canal.

Convergence or divergence

Moving forward, the levels of divergence are likely to be constrained by both domestic and external dynamics. The digital sector is global by nature so divergence between the UK and EU may not be automatically welcomed by businesses. In some areas there is also an acknowledged role for convergence and standardisation, as well as divergence.

With regard to climate change, for example, given the end goal of reducing net emissions is broadly the same, the UK and EU are clear there will be instances of collaboration on energy. For example, the UK remains open to linking its emissions trading system to the EU’s, given that a robust cross-carbon price will make renewables more competitive.

UK policymakers will need to weigh the benefits to be gained from diverging from EU regulatory standards against the significant costs that would arise for businesses from such a move.

Though significant divergence appears unlikely in the short term, the strength of desire to assert sovereignty and a possible need to accommodate the demands of other global trade partners are two factors that could spur regulatory divergence between the UK and EU in time.

Politics and public opinion will also inevitably play a role too.