Brexit: a question of competence

The key question asked of the CJEU was whether the EU is able to sign and conclude the Singapore FTA itself, or whether Member States themselves also have to individually agree and ratify it. The answer to this question ultimately comes down to a question of whether signing and concluding the Singapore FTA falls within an area of EU exclusive competence, as the Commission argued was the case.

The general principle is that the EU only has competence as conferred by the Treaties: it can only act within the limits of the powers assigned to it. Since the Lisbon Treaty, the Treaty on the Functioning of the European Union distinguishes between categories of competence, of which there are broadly three:

1. EU exclusive competence: only the EU can act and adopt legally binding acts; Member States can only do so if empowered by the EU or for the implementation of EU acts;
2. EU competence to support, coordinate or supplement the actions of the Member States: the EU can pass legally binding acts if empowered to do so by Treaty provisions, to the extent that it does not harmonise the law in these areas. The EU may not adopt legally binding acts that require the Member States to harmonise their laws and regulations and its powers do not supersede the competence of Member States, however subject to that the EU can have a significant degree of power in these areas; and
3. shared competence : this is a general residual category of competence which means the Member States can act only if the EU has chosen not to.

To answer the question, the CJEU had to conduct an analysis of the contents of the FTA and decide in each case whether the specific provisions fell within EU exclusive competence. In its decision, the CJEU decided that the Singapore FTA includes elements that are not within the EU’s exclusive competence, and must therefore be entered into by the EU and each Member State jointly, rather than by the EU alone (making it a so-called “mixed agreement”). However, the areas that the CJEU has found to be within the EU’s exclusive competence are wider than had previously been thought, and go further than the opinion of the Advocate General on this case.

The CJEU has determined that everything in the Singapore FTA is within the EU’s exclusive competence except for two areas:

1. non-direct foreign investment (which is also described as ‘portfolio investment’ - investment which is made without an intention to influence the management and control of the undertaking); and
2. investor state dispute settlement (ISDS).

This means that all of the other provisions of the agreement are within the EU’s exclusive competence, specifically:

• access to the EU market and the Singapore market so far as concerns goods and services (including all transport services) and in the fields of public procurement and of energy generation from sustainable non-fossil sources;
• the provisions concerning protection of direct foreign investments of Singapore nationals in the European Union (and vice versa);
• the provisions concerning intellectual property rights;
• the provisions designed to combat anti-competitive activity and to lay down a framework for concentrations, monopolies and subsidies;
• the provisions concerning sustainable development, including the obligations concerning social protection of workers and environmental protection; and
• the rules relating to exchange of information and to obligations governing notification, verification, cooperation, mediation, transparency and dispute settlement between the parties, unless those rules relate to the field of non-direct foreign investment.

Investment and ISDS have been the most controversial features of trade deals in recent years, and last year were the cause of last minute amendments to the EU-Canada agreement, known as CETA. CETA had been treated as a mixed agreement for practical purposes – the Commission reserved its legal position on competence pending the CJEU's opinion in relation to the Singapore FTA – and so required the approval of each Member State under its own constitutional requirements. This led to the Belgian region of Wallonia having an effective veto, and requiring certain concessions and interpretive clarifications, in particular on dispute settlement. It is possible that the CJEU was pragmatic in deciding that this sensitive area will still be a competence shared with Member States, while taking an expansive position on all other aspects. Indeed the CJEU has found exclusive competence in more areas than the opinion of the Advocate General, who had considered that provisions on certain transport services, non-commercial aspects of intellectual property rights, and labour and environmental standards were matters of shared competence, as well as those on portfolio investment and ISDS.

This decision, which is binding in respect of future trade deals, brings welcome clarity as the UK and the EU commence the Article 50 negotiations. It suggests the CJEU might be continuing its expansive approach to EU competence, which it took prior to adopting a more conservative approach following its decision in Opinion 1/94 on the WTO Agreements.

In some respects, the decision is encouraging as the key features of an eventual UK/EU FTA (as set out in the UK government’s policy paper on “The UK’s withdrawal from and new partnership with the EU”) seem to fall within the EU’s exclusive competence and are therefore not vulnerable to being rejected by Member State parliaments. However, the decision suggests that provisions on investment may need to be carved out if the UK wishes ensure to that the agreement will not need unanimous approval of Member States. Ultimately, the UK will need to weigh up carefully its desire for a comprehensive trade agreement with its desire to avoid potential hold-ups from national and sub-national legislatures.

It should also be noted that, if the EU-UK FTA is to replicate the trading and regulatory relationship that the UK currently has with the EU, the "bold and ambitious" FTA sought by the UK is likely to be much broader and deeper than a typical FTA.

Non-trade areas such as defence and security cooperation will not be affected by this decision. There are also significant areas, such as the financial settlement and the role of the CJEU in overseeing any withdrawal agreement, that are particular to the Article 50 process and will need to be resolved through negotiation (the Commission’s draft negotiating directives make it clear that significant progress will need to be made in relation to these areas before any FTA can be agreed).

While the decision may be encouraging from a post-Brexit UK perspective, it will nevertheless be crucial that the EU gets the procedure right in respect of any EU-UK FTA. Indeed, the legal division of competence between the EU and Member States may not be the end of the matter. EU Member States have at times insisted on an agreement being signed as a mixed agreement for political, rather than legal, reasons (e.g. the EU-Turkey Association Agreement and CETA) and the Commission has adopted practices aimed at avoiding disputes over competence delaying negotiations. However, the prospect of EU litigation should not be underestimated; inter-institutional litigation over questions of competence does occur and can have serious consequences. The CJEU has emphasised the importance of an agreement being signed on the correct legal basis, failing which the EU act concluding the agreement is liable to being invalidated, causing complications both at EU and international level. In an extreme case in which the EU was found not to have competence at all, the EU was required to denounce the agreement under international law (an agreement with the US regarding passenger name records). It will be important to the UK to avoid being a counterpart to an FTA in such a situation.

Financial Services

CMS and the Legatum Institute Special Trade Commission recently published A new UK/EU relationship in financial services: a bilateral regulatory partnership. You can access the key findings brochure here and the full report here.

Chapter 7 of the report looks at the timeline and legal issues in the context of financial services in light of the Advocate General's Opinion before the CJEU judgment was handed down.