Brexit Heralds Potential Changes to UK and EU Chemical and Chemical Product Sector

June 29, 20163E Global Research Team

Summary

The historic referendum vote on 23 June 2016 by the public in the United Kingdom (UK) (which includes England, Scotland, Wales, Northern Ireland, and Gibraltar) on whether the UK should remain in the European Union (EU), otherwise known as “Brexit,” has sparked many concerns in businesses operating in Europe and the UK. The future of many political, trade and commerce issues between the UK and the EU will remain unsettled until the former’s formal initiation of Article 50 procedures under the Treaty on European Union (“Withdrawal of a Member State from the EU”) and the related negotiations. However, it is clear now that if Brexit does occur – and the UK does leave the EU – companies, especially importers of chemicals and chemical products, must have a proactive strategy to handle the commerce and regulatory impacts of the UK's departure from the EU.

3E Analysis

Several possibilities exist for the types of relationships the UK may negotiate with the EU:

  • The UK may negotiate to be part of the European Economic Area (EEA) similarly to Iceland, Liechtenstein and Norway;
  • The UK may develop a bilateral agreement similarly to the one existing between the EU and Switzerland; or
  • Alternative agreements may be made.

If the UK becomes part of the EEA, it will continue to follow EU directives and regulations.  If the UK follows the direction of Switzerland, it will have more autonomy but will have to abide by much of the EU directives and regulations as negotiated.  A third option is that the UK may blaze a new trail and negotiate an alternate arrangement.

Regardless of which direction the UK-EU relationship might take, companies currently utilizing UK partners to comply with EU laws will likely have to shift strategy when the UK-EU split occurs.

Impacts of UK companies’ status to act as representatives under REACH
Under the REACH Regulation, manufacturers and formulators of chemical substances and preparations who have no presence in the European Economic Area (EEA) - which is comprised of EU members, Iceland, Liechtenstein and Norway - must obtain an "Only Representative" (OR) to comply with the EU compliance obligations similarly to those placed on EU importers and manufacturers. Many companies outside of the EU either delegate these responsibilities under REACH to their EU importers or appoint EU companies as their ORs through contractual agreements. With the UK as a member state of the EU, many non-EU companies have formed these types of contractual relationships with UK companies in order to access the EU market. These contractual agreements are in jeopardy because if the UK leaves the EU, the UK companies will be ineligible to act as ORs. However, UK companies may retain their status as ORs if the UK manages to negotiate a similar agreement to the EEA agreement which currently exist between the EU and Iceland, Liechtenstein and Norway.

Impacts on manufacturers and importers of biocidal and cosmetic products
The EU has also created a similar system of representatives for non-EU companies selling biocidal and cosmetic products on to the EU market.  Only cosmetic products for which a legal or natural person is designated within the EU as a "responsible person" (or RP) can be placed on the market. The EU Cosmetic Regulation outlines the precise definition of the RPs and their obligations. 

Under Article 95 of the Biocidal Products Regulation (BPR), only a person established in the EU who manufactures and imports biocidal substances or products containing such substances may submit a dossier and receive authorization to place the product on the market.

Similar to arrangements for ORs, many companies have business arrangements with UK companies for them to act as RPs for cosmetics or Article 95 representatives for biocidal products. Once the UK officially leaves the EU, it is unlikely that these arrangements would continue to satisfy the EU's current obligations.

UK authority’s status as an Evaluating Member State
Currently, the UK is one of the EU member state authorities that conducts chemical evaluations for a variety of products:

  • Biocides 
  • Plant protection products
  • REACH (substance evaluation, SVHC, etc.) 

It is unclear the impact of these evaluations between now and the formal exit by the UK.  It is likely that dossiers completed prior to the formal exit date will be allowed to stand while non-completed work will have to be transferred to other authorities or cease altogether.

Brexit: Next steps
While it appears in media reports that the UK will leave the EU, the referendum is not legally binding – the UK is not required to leave the EU as a result of the vote. Many political changes in Britain are in play and may affect the final outcome. If Britain does exit the EU, it will be the first country to do so and the first time that Article 50 has been used. Politics in the EU will affect the regulatory evolution as well, as EU officials may seek to deny benefits to the UK after a formal exit in order to dissuade other countries from following suit. Once Article 50 of the Lisbon Treaty is formally triggered, the UK will have two years to finalize negotiations with the EU on a plethora of topics including regulations impacting companies, substances, and products, new trade, and movement of people.

If after this two year window, trade deals have not been completed or agreed, the UK would have to seek the unanimous approval of the remaining 27 member states for an extension of this negotiation period. Given the prevailing negative view of Brexit on the continent, this unanimous approval would be very unlikely, so it’s possible that the UK may be divorced from the EU without any trade deals in place. Historically, countries like Switzerland, Canada and the US have taken 10 years or more to agree trade deals with the EU. If two years pass after Article 50 is invoked, and trade deals have not been completed, businesses would be subjected to non-EU trade tariffs which would likely disadvantage the UK economy and the businesses operating within its jurisdiction, as well as those wanting to do business with the UK.

Business Impact

Companies selling products on to the EU market will have to evaluate their business strategies, practices and commercial agreements to ensure that they will be in compliance with both EU and UK laws and regulations as they evolve. Companies with contractual agreements with UK companies to act as their representative under the various regulatory schemes (ORs, RPs, Art. 95 Representatives, etc.) should look into strategies to either shift their representative to another country or company, or at the very least renegotiate the contractual agreements to allow the business to make the shift once it is clear that they have to do so. Companies who use their UK entities as the EU importers must also review and may need to restructure their process and/or supply chain as necessary. 

Finally, the regulatory landscape will not shift immediately, but changes will be happening. Both the UK and EU have been at odds over certain issues, such as environmental and human health issues. If Brexit occurs, certain groups will use the opportunity to lobby the UK to create different requirements from the EU – either stricter or weaker, depending on their interests – for specific products. Companies must be vigilant in monitoring activities by both the UK and EU regulators to ensure compliance and weather any changes that might arise.

Written by 3E Global Research Team consisting of regulatory experts: Kirsten Wallerstedt, Nadeem Butt, Nhat Nguyen, and Scott Stephens.