Post-Brexit regulation of State aid rules: UK government set out a framework for the future

In a letter dated 28 March 2018, Andrew Griffiths MP, Minister for Small Business, Consumers & Corporate Responsibility, explains the UK government's position on how State aid rules and responsibilities will be managed post-Brexit, in the clearest terms that we have seen to date.

Why is State aid regulation important?

As a general proposition, the EU's existing State aid rules control and limit the extent to which State support may be awarded to support or sustain private economic activity within the EU, whether that is through grants, "soft" loans and guarantees, favourable tax treatment or any other form of advantage. In the absence of such rules, EU Member States could heavily subsidise their home companies and markets, distorting cross-border trade and creating the possibility of damaging trade wars (such as those we have seen threatened recently between non-EU countries such as the USA and China).

Historically, the UK government has been a staunch supporter of the EU State aid rules at a macro-economic level. The current Prime Minister, Theresa May, reiterated this position in her recent Mansion House speech, stating that "the UK has much to gain from maintaining proper disciplines on the use of subsidies and anti-competitive practices".

Accordingly, it is clear that, in principle, the UK government is keen to retain a functioning State aid regime as part of the quid pro quo in a final trade agreement with the EU, which will itself be the basis for the UK and EU's future economic partnership.

The framework for future State aid regulation in the UK

The UK government's position now expressly confirms that during the expected transitional (or implementation) period, expected to run from the official Brexit date (30 March 2019) until 31 December 2020, the existing structure of the EU rules and regulations will be maintained in full. This will mean that during the transitional period, the European Commission will remain responsible, as now, for approving and monitoring aid.

Longer-term decisions on the UK State aid regime are subject to further discussion with the EU as part of negotiations towards a comprehensive trade agreement. As above, we expect that the substance of the existing rules will be maintained on both sides. From the UK perspective, to ensure that an independent UK State aid regime is operable, the government has now concluded that at the point an independent UK State aid authority is required, the Competition and Markets Authority (CMA) will be best placed to take on this regulatory role.

Whether the CMA will take on this role for the UK as a whole, or whether Scotland, Wales and/or Northern Ireland may press for their own separate regulator, remains a matter for agreement between the Devolved Administrations.

EU State aid rules will therefore be retained in UK law, by virtue of the European Union (Withdrawal) Bill, while the role of regulating them will be taken on by the Competition and Markets Authority, which is "best placed" to take on the role due to its experience and understanding of markets and the independence of its decision making from government.

Osborne Clarke comment

It will be reassuring to UK and European businesses alike that the UK government expressly recognises that continued State aid regulation is in the best interests of all sides post-Brexit.

We agree that, in principle, the CMA is well placed to take on the role as regulator of State aid in the UK, given its understanding of markets and its independence from government. However, the role of a State aid regulator may place the CMA in the political firing line like never before, given the direct political impact of State aid decisions, such as to prevent the government from providing support to a particular project, sector or company. Whilst the CMA clearly has considerable experience of maintaining its independence despite wider pressures regarding merger or market investigations, the State aid remit may involve a level of political tension it has not previously encountered.

Finally, the application of State aid rules in Scotland, Wales and Northern Ireland may also prove a difficult challenge for the UK government in Westminster. In particular, it may be expected that the Scottish government, led by the SNP, will negotiate strongly for a Scotland-based regulator to review and decide upon State aid awarded by the Scottish government in Scotland. The risk that the UK government will be keen to avoid is the possibility of subsidy wars between the Devolved Administrations – e.g. the Scottish government offering subsidies for businesses relocating from the North of England to Scotland.