What Does a UK Internal Market Mean for Regulatory Divergence in the UK?

What Does a UK Internal Market Mean for Regulatory Divergence in the UK?

 

Kenneth Armstrong – Professor of European Law, University of Cambridge

The United Kingdom Internal Market Bill (‘UKIM Bill’) has been attracting a lot of headlines but not necessarily for the right reasons. The controversy has centred around those provisions which would allow UK ministers to take steps to disapply parts of the EU-UK Withdrawal Agreement (including the Protocol on Ireland/Northern Ireland) and for those steps to be protected against judicial challenge. Condemned by a string of former Prime Ministers, the provisions have also prompted the European Commission to commence infringement proceedings against the UK for breach of the ‘good faith’ obligation contained in the Withdrawal Agreement. One could, therefore, be forgiven for thinking that the rest of the Bill could hardly be as controversial.

Yet if these provisions were removed from the UKIM Bill we would still be left with a legislative proposal whose effects are highly significant for the exercise of devolved competences. Indeed, the Scottish Parliament has voted to withhold legislative consent for the Bill. Giving evidence to the Finance and Constitution Committee, the Chancellor of the Duchy of Lancaster Michael Gove suggested that there was a lot of ‘myth-making’ around the Bill. The aim of this post is to try and sort through the possible and plausible implications of creating a new legal framework for managing regulatory divergence within the UK.

 

A New Legal Framework

At the heart of the architecture of the UKIM Bill are the so-called ‘market access’ principles – mutual recognition and non-discrimination. Although these are familiar principles in EU law their application in the Bill is very different for four main reasons.

Firstly, what the Bill describes as ‘mutual recognition’ is really a country of origin principle. It allocates regulatory authority to the jurisdiction in which a good is produced or a service originates. So if a good is lawfully sold in England, any divergent regulatory requirements in Scotland would only be applicable to goods produced in Scotland.

Secondly and relatedly, while there is a strong presumption under EU law that goods placed on the market in one state should be permitted access to the markets of other states within the internal market – the well-known ‘Cassis de Dijon’ principle – that presumption is rebuttable. States may invoke a wide variety of public interest objectives – health, consumer, environmental protection being especially important – in order to prevent or restrict market access. Under the UKIM Bill, there is a very limited capacity to exclude the mutual recognition principle on grounds related to disease and pest control or the movement of unsafe food.

Thirdly, EU law invokes a proportionality principle in order to balance the competing objectives of market access and market regulation. Indeed, the proportionality analysis does the heavy-lifting. When the Minimum Unit Pricing for alcohol regime was challenged by the Scotch Whisky Association as a breach of EU law, what protected the regime in the end was an acceptance that there was no less restrictive means of seeking to attain the public health goal set by the Scottish Government. Under the UKIM Bill, there is no proportionality test.

Fourthly, the UKIM Bill, while sharing with EU law its capture of measures that are indirectly discriminatory only prohibits measures that have a ‘significant’ adverse effect on competition in the market. The threshold is, therefore, higher than its EU law counterpart. That is important because if that significant effect can be shown, there is a more limited set of ‘legitimate aims’ which regulatory authorities can claim to be reasonably necessary to protect their rules from attack under the Bill. These include public health but don’t include protection of the environment or consumers as is the case under EU law.

So if the legal discipline is different, what effects might the Bill have on the exercise of devolved competences. Two examples can helpfully illustrate the potential reach and effects of the UKIM Bill

 

The Deposit and Return Scheme

In May 2020, the Scottish Government made the Deposit and Return Scheme regulations to put in place a scheme for the return of single-use drinks containers to encourage greater recycling.  In a briefing given to members of the Finance and Constitution Committee I set out the implications of the Bill for this scheme. . Under the Bill, drinks containers lawfully sold in the rest of the UK that did not comply with the scheme could not be excluded from the Scottish market, thereby undermining the operation of the scheme. Meanwhile, obligations on retailers and producers to recover and return containers could be challenged as indirect discrimination (this may be especially so if a producer in England uses online sales to reach consumers in Scotland). Although similar schemes have been challenged in other European countries under EU law, the environmental aims of the measures have been taken into account and the proportionality principle applied. These features are not present in the UKIM scheme.

 

Minimum Unit Pricing

Some of the most vocal concerns have been around the impact of the UKIM Bill for the schemes on minimum unit pricing for alcohol that both the Scottish and Welsh Governments have implemented. As noted earlier, the Scottish scheme was challenged under EU law but in the end found to be a proportionate restriction given its important public health objective. So would this be treated differently under the Bill?

The first thing to point out is that existing divergences between the constituent nations of the UK are intended to be protected. However, if there is a substantial change in those rules after the UKIM Bill comes into force, they could be challenged. The Scottish scheme is due for review after five years of operation. If the market access principles can be applied this could restrict the ability of Scottish ministers to amend the scheme.

The second thing to note is an amendment to the original wording of the Bill. As I explained in a briefing note, the amendment now seeks to ensure that price controls are subject only to the non-discrimination principle and not the mutual recognition principle. That is significant because if the mutual recognition principle applies there is no balancing of market access principles against public health goals nor any proportionality analysis. The rules would simply be disapplied to goods produced outside of Scotland. If only the non-discrimination principle applies, then the issue becomes whether imported alcohol is put at a disadvantage and if so whether there is a significant adverse effect on competition. Only then would the public health goal be assessed.

Unlike the example of the deposit and return scheme, the impact of the UKIM Bill is less clear. But what both examples illustrate is that the schemes are not excluded from the scope of the market access principles. Particularly in the case of MUP there is a risk that the battles fought under EU law principles will be re-litigated using the legal framework of the UKIM Bill.

 

Conclusions

The repatriation of powers from the EU to the UK is intended to enhance the regulatory autonomy of the UK including the power to diverge from EU rules once the transition period ends. However, it becomes clear that when those regulatory power are exercised at a devolved level, the reach of the UKIM Bill may limit the scope for future regulatory divergence within the UK. That has an added salience in Scotland where the Scottish Government has proposed a new version of its Continuity Bill. In the process of ‘keeping pace’ with EU law, Scottish ministers may find that certain rule changes will trigger scrutiny in light of the market access principles. At the limit, an objective of maintaining alignment with EU internal market rules may be undermined by UK internal market limitations on regulatory divergence within the UK.

While work continues on so-called ‘common frameworks’ to manage regulatory diversity within the UK through intergovernmental co-operation and co-ordination, the new legal discipline of the UKIM Bill may result in novel litigation as firms seek to challenge regulatory divergences that they consider restrict their market access.

 

The author is an adviser to the Finance and Constitution Committee of the Scottish Parliament in relation to its work on the UK Internal Market. This blog is written in a personal capacity and is not attributable to the Scottish Parliament, the Finance and Constitution Committee or its members.

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