The State Aid (EU Exit) Regulations 2019, published in draft on 21 January, set out a replacement State aid regime for the United Kingdom on exit day in the absence of any withdrawal agreement. At this point in time, it very difficult to forecast whether or not there will be a withdrawal agreement, or whether Brexit will be postponed or even revoked. But even readers who are confident that a “no deal” Brexit will not happen should have a quick look at the Regulations, as they give an indication of the sort of domestic State aid regime that the Government has in mind as part of the final arrangement with the EU.
The starting point here is to remember that the effect of section 4 of the EU (Withdrawal) Act is that Article 108(3) of the TFEU – the right to a remedy by those affected by unlawful State aid – remains, along with the definition of State aid in Article 107(1) on which it depends, part of domestic law after exit day. The only way of stopping that outcome would (probably) have been to pass domestic legislation repealing that Article. But the Government has not done that: instead, it has decided to preserve a State aid regime.
Two immediate challenges arise.
Effect on trade
The first challenge is one of substance. The State aid rules apply, only, to aids that affect trade between Member States. That threshold may not be set very high: but it is an important one and has resulted in “no aid” decisions (see, for example, SA.38441 Isles of Scilly Airport (no effect on trade as runway too short for more than very small planes, unable to fly further than 30 minutes to the Cornish mainland as too small for a loo). If the Secretary of State had decided to replace “trade between Member States” with “trade within the United Kingdom” (cf the “translation” of Article 101(1) TFEU in section 2 of the Competition Act 1998), then a number of grants that would not now count as State aid would undoubtedly have fallen into the domestic State aid regime – a point made at §6.19 of the Explanatory Notes. On the other hand, replacing “trade between Member States” with “trade between the United Kingdom and any other country” would potentially have widened the rules. Faced with those alternatives, one can see why the Secretary of State opted to retain the current position, so that the UK test now covers a State aid “so far as it affects trade between the United Kingdom and the European Union”: regulation 2(4). But that option does have the odd consequence that, even on a “no deal” Brexit” in which the EU becomes in every other respect a third country, it is only aids that affect trade with the EU that will be subject to the regime: a result which is even odder when one remembers that on a “no deal”, in the EU, aids that affect only trade between the EU and the UK will not be subject to Articles 107 and 108.
The role of the CMA
The second challenge arises because Article 108(3) presupposes an apparatus for the notification and approval of State aid by the European Commission – set out in Article 107, as well as other provisions such as Article 93 – which vanishes on exit day. That apparatus has to be reconstructed domestically – and it is that reconstruction that occupies the bulk of the Regulations.
As earlier announced, the CMA plays the central role in the system occupied by the Commission. But that central role is subject to three caveats.
First, and understandably in the UK constitutional order, the CMA is not granted the power that the Commission has to set aside an Act of the UK Parliament on the basis that it is a State aid measure (although, as I wrote earlier on this blog, the CMA would have that power under the “backstop protocol”). Instead, regulation 4(5) and Schedule 3 set out a mechanism for the CMA to report on whether an Act of the UK Parliament – say, a tax measure – involves a State aid and if so whether it is compatible. But the UK Parliament can ignore such a report if it wishes to. Note, here, though, that it is only the UK Parliament that enjoys this carve out: although there is no express provision to this effect, there is no doubt that an Act of the Scottish, Welsh, or Northern Ireland Parliaments that granted an aid would be fully subject to the notification requirement and the CMA’s powers to declare an unnotified or unapproved aid to be contrary to Article 108(3) and hence unlawful and to order termination of it. The grant to what is, at the end of the day, an organ of the UK Government of such a power to set aside Acts of the devolved Parliaments may well be controversial.
The second caveat is that the Secretary of State is given power to issue guidance to which the CMA must have regard when assessing compatibility (regulations 5(2) and 56). The Secretary of State has to consult the devolved governments (as well as the CMA) (regulation 56(2)) but, at the end of the day, it is his decision. Further, in assessing compatibility, the CMA has to have regard to its own statements of policy (though until it does so, the Commission’s current statements of policy continue to apply) – but those statements of policy have to be approved by the Secretary of State (this time, without any formal role for the devolved governments): regulation 54. The effect of all this is to place a lot of the power to set policy in the hands of the Secretary of State: a position that those with concerns about the attitude to State aid policy of a future government led by Mr Corbyn might well wish to reflect on.
The third caveat is a carve-out for “urgent cases”: see regulation 57. This provision might be thought to have been inspired by the power of the Council to approve aid in “exceptional circumstances” under Article 108(2): but §§6.20-6.24 of the Explanatory Notes do not refer to that provision but instead state that the caveat is needed to prevent a “deficiency in retained EU law related to the UK not having the same concept of compatibility with the EU internal market after EU exit” (a passage I find a bit hard to follow) – and indeed §7.4 of the Explanatory Notes state that it was not thought appropriate to carry over that power of the Council. In any event, “urgent cases” are defined as aids: to remedy a serious disturbance in the UK economy; to preserve financial stability (presumably inspired the dramatic events of 2008); and to prevent serious social hardship. The effect of the carve-out is, however, limited: the aid can be put into effect immediately and without notification/clearance, but it then has to be notified and cleared, and, if it is not, the aid can be recovered (see regulation 57(5)). The impact of the provision is therefore simply to limit the possibility of seeking an injunction in the courts to restrain such a measure if it is implemented before being cleared.
Notification – improvements vis-à-vis the EU regime
There are two obvious improvements compared to the EU regime.
First, notification may be made by the aid grantor directly: an aid grantor that fears that the grant may amount to aid does not have to go through the process of persuading BEIS to make a notification.
Secondly, the CMA is given a 40 working day deadline to approve an aid or to open a phase 2 investigation (regulation 8): if it fails to meet that deadline the aid can be lawfully implemented provided that notice of implementation is given to the CMA. As to phase 2 investigations, the CMA is given 18 months to take a decision (regulation 13): that period is not, however, significantly better than many Commission phase 2 investigations (and the Commission has difficulties of translation that the CMA will not have).
Enforcement and procedure
The powers given to the CMA to order termination and recovery of unlawful aid look very familiar, as does the limited basis on which recovery orders can be resisted (10 year limitation period; legitimate expectation created by the CMA: regulation 40(2)).
One aspect of concern is that little is done in the Regulations to improve the procedural position of the beneficiary of aid. The beneficiary has no power to notify what it suspects may be an aid (though, in practice, a refusal to proceed with the project unless the aid grantor notifies is likely to be effective). More seriously, the beneficiary is treated simply as an “interested party” and is not, for example, given the right enjoyed by the aid grantor to comment on representations made by others (regulation 10) or the right to be informed of a complaint (regulation 33). Since the beneficiary is the entity most seriously affected by the finding of unlawful and incompatible aid, that is a serious flaw (albeit one that the EU Courts have systematically turned their face against addressing). It may be noted that there is powerful argument that the lack of procedural protection for the beneficiary in the EU regime is inconsistent with Article 6 ECHR: a question on which the Strasbourg court has yet to opine.
The Regulations are entirely silent about appeals from decisions of the CMA (apart from a reference in Schedule 5 to appeals to the court against administrative penalties). It follows – as §7.15 of the Explanatory Notes makes clear – that the only remedy for anyone wishing to challenge a CMA decision will be judicial review in the High Court or Court of Session. The decision not to give the power of judicial scrutiny to the Competition Appeal Tribunal is presumably a conscious decision by the Secretary of State, though it is not explained in the Explanatory Notes. It is a somewhat odd decision given the CAT’s expertise in competition and economic analysis and the fact that most CAT judges (unlike High Court judges) will have had some exposure to State aid law in the course of their practice. One hopes that the reason for avoiding the CAT is not the concern that the CAT would be more inclined to scrutinise the reasoning of CAT decisions than would be a High Court or Court of Session judge: if it is, the tactic may backfire if, as is quite possible, the CMA finds the High Court to be less inclined to accept generally understood notions of how the concept of “aid” is to be applied than the CAT.
There are a large number of detailed points about the Regulations that one could make, and those interested should certainly read, with care, the Explanatory Notes. Given their importance, they certainly call for scrutiny by Parliament under the Withdrawal Act mechanisms. If – as most hope – they never come into effect, the work done will not be wasted as it is likely to inform the final UK State aid regime set up after the expiry of transition.
George Peretz QC
19 February 2019