UK starts process to form post-Brexit state-aid watchdog

The UK will take an important step towards the creation of an independent authority to oversee its post-Brexit subsidy regime on Wednesday when it launches a consultation on how the new body will operate and whether it should have enforcement powers.

Rows over state aid were a major sticking point in the Brexit negotiations, with Brussels initially insisting Britain’s rules should remain aligned with the bloc. That position was strongly resisted by prime minister Boris Johnson, who argued that breaking free of the EU on state aid would enable the UK to take a nimbler approach.

The clashes over the issue were resolved in the December EU-UK trade deal, with Britain agreeing to set up an “independent authority” to monitor subsidy decisions.

The consultation, being run by the business department, will consist of 42 questions and seek opinions on whether to have a minimum threshold for subsidy deals before they face scrutiny as well as the timing of disclosure of deals.

At the heart of the process is how far the UK system should diverge from the EU’s “ex ante” system of regulation, under which member states cannot distribute subsidies until they have been considered at length by the bloc.

Now we have taken back control of our money and laws from the EU, we want to use our new-found freedoms to propel the UK to the forefront of innovation

During the post-Brexit trade talks with the EU, the UK refused to agree to an “ex ante” regulator, which ministers have long seen as too slow and restrictive. 

While the UK’s “independent authority” is not expected to mimic the EU’s, legal experts said it could still have the power to clear subsidies before they are handed out in order to provide certainty to investors.

Under the trade deal with Brussels, companies will be able to challenge subsidies awarded to British rivals in the UK’s national courts if they believe they violate principles in the agreement.

And without clear upfront guidance, legal experts warned that the UK’s subsidy regime could emerge via a series of legal challenges, creating uncertainty for business.

The business department announced on Tuesday night that it would allow various exemptions to the regime — for example to ensure low-value subsidies, those given to support natural disaster relief or in response to global economic emergencies.

The government insisted it was not seeking a return to a “1970s approach” of ministers bailing out unsustainable companies. Kwasi Kwarteng, business secretary, said: “Now we have taken back control of our money and laws from the EU, we want to use our new-found freedoms to propel the UK to the forefront of innovation.”

Leading EU competition lawyer George Peretz of Monckton Chambers said the aim of the consultation should be to create clarity for business and local government that had been left in a state of confusion by the current arrangements.

“It’s all in a bit of a mess, and everyone is left to interpret how the principles in the EU-UK trade agreement should be applied differently from EU state-aid rules — but until they are given clear counter-guidance they are unlikely to diverge far from EU practice,” he added.

Alexander Rose, an EU competition expert at law firm DWF, said public bodies were currently facing significant burdens in assessing the legality of subsidies.

He added that a key element of the consultation would be to identify “safe harbours” where subsidies are allowed unchallenged in defined areas — for example, to meet social and environmental policy goals. This would allow the vast majority of public funding to be awarded with legal certainty, as achieved by “block exemptions” in the EU state-aid regime.

“Public bodies need clarity . . . the UK should introduce safe harbours that would do away with the need for assessments in the vast majority of cases,” he added.

Still, James Webber, an antitrust partner at law firm Shearman & Sterling, said the government should make the most of the opportunity presented by Brexit, given the frictional costs caused by leaving the EU single market.

A bespoke UK system could speed up the delivery of productivity-enhancing projects and deepen research collaboration between industry and universities — as seen in the recent Oxford/AstraZeneca Covid-19 vaccine.

“Having paid for this subsidy freedom with reduced market access to the EU, it would be a travesty not to use it by then replicating EU state-aid rules in miniature,” he said.