Commercial Awareness Update – W/C 19th September 2022

An Impending Recession?

The British economy is slowly taking a toil as the prices of goods gradually increase, and the percentage gap between wages and the cost of living remains ever increasing.

With the cost of living increasing, workers have been offered an average wage increase, including bonuses, of 5.5% in the three months to July.

However, with inflation being considered, how could such wage increases compete with the cost of living?

Although the increase in pay should be sufficient to cover the costs of living at first glance, pay growth has fallen by 2.5% when the current inflation rate is considered.

Why the recession?

The current recession is primarily because the pay growth cannot keep pace with the annual cost of living, with the Office for National Statistics (ONS) recording that in July, the cost of living rose by   10.1% – the highest in 40 years. According to the ONS director of economic statistics, Darren Morgan, the ‘real value’ of pay continued to drop and was declining faster than ever since 2001.

The Bank of England believes that ‘a painful squeeze on our living standards, driven, primarily by soaring energy prices, is set to intensify’ as inflation is expected to hit a 13% increase later this year when the energy price cap rises to around £3,450, with average energy bills forecasted to reach £4,200 in 2023, therefore pushing the UK economy into a recession later in the year. – (ITV News)

Samuel Tombs, the Chief UK economist of Pantheon Macroeconomic essays surveys, chimed in with official data demonstrating that the demand for labour from employers is ‘barely rising’ and goes on to add that the unemployment rate over the coming months will increase as the economic situation worsens in the following months, with unemployment set to rise by 4% by the end of the year.

How does the government plan to address the rise in energy bills?

The new Prime Minister, Liz Truss, has outlined her plans to deal with soaring energy prices, which in summary, is the government’s Energy Price Guarantee which will limit the price energy suppliers can charge for each unit of energy; for example, a household using 12,000kWh (kilowatt hours) of gas a year and 2,900kWh of electricity a year will not have its annual bill rise above £2,500 from October, which without the outlined intervention, would have been £3,549 a year.

Also, to support low-income households throughout the cost of living crisis, a £326 instalment has already been paid to recipients of certain benefits, including tax credits and universal credits, alongside a £400 discount on bills for all households over winter. (Source – BBC). There are further fiscal packages due to said recipients over the autumn months.

What effects will a recession have on the legal sector?

With rising energy prices and the reduction of household discretionary income in general, law firms are likely to see a reduction in existing clients; however, they may also gain new ones due to the rising need for legal services, such as the desperate need to retain a home due to affordability issues.

Also, on the one hand, some lawyers may lose their jobs as some law firms may be unable to meet the demand for increased wages. However, on the other hand, firms may also derive profit as it is very likely that the public will need the help of lawyers in these unprecedented times.

Article written by Efua Okhiria

The Gap In The UK’s Regulatory Framework For Centralised Cryptocurrency Exchanges

Counter-intuitive is the prevalence of centralised exchanges in the market for cryptocurrencies. Today, centralised cryptocurrency exchanges provide the predominant means by which investors purchase, trade and store the de-centralised instruments created precisely to defy the self-serving, unreliable intermediaries from the financial crisis era. And similar (if not bigger) problems that plagued the financial sector now haunt users of centralised exchanges.

The issues

The first is financial loss–centralised exchanges may deal with users’ cryptocurrencies in risky ways (i.e., unauthorised uses and co-mingling of cryptoassets). A similar problem is that exchanges may omit to compensate customers for the loss of cryptocurrencies held on their platforms if the exchanges were hacked. Thirdly, exchanges permit and even participate in the manipulation of token prices, conduct which can cause users losses.

These problems arise from the gap within the UK’s regulatory framework for cryptocurrency exchanges: Since cryptocurrencies (formally known as exchange tokens) are excluded from the UK’s regulatory perimeter, the conduct of centralised exchanges in dealing with cryptocurrencies is unregulated. Untouchable by the corrective hand of regulation, centralised exchanges enjoy unfettered discretion in setting out the terms on which they hold their customers’ cryptocurrencies and oversee customer trading activities.

Strangely, neither the Treasury nor the Financial Conduct Authority (FCA) seems disposed to address the problems or, indeed, the regulatory gap.

In a recent consultation response, the FCA proposed the ‘first phase’ of legislative changes to regulate cryptoassets–only to exclude cryptocurrencies. The response was ambivalent; there is ‘merit in exploring further the case for comprehensive regulation’.

Wider concerns

An unconvincing attempt to rationalise the FCA’s indisposition was made last month by Charles Russell, the FCA’s Chair. In a Financial Times article, Mr Russell said that regulating crypto firms (including centralised cryptocurrency exchanges) would impose an undue burden on other regulated firms.

In the UK, all firms regulated by the FCA must contribute some of their resources to the Financial Services Compensation Scheme (FSCS), which offers compensation to customers of failed, insolvent firms. Since insolvency risks are exceptionally high for centralised exchanges owing to their susceptibility to hacking, other regulated firms would be compelled to pool in much more for customers of failed centralised exchanges.

Lofty as Mr Russell’s rank may be, his concern would likely fall on deaf ears. The Treasury oversees the FCA and has expressed high hopes for the UK to be ‘the best place for crypto’. It is widely accepted that regulation is the key to a stable, attractive environment for all crypto businesses, including centralised exchanges. Japan and the UAE have taken the point. Canada and the US are following suit. A ‘global crypto hub’ is too attractive an economic project and as a national brand to concede to the grey, minute calculations embedded within some domestic consumer protection mechanism.

Moreover, Mr Russell’s concerns seem ill-advised. One of the FCA’s objectives is to protect consumers, and the financial interests of financial firms should not be the regulator’s first and foremost concern. Also, the costs of covering centralised exchanges under the FSCS should not be overstated. Under the Financial Services and Markets Act, each customer of a failed firm is only entitled to compensation of a maximum of £8,500.

Considerations for the legal sector

The future regulatory landscape for centralised exchanges is far from clear. As the raincloud of cryptoasset regulation swells, it is unclear how long centralised cryptocurrency exchanges in the UK may keep their dry spot. While the UK may not be expected to stride towards regulation, as mysterious forces within the Treasury and the FCA wrestle over the correct regulatory approach to cryptoassets, practitioners should be vigilant to new developments.

For a safe bet, if it were decided to be the best way forward, the regulation would take the form of incremental amendments to the regulatory perimeter. Very likely, custody of cryptocurrencies would be governed as a new regulated activity. A fresh tide of crypto insurance products would flood the crypto sector as firms rush to find coverage for their legal risks. Practitioners in insurance may well find themselves working increasingly with centralised exchanges.

Article written by Oscar Wong

The Northern Ireland Protocol Bill

The Northern Ireland Protocol Bill (NIPB) was proposed to Parliament on 13 June 2022 to override some parts of the Northern Ireland Protocol (NIP) or Agreement. It received its third reading in the House of Commons on 20 July 2022, with its first reading in the House of Lords on 21 July 2022.

The NIP – An overview

The NIP is both a bilateral and multilateral agreement and an international legislative instrument negotiated as part of the Brexit Withdrawal Agreement between the EU and the UK in 2019.

The NIP is primarily a peace bastion as it helps prevent an escalation of tensions between the two nations and thus facilitates the fragile power-sharing Assembly negotiated at Stormont. Also, the NIP prevents a ‘hard border’, that is, the avoidance of checks on goods crossing the border between Northern Ireland (NI) and the Republic of Ireland (ROI), with the latter being an EU state.

For additional context, before the NIP, authorities on the Irish border were responsible for checking goods. However, the Protocol now makes border checks the responsibility of both NI and Great Britain.

Why is the UK government seeking to amend the NIP?

The UK government believe the amendments would address key practical issues affecting the ‘workability’ of the Protocol to include and, as explicated by www.gov.uk, ‘burdensome customs processes, inflexible regulation, tax and spend discrepancies and democratic governance issues’, all of which destabilise the Protocol which was geared towards rebuilding relationships within the NI, between NI and the ROI and between Britain and the NI.

In addition, the proposed amendments to the Protocol would mean that the EU’s control, jurisdiction, and sovereignty in the UK goods market is further reduced, thus reducing Brexit-induced tensions between all the states involved while safeguarding the EU Single Market.

Proposed changes and broader implications

Some of the measures through which the UK Government is seeking to amend the NIP to facilitate stability are as follows:

1. Creating a ‘green lane’ which would mean no checks for registered ‘trusted’ traders exporting goods for sale to NI.
2. The creation of a ‘red lane’ for goods exported into the EU single market pending the comprehensive checks undertaken by the EU.
3. The introduction of a dual-regulatory measure permitting NI businesses to produce goods meeting either EU or UK standards as opposed to said goods simply adhering to EU regulations.
4. The removal of the NI’s VAT obligations to the EU which would mean increased income for NI and its businesses.
5. The removal and replacement of the Court of Justice of the EU (CJEU) and additional EU bodies’ involvement in the Protocol with alternate dispute resolution methods primarily based on arbitration.

That being said, the NIPB will continue to support parts of the Protocol deemed effective, such as the Common Travel Area, and continue to ensure the Protocol’s continued adherence to international law.

Impact on the legal sector

Although the proposed amendments as per the NIPB affect the legal sector in general, they primarily impact UK constitutional law and, thus, the practitioners in that sector.

The NIPB eradicates s. 7A of the European Union (Withdrawal) Act 2018 which grants constitutional power to the Protocol, meaning any NIP cases need not be referred to the CJEU by UK courts, and in translation, this means no jurisdictional intervention by the EU and a colossal shift of sovereign power to the Executive and the Judiciary of the UK.

A necessary forethought is that the UK government adopted a unilateral approach to the proposed amendments (in direct contravention of Article 13(8) of the NIP, which states that ‘any subsequent agreement between the Union and the United Kingdom shall indicate parts of this Protocol which it supersedes’). The EU is yet to agree to the proposed amendments.

For constitutional lawyers, increased jurisdiction granted to the Executive and Judiciary means the doctrine of the separation of powers is at risk of being eroded. Further, it would mean that should the UK breach international law, that is, the newly amended NIP, the government would not be held to account by standards previously seen at the CJEU, thus negating the provisions of the rule of law.

Given the EU’s inveterate reputation in circumventing the relinquishing of jurisdictional power, the UK government would be premature in its confidence that the EU would accept the proposed amendments. However, the NIPB seeks to protect the Single Market, and therefore perhaps, 18 months of technical negotiations between the EU and the UK in reaching this point would not prove fruitless.

Article written by Aqua Koroma