Why is the Government Already Thinking about Amending the UK Internal Market Act?

After a swift parliamentary process, the United Kingdom Internal Market Act (UKIM Act) was granted Royal Assent on 17th December 2020 and came into force as the ‘transition period’ following the UK’s departure from the EU came to an end on 31 December 2020. Both the Scottish Parliament and the Welsh Senedd withheld their legislative consent to the Act, citing the ability of the ‘market access principles’ to disapply exercises of devolved regulatory powers. Indeed, the Welsh Government launched a judicial review seeking declarations to clarify that the Act could not be interpreted or applied inconsistently with the devolution settlement as provided for in the Government of Wales Act. Although this might have been considered to be a hypothetical concern, a recently launched consultation exercise by the Department for Business, Energy and Industrial Strategy (BEIS) on the ‘services’ aspects of the Act suggests that UK ministers might amend the Act sooner rather than later, bringing into sharp focus those anxieties about the power of the UK Executive and the regulatory capacities of devolved administrations.

To understand the consultation launched by BEIS, a little bit of background is required on the regulation of services prior to, and then under, the UKIM Act. Back in the early 2000s, the European Union adopted the highly controversial ‘Services Directive’. The European Commission’s original proposal provoked a backlashagainst the strong ‘country of origin’ principle written into the draft legislation which would have allowed services to be authorised in other Member States on the basis of an authorisation in the country of origin. The adopted Directive does allow this mutual recognition of authorisations but EU states can still seek to restrict services provided those restrictions are non-discriminatory, and protect a legitimate public interest in a proportionate manner. As for other requirements for the provision of services, these too would be subject to a proportionality-based analysis of whether they could be justified in the public interest. To also deal with concerns that the Directive could open up ‘services of general interest’ – healthcare, transport, water etc – to foreign competition, the Directive listed a wide range of such service sectors that would be excluded from the scope of the Directive.

As an EU Member State, the UK brought the EU Services Directive into domestic law through the Provision of Services Regulations 2009. An amended version of those regulations made clear than an authorisation granted in one part of the UK for a service allows that service to be authorised throughout the UK subject to the same rights to disapply the mutual recognition principle on public interest grounds. The Regulations also applied the non-discrimination requirements to other regulatory controls on the provision of services. The 2009 Regulations now form part of retained EU law, albeit that certain post-Brexit amendments have been made. The Regulations still have application notwithstanding the entry into force of the UKIM Act. The Act will only come into play if new requirements are introduced, or substantial changes are made to existing requirements. Keep in mind that the legal discipline under the UKIM is much tighter than that under the Regulations and, in the case of mutual recognition of service authorisations is closer to what the European Commission originally proposed in its draft Directive. On the other hand, the Act aligns with the 2009 Regulations insofar as a wide range of services of general interest are excluded from the scope of the Act via Schedule 2.

The BEIS consultation essentially asks whether the UKIM Act should continue to align with, or depart from, the 2009 Regulations. It explores this question in two ways.

The first is to determine whether any current restrictions on the mutual recognition of authorisations, or any circumstances in which the non-discrimination principle is currently disapplied under the Regulations should be likewise excluded from the operation of the UKIM Act. In other words, and without needing to loosen the very strict general requirement under the Act to apply the market access principles for services, Schedule 2 could be amended via the powers contained in section 18 UKIM Act to exclude the operation of the principles to a particular service requirement. This would maintain continuity and alignment between the position under the Regulations and that which would apply if the UKIM Act provisions were triggered. In effect, it would formalise the outcome of interest-balancing under the Regulation into a rule (an exclusion) under the Act.

The second aim of the consultation could lead to divergence between the EU law position under the Regulations and a new UK position under the (revised) Act. The Services Directive excludes a wide range of services of general interest from its scope, but the UK Government is questioning whether that is appropriate in a post-Brexit UK. The consultation notes:

the Government believes it necessary to consider whether such scope of application and sectoral coverage continues to be appropriate following the UK’s withdrawal from the EU, including whether the depth of the UK’s internal market in services can be further strengthened following the UK’s exit from the EU. Taking into account UK-specific considerations and the intent of the Act to ensure the continued free flow of services between the four constituent parts of the UK, it may be appropriate to add to, remove from, or vary the current list of exclusions in Schedule 2 of the UKIM Act.

It is worth noting that the UKIM Bill, as introduced, would have permitted UK ministers to make such changes via the ‘made affirmative’ power within three months of the entry into force of the Act and without seeking the consent of devolved governments. In seeking to defend this power against attempts by the Lords to delete it from the Bill, the minister Lord Callanan stated that the power was needed to guard against:

a risk that a situation may arise whereby it appears necessary for a particular service sector to be added urgently to the schedule to prevent that sector being unwittingly brought within scope of the market access principles in a way that could cause undesirable outcomes

The Government eventually conceded that it was enough to allow changes to the Act via the normal affirmative procedure. It also agreed that UK ministers would seek the consent of devolved governments to any changes while allowing those changes to be made if consent was not forthcoming within a month. 

But what remains significant is that the UK Government appeared to envisage that a quick change to the Act might be needed to add new exclusions to avoid ‘undesirable outcomes’. Yet, the consultation also asks whether any existing exclusions should be amended or even deleted. This is particularly sensitive to devolved governments where services such as water, healthcare and local transport fall within devolved competences. In his evidence to the Scottish Parliament’s Finance and Constitution Committee, and when pressed repeatedly on why UK ministers needed a power to amend Schedule 2 and the risks this might pose for healthcare services, the Chancellor of the Duchy of Lancaster, Michael Gove offered assurances that health services were not for sale and suggested that criticisms of the Bill were ‘myth-making’.

All of which has a certain legal significance on top of its undoubted political salience. An obvious response to the judicial review proceedings launched by the Counsel General for Wales is that any complaint about the constitutional implications of the regulation-making powers under the Act should properly be considered when any such regulations are made. An anticipatory ‘declaration’ might otherwise appear premature and hypothetical. However, that the BEIS consultation might lead to the section 18 powers being exercised brings the constitutional implications of the Act into clearer focus, with the devolution implications of any deletion of services from Schedule 2 strikingly obvious.With tensions around the Northern Ireland Protocol continuing to sour relations between the EU and the UK, it is easy to think that the dynamics of regulatory alignment and divergence operate at the level of ‘external’ relations. But it should now be obvious that the UKIM Act and its management of alignment and divergence continues to create tensions in the ‘internal’ relations between the UK and devolved governments.

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