After Brexit: The UK Internal Market Act and devolution

Part Four: The UK Internal Market Act 2020

What is an "internal market"?

54. The term "internal market" does not have a fixed or widely accepted single meaning. Trading activities intersect with a large range of other policy considerations that make up the governance arrangements of a state, such as:

• the civil law to underpin contracts and resolve disputes;
• product standards for safety and consumer protection;
• safety in the workplace;
• employment laws;
• competition policy;
• formation of companies, to limit risk and liability;
• intellectual property;
• rules for transport and safety of vehicles;
• environmental standards;
• promotion of human health;
• protection of animal and plant health;
• provision of public services, such as health and education;
• government procurement rules; and
• taxation of trading activities.

55. An internal market can therefore be seen to encompass many, if not almost all, areas of government and parliamentary activity, and public policy considerations. Internal markets are, in the view of legal authority, Professor Michael Dougan,

"...not merely about 'trade'. They are also about fundamental policy choices concerning how to structure your economy and society; as well as basic constitutional questions about the institutions, processes and values that underpin your public and democratic realm."^[24]

56. The UK Government's White Paper preceding the Bill describes the existence of a "UK internal market" that has been the bedrock of shared prosperity since 1707, a "centuries old" institution, overlaid between 1973 and 2020 by membership of the supranational European institutions (paragraphs 58-64).^[25]

57. While it is true that any state's market oversight arrangements are particular to that state's constitutional and economic development, the model offered by the UK Government in the White Paper disregards the complex dynamics that led to the 1707 Union, and the development of the UK state thereafter (see Annex B for more detailed discussion). The UK Internal Market Act does not represent a restoration or continuation of trading relationships across the UK before the EU single market: it is a new, unilaterally designed and imposed regime, that will operate in a manner that does not allow for adequate consideration of the types of fundamental policy choices outlined by Professor Dougan.

58. The UK Government's approach advances a narrow view of the internal market in the UK, at least for the purposes of the provisions in the Act:

"The UK's Internal Market is the set of rules which ensures there are no barriers to trading within the UK."^[26]

59. Unlike the EU single market, the UK Government's approach does not recognise that there is a far greater range of legitimate policy goals – for example tackling inequality or environmental protection – that nations in a shared market area can pursue through market regulation. Annex A explores different existing international models in more detail.

EU Exit and the UK's internal market arrangements

60. In 2017, the four UK governments undertook to work together to agree common ways of working in relation to devolved matters then subject to EU law: the common frameworks process. It was agreed that common frameworks would be developed in respect of a range of factors, including "ensuring the functioning of the UK internal market, while acknowledging policy divergence" [emphasis added].^[27]

61. The Scottish Government has participated in good faith in the common frameworks process since 2017, and believes that this process, which is designed to manage policy differences on the basis of agreement and is founded on respect for devolution, is all that is needed to manage the practical regulatory and market implications of the UK leaving the EU.

62. There are now around 30 areas where there is agreement that common frameworks may be required, covering a range of policy areas formerly subject to EU rules, such as agricultural support, public procurement, fisheries, animal health, food safety and plant health.

63. Common frameworks are based on agreement, not imposition, and the incentive to agree ways of aligning and managing differences is fundamentally weakened when the market access principles of the Internal Market Act require standards coming from other UK nations to be accepted across all nations.

64. What started as discussions of the UK's internal market within the common frameworks project rapidly became a parallel project led by the UK Department for Business, Energy and Industrial Strategy (BEIS).

65. It became increasingly evident over the course of 2017 and into 2018 that the policy proposals emerging from this BEIS-led activity were incompatible with the principles and operation of devolution in the UK since 1999.

66. The Scottish Government withdrew from this UK Government internal market project in March 2019. This decision was taken after it became clear that the Scottish Government's concerns regarding the project and the implications for devolution, and for the common frameworks process, were being ignored.

67. The Welsh Government, which stayed part of the UK Government's internal market project, has criticised the UK Government's approach saying that "it was agreed that this would be a joint piece of work [and] it is wholly unacceptable that we now seem to be faced with a solely UK Government generated proposal."^[28]

68. On 16 July 2020, the UK Government published its White Paper on the Internal Market, giving stakeholders no advance copy^[29] and just four weeks to digest and respond to the far-reaching and complex proposals. The consultation period fell during the Scottish Parliamentary recess. The length and timing of the consultation period was something highlighted by a number of stakeholders in responding to the White Paper consultation, including by the other devolved administrations. Full consultation responses have never been published by the UK Government.

69. On 9 September 2020, the UK Government published the UK Internal Market Bill, which was shared for the first time with the devolved administrations late the evening before. The UK Government then disregarded constitutional norms set out in the Sewel Convention by proceeding with the legislation despite both the Scottish Parliament and Welsh Senedd refusing consent to it. The Act came in to force on 1 January 2021.

Overview of the Act's provisions

70. The Act received Royal Assent on 17 December 2020 after the truncated scrutiny process and considerable resistance in the House of Lords where peers from all parties criticised the Bill, attempting to alter it numerous times. The Act, as enacted, contains a number of amendments made in the Commons and the Lords during its final parliamentary stages, the most significant of which are outlined below.

71. The Act introduces a new market access regime, comprising mutual recognition and non-discrimination principles. The regime means that goods which are sold in one part of the UK (where they originate from or are imported to) are automatically accepted across all other parts of the UK, regardless of the rules there; and where provision of a service is regulated across the UK, the authorisation for that service in one part of the UK authorisation will be recognised in all other parts. The principles are outlined in more detail below.

72. The Act also introduces new rules for the recognition of professional qualifications in the UK. It establishes a new body, the Office for the Internal Market (OIM), within the Competition and Markets Authority (CMA), to monitor, advise and report on the internal market. The Act confers new powers on UK Ministers to spend in devolved policy areas, without the oversight of the Scottish Parliament and reserves state aid, a previously devolved matter. As discussed above, the entire Act has been placed beyond any modification by the Scottish Parliament, introducing further uncertainty over the exercise of devolved competence in the future, when compared with the well understood EU law constraints that applied symmetrically across the UK until the UK exited the EU.

73. The main provisions of the Act are: ^[30]

Part 1 and Schedule 1 - UK Market Access: Goods

74. This section introduces a new market access regime for goods in the UK. The regime is based on the principles of:

• (1) mutual recognition - any good that meets regulatory requirements in one part of the UK can be sold in any other part, without having to adhere to the relevant regulatory requirement in that other part; and
• (2) non-discrimination - a prohibition on direct or indirect discrimination based on treating local and incoming goods differently. It also provides for limited exclusions from these rules, based on individual policy areas.

75. There are some goods currently excluded from the market access principles such as pesticides, fertilisers and animal feed. However, exclusions are limited in their application, which creates a complex new regulatory landscape (more detail on exclusions is at Annex D). The Act introduces "delegated powers" (where primary legislation can be changed without needing a new Bill), which mean that UK Ministers alone have the power to change what is in and out of scope of these provisions, with no formal role for the devolved legislatures. These powers are referred to as "Henry VIII" powers. The Bill was amended in the House of Lords to require UK Ministers to seek the consent of the devolved administrations before exercising the Henry VIII powers to alter the scope of the non-discrimination principle, or to amend Schedule 1 (exclusion of the market access principles in certain cases). As a result of the amendment, UK Ministers can proceed without this consent after a period of one month and must make a statement to the UK Parliament explaining why. UK Ministers can then change what is excluded from the market access principles through using secondary legislation, whether these changes affect devolution or not, and without consent from the devolved administrations.

76. An amendment to the Bill during scrutiny in the House of Lords means that UK Ministers may also use these delegated powers to exclude "certain cases, matters, requirements or provision" in common frameworks areas from the market access principles. This can only be done with agreement across the four UK nations, and then only with the consent of the UK Government Secretary of State to exercise their powers in this respect. The default position is that policy areas already subject to the common frameworks process will be within scope of the Act's market access principles.

77. This part of the Act was also amended by the UK Government to exclude manner of sale requirements from the Act's mutual recognition principle. A manner of sale requirement is a statutory requirement "that governs any aspect of the circumstances or manner in which the goods are sold (such as where, when, by whom, to whom, or the price or other terms on which they may be sold)."

78. The exemption will not apply to any requirement that "appears to be designed artificially to avoid the operation of the mutual recognition principle in relation to what would otherwise be a requirement within the scope of that principle."

79. This amendment was characterised by UK Ministers as providing legal certainty that measures such as minimum unit pricing (MUP), or similar conditions on the sale of goods, are exempt from the mutual recognition principle. MUP and similar measures could in future, however, still be caught by the Act's non-discrimination principle.

Part 2 and Schedule 2 – UK Market Access: Services

80. This establishes a new market access regime for services in the UK based on the same mutual recognition and non-discrimination principles as above. Again, it provides for limited exemptions from these provisions; and what is in or out of scope can be changed, unilaterally, by the UK Secretary of State, with no powers for the devolved legislatures.

81. As a result, a UK Minister can subject devolved policy areas to "market access" principles regardless of the view of the people of Scotland or the Scottish Parliament. The Parliament's ability to regulate, and set policy for, services in Scotland could therefore be fundamentally undermined.

82. The practical effect is potentially far-reaching. Policy areas which could be brought under the market access principles by the UK Government against the wishes of the Scottish Parliament, include:

• transport services, such as railways;
• water supply and sewerage services; and
• social services relating to social housing.

83. Perhaps most noteworthy of all, the UK Government has given itself, and any subsequent UK Governments, the power to subject "healthcare services provided in hospitals" and "other healthcare facilities or at other places" in Scotland, to market access principles.

84. The UK Government maintained during the passage of the Bill that it should be allowed the power to take this action without the consent of the Scottish Parliament.

85. As above, the Act was amended in the Lords to require UK Ministers to seek the consent of the devolved administrations before exercising the delegated powers to amend Schedule 2 (services exclusions). However, UK Ministers can proceed without this consent after a period of one month, making a statement to the UK Parliament explaining why.

86. The Bill was also amended to require UK Ministers to seek the consent of the devolved administrations before exercising the delegated powers to alter the list of legitimate aims specified in S21(7) of the Act. Under the Act, a relevant devolved measure would not be covered by the indirect discrimination provisions where it cannot reasonably be considered a necessary means of achieving a legitimate aim.^[31] UK Ministers can, however, again proceed without this consent after a period of one month, making a statement to the UK Parliament explaining why.

Part 3 – Professional Qualifications and Regulation

87. This provides for a system for the mutual recognition of professional qualifications that are regulated in law across the UK. It introduces an "automatic recognition" principle for a professional qualified in one part of the UK to be treated automatically as qualified in respect of that profession in another part of the UK, as well as setting out the situations where the automatic recognition principle does not apply. Certain legal professions are excluded, as is school teaching, which was eventually excluded after considerable pressure from Scottish teaching organisations, the Scottish Government and peers during the passage of the Bill.

Part 4 – Independent Advice and Monitoring of UK Internal Market

88. This provides for the creation of a new reporting, advising and monitoring function for the Competition and Markets Authority (CMA), by creating "the Office for the Internal Market" within the body. In addition to these functions, the CMA will have powers to require information from an individual, business or public authority, and powers to issue penalty fines for non-compliance. It will report to all four governments, and where a report is requested by one of the UK administrations – and supplied by the CMA – the relevant government must make a statement to its respective legislature. The powers of the CMA are limited, however: it can choose not to exercise them and there is no obligation on the governments to act on CMA reports. It is also not clear how disputes will be resolved.

Part 5 – Northern Ireland Protocol^[32]

89. This Part contains provisions relating to the Protocol and state aid.

Part 6 – Financial Assistance Powers

90. This section gives UK Ministers a wide new power to take decisions on spending on the following devolved matters across the UK: economic development, infrastructure, culture, sporting activities, domestic educational and training activities and exchanges, and international education and training activities and exchanges. This restores to UK Ministers powers that (with a few minor exceptions) were removed from them by the Scotland Act in 1998 and transferred to the Scottish Ministers to be exercised under the authority of the Scottish Parliament. This is a fundamental change which undermines a central plank of devolution: the clear split of governmental responsibilities that was established in 1999.

91. This new power allows the UK Government to bypass devolved decision making, overriding democratic processes for allocating spending in Scotland. UK Ministers have already used it to replace programmes previously administrated via the European Structural Funds. In January 2021, the UK Government announced it would use the power to bypass the devolved administrations to replace European Structural Funds with a centrally controlled fund: the Shared Prosperity Fund. For Scotland, this means more than £100 million a year could be spent in areas that are normally devolved to the Scottish Parliament – with no say for Scotland's elected representatives in the Scottish Parliament.^[33]

92. The UK Government has also announced plans to use these spending powers in a new "Levelling Up" Fund which will bypass devolved administrations and parliaments in allocating spending in ways that could contradict priorities set by the Scottish Parliament and Government. This new £4 billion fund was originally intended for England only. Following the UK Government's Spending Review, it was expected that consequential funding (the mechanism which means funds will be made available to devolved nations to spend, reflecting public spending in England) would come to the devolved nations to be spent in line with devolved spending priorities. This is now not the case.

93. Finally, the powers given to the UK Government in this part of the Act have led to the UK Government replacing the Erasmus Plus EU learning programme with a UK-wide programme.^[34] We discuss this later in the document.

Part 7 - Subsidy Control

94. This part amends Schedule 5 of the Scotland Act 1998 to remove power over subsidy controls from devolved legislatures, taking the powers to Westminster instead when the UK ceased to follow EU state aid rules. The subsidy regime is being developed by the UK Government separately. At the time of this publication there is still no regime in place.

Part 8 - Final Provisions

95. This adds the Act to the list of protected enactments in Schedule 4 of the Scotland Act 1998. The effect of this is that the Scottish Parliament cannot change the content of the Act, or how it is applied.

Comparison with the EU Single Market

96. Devolution in the UK was established in the context of EU membership. EU rules governed not only the UK's external trade relationships with other EU member states, but also questions of trade and regulatory coherence across the UK's nations.^[35]

97. The UK Government's position is that the UK Internal Market Act will simply replace EU rules with similar rules for the UK upon exit from the EU single market. However, the process through which EU rules are developed is fundamentally different. EU processes seek to find agreement between member states, whereas the Act unilaterally imposes regulation on the devolved institutions. The EU rules aim for a balance between economic interests and other policy goals (the principle of proportionality), as well as valuing and protecting the principle that decisions should be made as locally to people as possible (the principle of subsidiarity). The Act has no such balance or protection.

98. The UK Government's expressed view is that EU exit could lead to differences emerging between the UK and devolved governments in regulation governing the access of goods and services to their respective domestic markets, and that this will be to the detriment of internal UK trade flows.

99. It states that this is an issue that arises as a result of the UK exiting the EU single market where the implementation of mutual recognition and non-discrimination principles are key tools preventing impediments to the smooth operation of the EU single market. In the Scottish Government's view, this does not adequately reflect the way in which the EU manages the single market and draws an inaccurate equivalence between the EU regime that we have left and that which the Act imposes.

100. As a result – despite the ongoing common frameworks project – the UK Government's Internal Market Act includes provisions requiring strict adherence to the principles of non-discrimination and mutual recognition between the four nations of the UK.

101. Although non-discrimination and mutual recognition are core elements in the EU single market tool-kit, so too is a common legislative framework whereby all member states jointly and collectively agree on the broad regulatory framework – including the basic or minimum standards with which goods and services must comply, governing the EU single market. This ensures that all EU member states are represented when minimum EU-wide standards for goods and services are decided.

102. This also ensures that mutual recognition – that is the principle that a good or service that meets the regulatory standards in one part of the single market can be sold in any other part of that market – does not involve a race to the bottom. Even so, EU law allows for exceptions to both principles of non-discrimination and mutual recognition (and therefore to free movement of goods and services), as long as such exceptions can be justified as necessary and proportionate to the outcome that is obtained, and which cannot be achieved by other means.

103. Article 36 of the Treaty on the Functioning of the European Union provides that prohibitions or restrictions on imports or exports may be permitted if justified on a number of grounds including the protection of:

"…public morality, public policy or public security; the protection of health and life of humans, animals or plants…"^[36]

104. There is extensive case law confirming that member states, and indeed sub-state governments may legally prohibit imports of goods from other parts of the EU internal market on grounds including protecting public health and the protection of the environment.

105. The provisions of Article 36 and the manner in which it has been applied demonstrate that EU law respects the subsidiarity principle: that there will be instances where "local" responses to "local" problems are justified, even though this might involve prohibiting imports and thereby contravening the underlying principles of the EU single market.

106. The contrast between this cohesion and flexibility in the EU single market, and the Internal Market Act definitions of non-discrimination and mutual recognition is stark. In the UK legislation, the principles of non-discrimination and mutual recognition are almost absolute - even if this will be to the detriment of the social, environmental and health goals; and legislation of a particular UK nation. There are only very limited provisions that permit the prohibition of the sale of goods or services in one UK nation that are legally sold in other parts of the UK.

107. The development of the European single market, over decades, has been based on principles of trust, equality, cooperation, co-decision, proportionality, subsidiarity and consent, and setting a baseline of minimum agreed standards for member states' own rules. The Act is based on unilateral decision-making and imposition, with no minimum standards or guarantees. The Act also creates a power for UK Ministers to alter what is in or out of the scope of the Act unilaterally (for example, health services are currently excluded), without the consent of devolved administrations.