Brexit impact on the telecoms industry
A regulatory perspective
27 April 2017
As the UK prepares to leave to EU, this article looks at the effect of Brexit on certain areas of telecoms regulation.
Following the UK public vote to leave the European Union, the UK Government is seeking to serve a withdrawal notice under Article 50 of the Treaty on European Union by the end of March 2017. After the ruling by the UK Supreme Court that authorisation from the UK Parliament is required to serve the notice, the Government managed to pass the European Union (Notification of Withdrawal) Act 2017 authorizing the Prime Minister to initiate the withdrawal process.
Upon serving the notice, the UK will have a period of two years (and such extension period as may be agreed with the EU Member States) to negotiate the terms of its withdrawal. In her speech of 17 January 2017, the UK Prime Minister indicated that the Government would not be seeking to remain within the single market (whether by joining the European Economic Area, European Free Trade Association or otherwise), but aims to negotiate a free trade agreement (FTA) with the EU within the two year period. This is certainly an ambitious aim, given that an FTA of comparable complexity between the EU and Canada took seven years to negotiate. It is also an aim which is at odds with the EU's position that the withdrawal agreement should be concluded prior to substantive negotiations commencing on the future trade agreement.
Continued applicability of the current EU regulatory framework for telecoms
In her speech, the Prime Minister reiterated the Government's intention to issue a "Great Repeal Bill" to repeal the European Communities Act 1972 and, where necessary and desirable, convert the existing body of EU law into UK law. How will that pan out for the regulatory framework governing the telecommunications sector?
The EU regulatory framework for the telecommunications sector comprises at its core a set of EU Directives (which are required to be transposed into national legislation of member states), a number of EU Regulations (which normally have direct effect in a member state), and a number of (nonbinding) Recommendations from the European Commission. Upon the UK withdrawal from the EU, this EU regulatory framework will no longer apply. Insofar as the EU Directives are concerned, this will not have immediate consequences for the regulatory regime applicable to the provision of telecommunications services and networks in the UK, as these Directives have already been transposed into UK national laws (primarily through the Communications Act 2003). The subject matter of the EU Regulations, which include rules on wholesale and retail roaming charges in the EU and on net neutrality, will need to be additionally incorporated into UK laws to the extent they are to be maintained for UK telecom providers (further discussed in the below).
In a speech on 1 December 2016, Ofcom's chief executive Sharon White advocated a triple test to decide which EU laws to retain within the UK: (i) does it prioritise the interests of UK consumers and the wider public, (ii) does it promote competition and investment, and (iii) does it support UK companies' ability to successfully trade in the EU and globally? From this perspective she argues, for example, to retain the 'country of origin' principle enshrined in EU broadcasting law, which allows broadcasters to transmit across the EU, provided they comply with the rules of the country where they originate. Ms. White nevertheless immediately recognises that this requires to be part of the new FTA with the EU, as the country of origin principle cannot endure merely by virtue of existing in UK law.
Market access & cross-border services
Aside from specific arrangements under the future FTA, access to the EU telecom markets from the UK and vice versa (whether by establishing a commercial presence, acquiring ownership of, or otherwise investing in telecoms companies or interconnecting with the networks of public network operators), will ultimately be safeguarded by the commitments undertaken in the context of the General Agreement on Trade in Services (GATS) within the World Trade Organization (WTO).
Although it is an independent member, the UK currently shares the telecoms related commitments set forth in the GATS with the EU and has been represented by the EU in the trade negotiations. In principle, there will be no need for the UK to negotiate its own commitments post-Brexit; it could simply state that these commitments are the same as undertaken by the EU on its behalf. With a few limited exceptions in certain EU member states, the GATS rules (including the Annex on telecommunications and the Reference Paper that sets forth certain telecoms regulatory principles) allow for uninhibited market access and investments, and prescribe a right of network interconnection on the same conditions as applied nationally.
There is no one-stop-procedure for telecoms licences in the EU, therefore national licensing requirements will continue to apply as they currently already do (normally, a notification or general authorisation regime for public fixed telecoms and a regime of individual licences for public mobile). That does not mean that operators in the UK providing cross-border telecoms services into the EU (and vice versa) can readily expect equal treatment on all fronts. The GATS rules (including the so-called Most Favoured Nation and National Treatment obligations) do not necessarily entail that UK operators will be able to take advantage of regulated (fixed and mobile) termination rates to deliver traffic to end users in EU member states, or benefit from the caps on wholesale and retail mobile roaming charges under the EU Roaming Regulation.
The position of the European Commission is that the EU Roaming Regulation has "no significant impact […] on third countries, international trade or investment" and that it does not conflict with the WTO obligations. The jury is still out on whether the EU customs union generally allows member states to charge higher international termination rates to non-EU providers (BEREC has been investigating this in the past year without any publicly available results), but the fact is that a majority of EU member states does exactly that and generally few concerns have been voiced in respect of this practice in relation to WTO obligations.
Nevertheless, wholesale pricing of international interconnection and termination services remains a fairly non-transparent arena in which the balance of traffic plays an important part in determining ultimate charges, and it may well be that reciprocity of rates between most EU member states and the UK will be a commercially driven outcome anyway.
With regard to mobile roaming specifically, where retail surcharges for roaming within the EU are scheduled to be abolished by 15 June 2017, Ofcom's Sharon White has argued to retain the current limits on roaming charges. Even in the absence of such agreements, competitive pressures may well force operators in both the UK and EU to limit roaming charges. Depending on its post-Brexit powers, Ofcom might also be in a position to drive down retail roaming charges charged by UK operators if these appear to be unfairly punitive for UK consumers. In her December 2016 speech, Ms White indeed stated that future UK laws should keep the door open to retail intervention.
With the telecoms sector generally displaying continuing consolidation, the question is whether Brexit will materially affect the assessment under general competition rules of mergers and acquisitions. Obviously, Brexit will mean that future mergers and takeovers will be presided over by UK regulators where they might previously have fallen under the review of the European Commission, as was the case with the attempted acquisition of O2 by Three.
In the latter case, the UK regulators were aligned with the Commission's decision to block the four to three player reduction on the UK mobile market. In the future, however, differences may be revealed where the UK Competition and Markets Authority will have the final say. In this context, Ms White indicated in her December 2016 speech that there is an opportunity to introduce a wider set of considerations in merger decisions, including policy and public-interest concerns where a company has particular strategic significance in the UK. As mentioned, she is additionally calling for new powers to protect consumers through retail regulation if need be, where the trend in the EU is to rely on general competition law safeguards and sector-specific wholesale regulation. Upon Brexit, Ofcom would also seek to reserve the right to enforce legal and structural separation measures in respect of BT and Openreach, measures which are currently subject to European Commission oversight. With regard to significant market power regulation under the EU framework, Brexit will entail that Ofcom may gain considerably more leeway in defining relevant markets within the UK upon which to intervene and to determine the type of remedies required to address competition deficiencies.
It appears that Ofcom will want to do away with the 3-year interval for market reviews currently prescribed under the EU regulatory framework, allowing for a lengthier interval and more flexible intermediate intervention, which incidentally is also currently envisaged in the European 'Electronic Communications Code' proposed by the European Commission to replace the current regulatory framework.
Net neutrality & digital single market measures
With the recent rules on net neutrality, the EU has taken steps that limit the ability of telecoms operators to take advantage of zero-rating and other (communications content dependent) business models. The UK strongly influenced the further refinement of these rules by BEREC to take a more case-by-case approach rather than imposing onerous limitations across the board. Brexit will enable the UK regulators to perhaps take a more relaxed approach towards net neutrality, to foster new business models in the telco space or to allow a stringent parental control regime as was advocated by the government in the past.
The UK can probably also steer its own course in determining to what extent Over-The-Top services should be pulled within the ambit of telecoms regulation, as is currently envisaged in the proposed European Electronic Communications Code. It remains to be seen whether that Code will enter into force prior to Brexit, and even if so, to what extent the UK will choose to implement or maintain the new rules with Brexit on the horizon.
The same is true for other measures proposed by the European Commission in the context of its Digital Single Market (DSM) strategy, including access to network infrastructure and audio-visual services. A definite downside for the UK is that it will not likely benefit from the European funds made available to promote the DSM strategy and, more generally, will not automatically take advantage of the measures taken to facilitate the cross-border provision of digital services and to enhance consumer protection across Europe in this context.
The UK as a springboard to Europe
The effects of Brexit on the UK telecoms market may not be so pronounced as in other sectors of the economy, given that telecommunications markets are generally to a large extent nationally delimited, with end users seeking services at a national level and a relative lack of "trade" in telecommunications services. Nevertheless, where it concerns international interconnection and call termination, but also (and maybe especially) with regard to the wider Digital Single Market strategy measures, companies will seek to take advantage of the regulatory harmonisation within the EU and may for that reason (apart from other freedom of persons and capital considerations) choose to seek residence in an EU member state rather than in the UK. There are therefore clear incentives for the UK government to seek post-Brexit arrangements in the envisaged FTA above and beyond what may be safeguarded by the WTO rules.
A previous version of this article was published on TelecomFinance.