Brexit Seen Forcing New Talks on Personal Data Flows, Jeopardizing Investment

Britain's decision to leave the EU will mean renegotiating trans-Atlantic data flows and information technology trading agreements, among other things, and could jeopardize U.S. investment in the country, commentators here in the U.K. and abroad said Friday. Trading in European telco and cable companies could be uneven, said one market analyst, and the stock of the company he wrote about, Liberty Global, fell, as did the shares of many other companies. But Brexit could bring the two countries closer in digital trade, a paper for the American Enterprise Institute said. Industry officials had worried about the effect of any Brexit on European telecoms (see 1606220001).

The vote "will have wide-ranging implications" for data transfers and for transfers from the U.K. to the remaining 27 EU members, said Squire Patton (London) privacy and cybersecurity attorney Ann LaFrance. The U.K. will have to, as the U.S. is doing, negotiate its own Privacy Shield-type arrangements with the EU, she emailed. This will be particularly important given the financial services sector's need to shift data between the two jurisdictions, she said.

The existing U.K. Data Protection Act, which adopted the EU general data protection directive into national law and is highly intertwined with it, will have to be amended, said LaFrance. The U.K. will have to take into account the "adequacy" standard the EU will apply to the U.K., to the U.S. and to other countries outside the European Economic Area (EEA), and to show its regime is adequate to meet the new EU general data protection regulation, she said. The U.K. will "presumably also need to assuage any EU Member State of [Edward] 'Snowden' concerns" similar to those that led the European Court of Justice to strike down safe harbor, she said.

Brexit could give the U.S. the chance to agree on a new data transfer accord with the U.K. "that reflects our shared commitment to free trade," wrote American Enterprise Institute visiting fellow Roslyn Layton and intern Lindsay Bembenek in the AEI paper. The two countries could develop a competitive international data transfer policy to be a framework for future multilateral digital trade agreements, they said. "Given the ongoing challenges to US-EU Privacy Shield negotiations, as well as the [Trans-Atlantic Trade and Investment Partnership], a digital trade agreement between the US and the UK could serve as an example to the EU and signal that the UK will not continue down its current privacy trajectory."

U.K. companies trading with EU citizens must continue to respect their rights, said Digital Marketing Association Group CEO Chris Combemale. Because the U.K. wants to continue doing business with the EU, "our data protection law will need to be broadly equivalent to existing legislation and strike the right balance between the right to privacy and economic growth," he said.

Brexit likely will have a short- and medium-term impact on enterprise IT investment in the U.K., said Ovum analyst Tim Jennings. He urged senior executives to prepare their core systems for any implications of revised trading and legislative agreements, and to consider postponing investment in nonmandatory IT projects such as digital transformation until things become clearer. Conversations with enterprise IT leaders "suggest that few have planned or prepared for the changes that might be required as a consequence of Brexit," he said.

IT suppliers generally strongly favored remaining in the EU, partly because of the commercial implications for their businesses, but "also in recognition of the uncertainty for their customers, in areas such as systems preparedness, data protection, IT contract terms, and the physical locations of IT service delivery," Jennings wrote. But Brexit probably will have little impact on the U.K. telecom regulatory environment because it's "highly likely" it will continue to be part of the EEA, and because the European regulatory approach "actually borrows a great deal from the UK's experience of privatization and market liberalization, said Ovum analyst Luca Schiavoni.

Britain's copyright system could diverge from Europe's depending on what it negotiates, said Hogan Lovells (London) intellectual property attorney Sahira Khwaja in an interview. If the U.K. wants to remain part of the single market, it might have to accept the EU copyright regime, she said. The U.K. will have two years to work out its exit deal, which won't likely give it time to write its own copyright laws, she said. It now will probably carry on with existing law, but change it in the future, Khwaja said.

"Even the most supposedly defensive euro telco stocks have traded poorly" recently because of the prospect of Brexit, said Pivotal Research Group analyst Jeffrey Wlodarczak in a client note on the effect of the vote on Liberty Global. If those telco stocks are significantly weak, then higher-levered names such as Liberty Global's "will be hit even harder," he said. While the U.K. will remain in the EU for at least two years, and may ultimately decide to effectively be part of the union, "until the market gains greater certainty about the ultimate effects from a potential Brexit trading in Euro cable/telco names may potentially continue to be choppy," he said. Liberty Global shares closed 13 percent lower Friday in U.S. trading to $28.80.

The U.K. is one of Discovery Channel's biggest markets and a "critical creative and business hub," Discovery Communications said. The global company is used to operating in an industry and world where change is constant and will work with U.K and EU leaders to navigate Brexit, it said. Its currency-hedging program will help minimize the foreign exchange impact of the vote on its financial performance, it said in a statement. Discovery shares closed 7.2 percent lower Friday in U.S. trading to $24.46.

While some uncertainty is unavoidable in the near term, "the first order of business will be to reassure investors about [the choices awaiting policymakers] and avoid precipitous action in the coming negotiations with the EU," said U.S. Chamber of Commerce President Thomas Donohue. American companies' investments in Britain are worth more than half a trillion dollars, and many were made to reach not just British consumers but those on the Continent, he said. Those stakeholders' priorities must be considered in the coming debates, he said.