Staying connected? - Ukie

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Staying connected? Implications of the EU Referendum for the UK Games industry

Contents 03

About Ukie

03

About this paper

03

Introduction

03

What will be the impact on the UK economy and foreign direct investment?

04

What is the regulatory impact on business?

04

What does change look like post-Brexit?

05

Which option is good for business?

05

Regulatory issues for games industries

07

Conclusion

About Ukie UK Interactive Entertainment (Ukie) is the trade body that represents over 250 businesses and organisations involved in the games and interactive entertainment industry in the UK. Ukie exists to make the UK the best place in the world to develop and publish games and interactive entertainment. Ukie’s membership includes games publishers, developers, console manufacturers and the academic institutions that support the industry.

About this paper The campaign for the UK’s continuing membership of the EU began in earnest on 15th April. Ukie takes no position on the EU Referendum (Brexit) and is not advising on how to vote on 23 June. This paper provides an objective analysis on how the debate relates to the industry.

Introduction Our existing membership of the EU involves a tradeoff between full access to the continental market of 560 million citizens and the collectively-decided rules business operate under and consumers enjoy. The debate about whether the UK remains or leaves the EU can be said to pose ‘known knowns’ (things we expect to happen); ‘known unknowns’ (issues which are recognised, but poorly understood) and ‘unknown unknowns’ (issues or events which cannot be expected because there has been no prior experience).

What will be the impact on the UK economy and foreign direct investment? The most hotly contested ground between the camps is the direct economic impact of Brexit and a number of studies have been produced by the ‘Remain’ camp. Advocates of ‘Leave’ argue a depreciated currency could prove a boon for exporters and provide an economic stimulus as UK businesses become more competitive internationally. HM Treasury, supporting the government position, argues the impact of withdrawal would most likely be felt in areas such as foreign direct investment and the UK’s contribution to the EU Budget. A decline in economic activity could lead to lower tax receipts which may encourage the government to intensify spending cuts or raise taxes. Spending cuts associated with the austerity regime have already impacted the games industry in that we have already seen a tightening and refocusing of public funding in government departments. However, the ‘Leave’ camp points to the reinvestment of the UK’s £8.5 billion contribution to the EU in 2015 (around 1% of total public expenditure, equivalent to 0.5% of GDP). It is unclear how the UK tech or creative industries would fare from any such redistribution of funds, which would face strong competition from other sectors for prioritisation. This also needs to be balanced against the loss of EU funds, which provide substantial support to the UK regions1. In addition to the UK’s competitive strengths, foreign firms also look to use the UK as a base for selling to the rest of Europe. A full-blown exit could tarnish the UK for many foreign organisations based here, or be seen as removing existing trading and regulatory foundations that make the UK an attractive bridge to the EU. The role of the UK both as a base for European operations and a force-for-reform within the EU is an important factor for ‘Remain’ advocates2.

1.  See, e.g. LSE Europe Blog, “Should the UK stay or go: the economic consequences of Britain leaving the EU” http://blogs.lse.ac.uk/ europpblog/2015/03/24/should-the-uk-stay-or-go-the-economic-consequencesof-britain-leaving-the-eu/ 2.  London First, Jobs and Growth for London http://londonfirst.co.uk/wpcontent/uploads/2016/02/Jobs-and-Growth-for-London-London-First-report.pdf

4 Staying connected? Implications of the EU Referendum for the UK Games industry

What is the regulatory impact on business? The second major area of consideration is the impact on business regulation in the UK. Here we have to consider both the current/future impact of EU regulation on business and the impact of potential changes were the UK to leave. In considering this subject we have to weigh up the particular characteristics of the games industry outlined in Ukie’s Blueprint for Growth3: ++Preponderance of small and micro-studios in the games industry ++Pan-European and global nature of platforms and sales ++Relative youth of many studios and interdependency with other tech and creative sectors ++Importance of access to finance, investment, talent acquisition and retention The policy areas in which the EU operates and may legislate, known as competencies, are set out in the Treaty on the Functioning of the European Union (TFEU - formerly the Treaty of Rome) and the ‘Four Freedoms’ – freedom of movement of goods, people, capital and services. The laws of the UK and the EU have been entwined since Parliament passed the European Communities Act 1972 (ECA), giving EU law supremacy over national law. There are two main types of EU legislation – directives and regulations. Directives require implementation into UK law through primary or secondary legislation in order to have effect, in a process known as transposition. The UK’s exit from the EU would not result in the automatic repeal of this legislation. The government would need to make a conscious decision to repeal them on a case-bycase basis. In most cases, the EU legislation is in the form of directives but where they are regulations they have direct effect and would automatically be repealed on withdrawal from the EU. If the ECA were repealed, then all EU regulations would cease to have force 3. 

Ukie, Blueprint for Growth http://ukie.org.uk/blueprint

unless saving legislation were to be implemented. This would be an unprecedented situation and seems highly unlikely given the legal uncertainty it would cause. A more orderly transition through transitional arrangements or new legislation seems more probable. It is likely that the strength of these laws will be the subject of national debate between those who see Brexit as an opportunity to deregulate and those who would resist that vision.

What does change look like post-Brexit? It is likely that some EU legislation may need to remain in force as part of any trade agreement negotiated following the exit, particularly if the UK were to remain in the European Economic Area (EEA). The final status of the UK post-withdrawal could take some time to determine – the minimum time period for withdrawal as stipulated in Article 50 of the Treaty of the European Unit is 2 years – and it seems unlikely that legislation would be repealed until a decision were taken on whether to remain in the EEA. The table below outlines some alternative scenarios set out by HM Treasury4. The most likely options for UK trade with the EU following Brexit are as follows: 1. membership of the European Economic Area (EEA), like Norway 2. a negotiated bilateral agreement, such as that between the EU and Switzerland, Turkey or Canada 3. World Trade Organization (WTO) membership without any form of specific agreement with the EU - like Russia or Brazil

4.  HM Treasury, Analysis on the EU referendum, https://www.gov.uk/ government/uploads/system/uploads/attachment_data/file/517415/treasury_ analysis_economic_impact_of_eu_membership_web.pdf and https://www.gov.uk/ government/news/eu-referendum-treasury-analysis-key-facts

Which option is good for business? Advocates of ‘Remain’ argue that EU-level rules create benefits for British businesses, for example by removing barriers and creating common standards to sell to 560 million consumers. However, the Confederation of British Industry (CBI), even though campaigning to ‘Remain’, point to the negative effects on business of existing EU legislation, both individually and taken together, when they cite that 52% of businesses believe that, were the UK to leave the EU, the overall burden of regulation on their business would fall. Areas where UK firms are frustrated with EU regulation include labour market regulation, highlighted by nearly half of businesses as having had a negative impact – with particular frustrations around the Temporary Agency Workers Directive and Working Time Directive. The Federation of Small Businesses also argues that current regulations on employment, health and safety and data protection are particularly burdensome for small businesses, something Brexit could remedy. Advocates of ‘Remain’ have modelled the negative economic impacts of leaving, the most notable being the April 18 HM Treasury analysis. PwC estimate that total UK GDP in 2020 could be between around 3% and 5.5% lower under alternative scenarios than if the UK remains in the EU, representing a reduction of around £55-100 billion in UK GDP5. “By 2030 this post-exit uncertainty should be resolved, but they estimate that the net longer term impact of other changes related to EU exit could result in total UK GDP in 2030 being between 1.2% and 3.5% lower than if the UK remains in the EU (around £25-65 billion, at 2015 values). This reflects the potential negative economic impacts of increased barriers to trade and labour mobility after EU exit, offset in part by potential benefits from lower regulatory burdens and fiscal savings from no longer paying net budgetary contributions to the EU.” Open Europe’s modelling speculates that any deregulatory boost to the UK economy is dependent of future decisions by UK governments6:   5.  CBI, Leaving the EU: implications for the UK economy http://news.cbi.org.uk/ news/leaving-eu-would-cause-a-serious-shock-to-uk-economy-new-pwc-analysis/ leaving-the-eu-implications-for-the-uk-economy/ 6.  See Open Europe, Britain and the EU: what if there were Brexit? http:// openeurope.org.uk/intelligence/britain-and-the-eu/what-if-there-were-a-brexit/ and http://openeurope.org.uk/today/blog/where-do-the-costs-and-benefits-of-brexitcome-from/

“the economic impact of Brexit is not as clear cut in either direction…Instead it will depend on a number of tough decisions in the UK and Europe. This includes whether the EU itself will embrace reform and whether UK politicians and voters are willing to turn Britain into the deregulated, free trading economy it would need to become outside the EU.” The political environment in Europe could very much shape how future treaties are drawn up. Elections in France and Germany next year are both likely to feature a challenge from Eurosceptic parties, meaning that reaching agreement around Brexit may be more difficult in practice than Leave advocates suggest.

Regulatory issues for games industries A useful overview of the possible impact of postBrexit legislative changes is provided by Osborne Clarke7. Building on that analysis and from other sources, we highlight these important areas for games firms:

1. Digital Single Market

The Digital Single Market (DSM) is a project to remove digital trade barriers between EU countries. Consumer law, competition law, copyright law, audio-visual content regulation, data protection law and more are all being reviewed, with the role of games-critical online platforms also coming under scrutiny. HM Treasury estimates that an expected addition of 0.9% of UK GDP is estimated as the benefits are realised, although the effect could be greater since the UK could benefit disproportionately as one of Europe’s leading providers and users of e-commerce8. In the short term, while these rules are being drawn up leaving the EU would take away any ability of the UK to influence this agenda. Were the UK to re-join the EEA post-exit, or make a separate trade agreement, we would be subject to any changes made under the DSM project without our input. Experience of the project so far has seen the UK taking a crucial role in holding back changes that would be very negative for the games industry, 7.  Osborne Clarke, http://www.osborneclarke.com/connected-insights/blog/ commercial-legal-implications-brexit-your-business/ 8.  HM Treasury https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/517415/treasury_analysis_economic_impact_of_eu_ membership_web.pdf

6 Staying connected? Implications of the EU Referendum for the UK Games industry particularly around consumer law. The UK games industry would lose any ability to influence, through the UK government, the rules governing how we could sell to the rest of Europe digitally. However, if the UK were to rely on WTO rules alone, the government would have the ability to remove any DSM requirements they felt were unfair on business, including for the games industry. Several of these are discussed below, as this question covers a large area of potential regulation. New copyright exceptions introduced by the EU, for example, could be refused by the UK (although no games-relevant exceptions are currently being discussed). Overall, although the UK is a substantial digital market in its own right, adoption of any changes in the DSM may affect a business’s decision whether or not to launch or base online services or operations in the UK. Significant departures from rules on crossborder commerce and/or access to content, for example, may make it more difficult for UK-based companies to offer games direct to the whole EU market. Ultimately, it may affect UK consumers (e.g. if it were to become more expensive for online businesses to include UK content in a European bundle of services).

2. Consumer Law

A huge amount of UK consumer protection regulation is derived from the EU, for example, directives implemented in the UK protect consumers from unsafe products, unfair practices, misleading marketing practices, distance selling etc. UK Consumer Law was updated in 2015 in the light of EU directives, business activity will need to comply with this unless changed or repealed by a future government.

3. Data

Rules governing the use of data are fundamental to new business models in the video games industry. The UK’s Data Protection Act 1998 has its origins in the 1995 EU Data Protection Directive. The latter will be replaced by the General Data Protection Regulation in 2016 which as a regulation will not require any new UK legislation. In the event of Brexit the UK would, as above, have to a seek alignment through alternative treaties.9 9.  Osborne Clarke, http://www.osborneclarke.com/connected-insights/blog/ data-protection-and-privacy-legal-implications-brexit-your-business/#sthash. R89TCnQ7.dpuf

4. State Aid

The State Aid rules are critical to how the public sector procures goods and services and delivers public services. They are designed to prevent government in the member states from unfairly subsidising economic activity. The Video Games Tax Relief (VGTR) is a UK incentive implemented in compliance with EU law governing State Aid (e.g. the ‘cultural test’). State Aid issues also have arisen in Ukie’s dealings with Local Enterprise Partnerships in England. Lifting State Aid rules could be a benefit to business should government adopt a more activist approach to industrial policy, however this also risks more difficult negotiations around trade agreements with other trading blocks. There is also clear precedent from EU agreements with 12 Mediterranean countries and South Africa (for example) that the EU will insist on its state aid rules being respected in any free trade agreement. Any trade agreement the UK sought post-Brexit, including joining the EEA, would require keeping to the existing rules under which VGTR has been secured.

5. Labour market regulation

Much of the UK’s employment legislation stems from EU covering areas such as annual leave, agency worker rights, part-time worker rights, fixed-term worker rights, collective redundancy, paternity, maternity and parental leave, protection of employment upon the transfer of a business and anti-discrimination legislation. This legislation is mostly in the form of Directives. The UK has a partial opt-out of the Working Time Directive. The ‘Leave’ campaign signals that Brexit will deliver more labour market flexibility due to less onerous rules on employers. Were this to be the case, there would be significant challenge from unions and the centre-left on which regulations should stay and which should go. Osborne Clarke questions whether Brexit would necessitate a redrafting of contracts of employment10.

6. Immigration

Talent is one of the most important issues for UK games companies and the source of much industry lobbying. The most detrimental aspects of a Brexit are perceived to be the new difficulties this would bring in sourcing high-skilled EU workers – such as software engineers – who play a big part of the UK’s tech sector. As part of the Treaty on the Functioning 10.  Osborne Clarke, http://www.osborneclarke.com/connected-insights/blog/ employment-legal-implications-brexit-your-business/

of the European Union, EU citizens have the automatic right to work in other EU member states. Withdrawal from the EU would remove this, which is a major aim of both ‘Leave’ campaigns. This would have a major but as yet unknown impact on games industry employers depending on if and how visa requirements for EU citizens would be implemented post-withdrawal. It is not known at present what proportion of the games industry workforce are citizens of EU member states other than the UK and the Republic of Ireland. However, it is known that talent acquisition and retention are number one priorities for the sector and that the ability to recruit from across Europe is of benefit to the industry to grow business and secure work globally, at the moment. Osborne Clarke set out a series of important questions for businesses11: ++How would Brexit affect my current staff and ability to recruit? What proportion of existing staff might need visas and/or residence permits? Would they be required to leave the UK and reapply?

and promote regional development. Businesses can access EU structural funds allocated to and administered by the Local Enterprise Panels. The European Regional Development Fund, for example, will provide around £2bn (€2.4bn) to boost innovation, broadband access and small businesses across the UK from 2014 to 2020.

Conclusion There is much uncertainty in this debate for the UK games industry. Fundamentally, the decision revolves around whether there are is the possibility of negotiating a potentially better, more tailored national regulatory regime when pursuing an independent agenda; and whether this outweighs access to the single market and high-skilled labour currently experienced by our sector.

++Will further tightening of UK immigration rules make it more difficult or costly to employ EU citizens? ++Might there emerge a two-tier Europe, with preference given towards nationals from (for example) Germany and France over Romania? ++Can I protect myself and my staff by securing permanent status and/or UK nationality now? The counter-argument is that a standalone UK could have the option to redefine its immigration laws away from those mandated by Brussels, providing more opportunity to attract technologically-skilled workers to the UK, perhaps through a system like the Australian Skilled Immigration Points scheme. However, immigration would be the source of much political debate in a post-Brexit UK and it is uncertain whether this outcome would be achieved.

7. Regional Policy

Regional Policy is an EU competency which is largely carried out through instruments such as the EU structural funds rather than legislation. The purpose is to compensate for the uneven impacts of the single market in goods, services and capitals 11.  Osborne Clarke, http://www.osborneclarke.com/connected-insights/blog/ immigration-legal-implications-brexit-your-business/

What further guidance is there for business? The two official campaigns are: + Remain: Britain Stronger In: strongerin.co.uk + Leave: Vote Leave, Take Control: voteleavetakecontrol.org/campaign + Ukie is a member of the CBI which has produced an information pack with FAQ on how to prepare businesses for the Referendum outlining the arguments in further detail. CBI, EU Referendum Information Pack: news.cbi.org.uk/ business-issues/uk-and-the-european-union/eubusiness-facts/cbi-eu-referendum-information-packpdf/

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