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Chamber and committees

Guidance on UK Internal Market

Introduction

1. The aim of this paper is to provide subject committees with guidance on scrutiny of the impact of the UK internal market on devolved policy areas.

2. In Session 5 the focus of the Parliament and its committees has been on withdrawing from the EU and the legislation needed to ensure legal continuity after Brexit. In Session 6 the focus will shift to policy-making and secondary and primary legislation within the new constitutional arrangements.

3. These new arrangements are substantially more complex than existed while the UK was a member state of the EU. This is essentially for two reasons. First, the four governments within the UK are no longer constrained by a statutory requirement to comply with EU law. Second, there is substantial disagreement between the devolved governments and the UK Government regarding the governance of the UK internal market which replaces membership of the EU single market and which in practice will limit regulatory divergence .[1]

4. The core of this continuing disagreement is the process for limiting regulatory divergence in order to ensure that businesses can continue to trade freely across the UK while respecting the devolution settlement. While the UK Government and the devolved governments agree that there is a need for a common UK or GB approach to the governance of the UK internal market there are fundamental differences as to how this can be achieved.

What is an Internal Market?

5. The Finance and Constitution Committee’s internal market adviser, Professor Kenneth Armstrong, defines an internal market as –

“an economic space consciously created to facilitate economic activity between the territorial jurisdictions that comprise the internal market. It entails governance arrangements that aim to integrate distinct territorial markets – market integration – while allocating and policing decision-making in the public interest between different jurisdictions – market regulation.”

6. He also states that from the experience of the EU internal market we can learn four general lessons:

  • An internal market is not an uncontested concept ;
  • Trade-offs and balances are involved in making an internal market;
  • The operation of an internal market depends upon its governance architecture and its relationship with constitutional settlements;
  • There is more than one way to design an internal market.

7. The Scottish Government’s view is that 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.

8. The Scottish Government states that an internal market can “therefore be seen to encompass many, if not almost all, areas of government and parliamentary activity, and public policy considerations.”

9. The UK Government’s view is that -

“the UK will continue to operate as a coherent Internal Market. A Market Access Commitment will guarantee UK companies can trade unhindered in every part of the United Kingdom – ensuring the continued prosperity and wellbeing of people and businesses across all four nations. At the same time, we will maintain our high standards for consumers and workers.”

UK Internal Market Act (UKIMA)

10. The UKIMA creates two key market access principles which will operate in the post-Brexit environment: the mutual recognition principle and the non- discrimination principle. All devolved policy areas are potentially impacted by the market access principles although some exemptions are provided in the Act. For example, neither of the market access principles currently applies to healthcare services, social services or transport services.

11. Both principles can be applied to relevant requirements in respect of the sale of goods or the provision of services. These principles serve to disapply relevant requirements in one part of the UK when goods or services are lawfully provided in another part of the UK.

12. The principles will permit access to the Scottish market of goods and services which originate elsewhere in the UK under different regulatory conditions. This is likely to have a substantial impact on the effectiveness of devolved regulatory regimes.

13. The principles do not introduce any new statutory limitations on the competence of the Scottish Parliament or Scottish Ministers[2]. But in practice, regulatory competition may constrain the ability of the devolved authorities to exercise their executive and legislative competences. Specifically, UKIMA may not affect the Scottish Parliament’s ability to pass a law, but may have an impact on whether that law is effective in relation to goods and services which come from another part of the UK.

14. This means that the Scottish Government and Scottish Parliament will need to be cognisant of the regulatory environment in each of Wales, Northern Ireland and England when considering the impact of legislative change in Scotland on market access across the UK. This will include the impact of the Ireland/Northern Ireland protocol.

15. In particular, given the size of the English population and economy relative to the three other nations within the UK, the Scottish Government will need to take account of market forces when considering regulatory divergence. The devolved governments will not want to put their own economies at a competitive disadvantage with the much larger English economy by introducing higher regulatory standards which imports from other parts of the UK do not need to comply with.

16. The Scottish Government’s view is that the UKIMA is fundamentally incompatible with the principles and practice of devolution in the UK’s constitutional arrangements since 1997. In its view the Market Access Principles cut across the clear reserved powers model to introduce wide ranging constraints on devolved competence, and in ways that are unpredictable and will lead to increased legal disputes. The mutual recognition principle, in particular, will reduce the ability of the Parliament to use its powers to pursue devolved social and economic objectives in Scotland for which it is accountable.

17. The UK Government’s view is that the market access principles will allow people and businesses to trade, without additional barriers based on which nation they are in. In its view the end of the need to comply with EU law means that vast numbers of powers currently exercised by the EU will flow back to the UK, including new powers for the Scottish Government in over a hundred policy areas.

18. The Act was passed notwithstanding that legislative consent was withheld by the Scottish Parliament and the Welsh Senedd. The Welsh Government is seeking a judicial review with a view to obtaining a declaration that the powers conferred by the Act cannot be exercised incompatibly with the constitutional status of the devolution statutes. The Scottish Government has indicated that it is supportive of this approach.

Common Frameworks

19. Both the Welsh and Scottish Governments argue that the legislation is unnecessary as common frameworks approach can fulfil the same objectives in guaranteeing market access across the UK. A set of principles were agreed in October 2017 to guide the negotiation of these frameworks including where they are necessary to:

  • enable the functioning of the UK internal market, while acknowledging policy divergence;
  • ensure compliance with international obligations;
  • ensure the UK can negotiate, enter into and implement new trade agreements and international treaties.

20. Common Frameworks are intended to set out a common UK, or GB, approach and how it will be operated and governed. This may consist of common goals, minimum or maximum standards, harmonisation, limits on action, or mutual recognition, depending on the policy area and the objectives being pursued. Frameworks may be implemented by legislation, by executive action, by memorandums of understanding, or by other means depending on the context in which the framework is intended to operate.

21. The Scottish Government’s view is that the common frameworks approach provides all of the claimed objectives of the Bill in guaranteeing market access across the UK, while respecting devolved competence, and, crucially, effectively providing agreed minimum standards which all producers must meet, avoiding the risk of competitive deregulation while giving producers and consumers clarity and certainty.

22. But the UK Government does not believe that common frameworks would provide the certainty for businesses and citizens because they –

  •  are not able to assess the wider economic impacts or knock-on effects of regulatory divergence;
  • do not address how the overall UK Internal Market will operate;
  • will not account for the full UK economy across goods and services.

23. The Scottish Government’s view is that the UK Internal Market Bill as introduced undermines the agreed process of negotiating and agreeing common UK frameworks where these are required to replace existing EU structures. In its view the Bill cut across agreed common frameworks in a deeply damaging manner, undermining processes to manage policy divergence by agreement and instead requiring that standards set in one part of the UK are automatically recognised elsewhere, including in policy areas covered by common frameworks, regardless of whether these standards are compatible.

24. The UK Internal Market Bill was amended to provide a mechanism for UK Ministers to disapply the market access principles in respect of legislative measures that fall within common frameworks policy areas. But there is no requirement to do so; the discretion lies with UK Ministers.

25. Despite the disagreement on the Impact of the UKIMA, the most recent quarterly report on common frameworks, published by the Cabinet Office in May 2021, states that they “are being developed through constructive discussions between the UK Government and devolved administrations” and that this “has continued during the latest reporting period.”

26. Until now there has been limited parliamentary scrutiny of the frameworks. While all 26 common frameworks have been minimally operable since 1st January 2021, only 3 provisional frameworks have completed Scottish parliamentary scrutiny. A further 5 provisional frameworks have been published and laid in the UK Parliament to aid transparency but are not yet ready for parliamentary scrutiny. The timescale for publication and scrutiny of the remaining 16 frameworks remains unclear.

27. The Scottish Government has previously stated that it is committed to operating as if the full frameworks were in place until they are finalised.

Scrutiny Issues

28. The CEEAC Committee will have the lead role in scrutinising the overall impact of the UK internal market on the devolved settlement. But subject committees will have responsibility for how the UK internal market impacts on the Scottish Government’s policy commitments and legislation within their respective remits.

29. Key questions which the subject committees may wish to consider early in Session 6 are as follows –

  • To what extent are the market access principles impacting on the implementation of the Scottish Government’s policy commitments. For example, in areas such a single use plastics, regulation of fireworks, the deposit return scheme and regulatory policy more generally;
  • To what extent is the policy-making and legislative process constrained by the lack of final agreement on common frameworks;
  • What are the outstanding issues which need to be resolved in finalising each common framework;
  • Is there an expectation that the market access principles will be disapplied from legislative measures that fall within common frameworks policy areas once the frameworks are finalised and if not how will minimum standards in Scotland be maintained.

Trade and Co-operation Agreement (TCA)

30. The regulatory environment within the UK internal market will to some extent be dependent on international agreements including the TCA. The TCA between the EU and the UK does not provide for common regulatory standards for goods - manufacturers who wish to place goods on both the UK and EU markets will need to comply with the regulatory rules for those goods in the UK and EU even where they are different.

31. Non-regression has been agreed on some overall legal standards in the areas of labour and social standards, environment, and climate: under the TCA the overall levels of protection in these areas cannot be lowered in a way which affects trade and investment between the UK and the EU. This went some way to addressing both the UK and EU position on the level playing field question.

32. Previously, the constraints imposed by EU law on the policy-making process within the UK including at a devolved level were legally explicit. By contrast, what exactly the TCA requires is not spelt out to the same extent. It relies instead to a much greater extent on ongoing negotiation and agreement between the UK Government and EU. The TCA also contains many commitments to cooperate which do not detail exactly what that cooperation requires.

33. The TCA also stablishes a complex governance structure, headed by a ‘Partnership Council’, co-chaired by the European Commission and the UK Government, to oversee the implementation of the agreement. The Partnership Council will be supported in its work by nineteen Specialised Committees and four working groups. The Specialised Committees will consider issues which are within devolved competences such as fisheries, law enforcement and judicial co-operation.

34. The UK Government has stated that where “items of devolved competence are on the agenda for the Partnership Council or Specialised Committee, we expect to facilitate attendance by Devolved Administrations at the appropriate level.”

35. The TCA governance structure also establishes a ‘Parliamentary Partnership Assembly’ and a ‘Civil Society Forum’. The Parliamentary Partnership Assembly (PPA) is proposed to consist of Members from the European Parliament and UK Parliament. The Culture, Tourism, Europe and External Affairs Committee recommended in Session 5 that representation from the Scottish Parliament be included on the PPA.

Scrutiny Issues

36. The CEEAC Committee will have the lead role in scrutinising the impact of the TCA on the devolution settlement including addressing the issue of Scottish Parliament representation on the PPA. Subject committees are likely to have an interest in how the operation of the TCA is impacting on policy areas within respective remits. In particular, how the operation of the TCA impacts on the level of alignment with EU law. Subject committees may also have an interest in the make up of any Scottish Parliament representation on the PPA. It is also likely that a number of subject committees will have an interest in scrutinising the economic impact of the TCA on Scotland.

37. Key questions which the subject committees may wish to consider early in Session 6 are as follows –

  • To what extent does the TCA allow for policy divergence between the UK and EU and how might this impact on Scottish Government policy commitments;
  • The scrutiny role in relation to the work of the Specialised Committees in areas within devolved competence;
  • The scrutiny role in relation to the work of the PPA.

Legislation

38. Existing mechanisms and procedures in the UK and Scottish Parliaments for the scrutiny of EU measures of political and legal significance to the UK and Scotland were predicated on the obligations to align with EU law while a member. Post-membership, the scrutiny challenge lies in understanding the reasons behind both future divergence from, and future alignment with, EU rules (or indeed other international legal norms).

39. When scrutinising Scottish bills or subordinate legislation, the limits on regulatory autonomy will not always be clear, given the impacts of the UKIMA, common frameworks and the TCA. Analysing such legislation presents a different challenge to the more familiar one of determining what the limits of legislative or executive competence are. Both exercises will be necessary to fully understand the policy approach being taken.

40. It is also expected that the UK Government will increasingly make use of other statutory powers to make instruments arising from UK withdrawal from the EU that would include provisions within the legislative competence of the Scottish Parliament. The Scottish Parliament has no formal scrutiny role in relation to subordinate legislation in devolved areas made by UK Ministers. Its role is instead to hold the Scottish Ministers to account for their decisions on whether or not to consent to UK Ministers making such legislation. Scrutiny of those decisions generally takes place prior to the legislation itself being available for consideration

41. Whilst the Scottish Parliament cannot scrutinise secondary legislation laid at the UK Parliament, even where the proposed changes to the law are in devolved areas, it can scrutinise decisions by Scottish Ministers to consent to such legislation. Protocol 2 was agreed between the Scottish Parliament and the Scottish Government and is applicable for all proposals to make UK statutory instruments which include devolved matters and which are in former EU law areas. It sets out the agreed process for the Scottish Parliament’s role in scrutinising the Scottish Government’s decisions to consent to devolved matters being included in Statutory Instruments being made by UK Ministers rather than by Scottish Ministers.

42. Protocol 2 covers secondary legislation to be made by UK Ministers that include provisions that are within devolved competence and were previously within the competence of the EU. It applies regardless of whether there is a statutory requirement on UK Ministers to obtain the consent of the Scottish Ministers before making an instrument that contains provisions within devolved competence.

43. Scrutiny will be required of notifications of proposals by the Scottish Government to consent (or refuse consent) to new UK regulations under the UKIMA. Changes under the UKIMA are potentially of great significance since they could constrain Scottish Ministers’ powers to regulate the goods and services that come into Scotland from other parts of the UK. New regulations under the UKIMA can be made by UK Ministers to change its scope.

44. The changes for which the devolved Governments’ consent must be sought under the UKIMA are those which:

  • amend the Schedules to the Act and so change the scope of application of the Act to the sale of goods or provision of services;
  • change what constitutes a “legitimate aim” for measures indirectly discriminating against incoming goods or incoming service providers;

change the Schedules to the Act by amendment to reflect the outcome of a common framework process.

45. Protocol 2 will apply to the scrutiny of these requests for consent (among others).

Scrutiny Issues

46. Subject committees when scrutinising primary and secondary legislation and LCMs and consent decisions under Protocol 2, will wish to consider whether the legislative purpose is wholly or in part–

  • to align with EU law;
  • a requirement of an international treaty/trade agreement;
  • consistent with the TCA;
  • consistent with a UK-wide common framework;
  • consistent with the market access principles in the UKIMA?

47. An example of how legislative scrutiny needs to evolve within the new constitutional arrangements is provided at Annexe A.

“Keeping Pace”

48. While the UK was a member state of the EU, the Scottish Government was required to comply with EU law in devolved areas. Powers were available to Scottish Ministers through Section 2(2) of the European Communities Act (ECA) to implement EU legislation in domestic law. These powers are no longer available to Scottish Ministers.

49. Scottish Ministers have indicated that, where appropriate, they would like to see Scots Law continue to align with EU law. To support this policy aim Part 1 (section 1(1)) of the UK Withdrawal from the European Union (Continuity) (Scotland) Act 2021 confers a power on Scottish Ministers to allow them to make regulations (secondary legislation) with the effect of continuing to keep Scots law aligned with EU law in some areas of devolved policy (the “keeping pace” power).

50. Scottish Ministers could also use other legislative powers to “keep pace”. Primary legislation has been passed at Westminster (and to a lesser extent at Holyrood) in a number of policy areas previously governed by EU law. This legislation has given many new powers to UK and Scottish Ministers to make secondary legislation in those policy areas. Scottish Ministers may also seek to “keep pace” using secondary legislative powers provided by non-Brexit related primary legislation.

51. The Scottish Government’s view is that while in some cases it may be possible to align with EU law using other legislative powers these are not sufficient. The Scottish Government considers it necessary therefore to give Scottish Ministers the power to make secondary legislation (“the keeping pace power”) to ensure that Scotland’s laws may keep pace with changes to EU law, where appropriate and practicable.

52. In summary, this means that there are a number of legislative options through which the Scottish Government may seek to “keep pace” with EU law –

  • Already existing legislative powers which cover the subject matter of a particular EU law;
  • New primary legislation;
  • The provision of consent to the UK Government to legislate in devolved areas using secondary powers in policy areas previously governed by EU law;
  • The “keeping pace” power.

53. The Scottish Government is statutorily required to report to the Parliament (first in draft form for consultation and then a final version) on the intended and actual use of the keeping pace power. However, there is no statutory requirement to report on the use of other legislative powers to keep pace.

54. There are two forms of reporting to Parliament on the use of the keeping pace power:

  • a Policy Statement setting out policy on, and how decisions will be made about the use of the keeping pace power;
  • and an Annual Report explaining how the power has been used during the reporting period, and how Scottish Ministers intend to use it in future.
Scrutiny issues

55. It is anticipated that the CEEAC Committee will take the lead in co-ordinating the scrutiny of the draft policy statement and annual report. It is likely that it will wish to seek the views of subject committees on both the draft policy statement and the annual report.

56. Given these documents may only cover the use of the keeping pace power, subject committees may also wish to scrutinise Ministers more comprehensively on the extent to which the Scottish Government intends to use other legislative powers to align with EU law and areas where, for whatever reason, they have decided not to align. Some awareness of the EU policy-making and legislative programme (as discussed below) will be necessary in doing so.

57. Subject committees may also wish to routinely include questions in relation to keeping pace as part of their legislative scrutiny. For example, whether legislative proposals are intended to keep pace with EU law and whether this is part of a UK-wide approach or whether there is any divergence with other parts of the UK.

Monitoring the EU Policy-Making and Legislative Programme

58. In order to scrutinise levels of future alignment with EU law, subject committees will need to have an understanding and awareness of EU policy developments. The Finance and Constitution Committee legacy expert panel stated that it will be necessary to be aware of developments in EU law in all devolved areas in order to scrutinise the Scottish Government’s decisions on which areas it chooses to keep pace with, and where it chooses not to do so.

59. The Scottish Government's Brussels Office’s identified priorities show a continued attempt to try to influence EU policy development, and aim to create opportunities for Scottish cooperation with partners across Europe in areas such as knowledge exchange and EU funding opportunities.

60. In January 2020, the Scottish Government published The European Union's Strategic Agenda 2020-2024: Scotland's Perspective. This set out why the Scottish Government thinks the EU's priorities are of importance to Scotland and how Scotland can contribute to their delivery.

61. The Scottish Government suggests there are opportunities for Scotland in engaging with the EU's work in the following priority areas:

  • promoting progressive, democratic values on the world stage
  • addressing the challenges presented by the global climate emergency
  • promoting the wellbeing of all of society
  • creating smart economies which thrive by the intelligent and humane use of new technologies.

62. The Scottish Government set out the ways in which it would seek to work with the EU:

  • proactive and constructive engagement with the EU institutions and other multilateral organisations
  • active bilateral collaboration with member states.
  • robust and constructive engagement with the UK Government and the other devolved governments to protect Scotland's interests and shape the UK Government's approach to influencing the EU and future international activity.

63. The Scottish Government have stated that relevant policy leads, staff in the Scottish Government Brussels office and legislative monitoring staff contributed to the development of, monitoring and, where necessary, implementation of EU law. While this cannot be entirely replicated outside the EU they have said that this approach, of a collaborative process involving EU-facing staff, could be continued and developed to monitor changes to EU law and, in collaboration with policy teams, develop policy proposals for keeping pace with EU law as appropriate.

64. The Scottish Parliament currently has a contract with Scotland Europa which is based in Brussels and which provides regular updates on policy developments at an EU level. This includes a guide to the European Commission annual work programme. These updates will be provided to the subject committees.

Scrutiny issues

65. Subject committees will therefore need to consider the extent to which they will wish to monitor EU policy developments and the Scottish Government’s related policy priorities within their respective remits. While this is likely to be high level there is a need to be aware of EU policy developments especially in relation to scrutiny of the Scottish Government’s “keeping pace” commitment.

66. Subject committees should also consider whether to appoint a EU reporter. Rule 12.6.2 of the Standing Orders requires each subject committee to appoint a committee member as a European Reporter to bring to the attention of the committee any EU issue including legislative proposals. While the Parliament will need to consider whether this requirement remains appropriate following Brexit there is nevertheless an ongoing business need to monitor EU policy developments which merits consideration of appointing an EU reporter.

[1] The extent of this disagreement is evident in the response of the Scottish and Welsh Governments to the UKIMA and the votes in both the Senedd and the Scottish Parliament to withhold consent. See, for example, the Scottish Government’s LCM on the UKIMA

[2] Amended 28 February 2022 to replace 'The Act' with 'The principles'.

Annex A

Legislation that could affect the sale of goods/services

Example: scrutinising legislation for a new measure requiring a food product to conform to a new standard in Scotland.

Previous position: Can SP legislate for this? Answer: consider (a) Scotland Act 1998 and (b) EU law.

New position: In the new devolution landscape, in order for its scrutiny to be effective, the Parliament may now need to be informed about and to consider the following additional matters:

  • Does this relate to a common framework(s)? Is the proposal consistent with the common framework? Is it consistent with the market access principles in the UKIMA? Could it be disapplied by the operation of the UKIMA in relation to goods imported from other parts of the UK?
  • Does it rely on one of the exclusions in the UKIMA (e.g. if the measure indirectly discriminates against goods from another part of the UK but for the legitimate aim of health protection)? If so, what is the evidence justifying this
  • What are the equivalent rules in each of the other parts of the UK, and are any changes to them in prospect? (In order to assess the measure against the UKIMA.)
  • Has the measure (or a similar measure in this or another part of the UK) been considered by the new Office of the Internal Market (“OIM”)?
  • Has the OIM produced a report or advice on the measure (or similar measures)?
  • Can evidence be taken from the following new bodies: OIM; Trade Remedies Authority, Trade and Agriculture Commission (if relevant)?
  • What is the equivalent EU law position?
  • Is the measure consistent with the requirements of the TCA?
  • Are there any relevant decisions/subsequent agreements by the Partnership Council that change or expand on the position in the TCA as initially agreed?
  • Are any related matters currently under consideration by the Partnership Council and the relevant committees that sit under it?
  • How does the TCA work (for example, could the EU take retaliatory action under the TCA if this measure breaches the TCA)?

 

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