Direct Selling in the UK – Preparing for Brexit

Brexit poses uncertainties for the UK, the European Union, and the rest of the word. We know that the United Kingdom will have left the European Union by April 2019 but we do not yet know on what terms or what a post-Brexit world will look like. So how do direct selling businesses, both established players and new market entrants, plan for the future … and make that future a success?

The Direct Selling Business Model

The EU has never harmonised the regulation of the direct selling business model. Direct selling businesses are not licensed in the same way as, say, financial services businesses: there is no ’passporting’ of an authorisation from one home country across the rest of the EU. Regulation is on a national basis, with different laws applying, and companies are frequently obliged to expand on a country by country basis.  The existing regulatory structure can be frustrating to businesses who expect a ‘union’ to mean harmonised laws: but at least the good news is that post-Brexit the legal position will not change and, for international businesses planning to expand into Europe, the considerations as to the optimum business model will remain the same.

The Great Repeal Act

The Great Repeal Act is intended to be passed ahead of the UK’s exit from the EU but only to become law when it actually leaves. The Act will do two things: it will repeal the European Communities Act which says that EU law is superior to the UK’s and remove the UK from the jurisdiction of the European Court of Justice; and it will transpose all EU legislation into domestic UK law to ensure a legal ‘steady state’ at the time of exit. That legislation will then be reviewed over time to provide a “calm and orderly exit”.

So immediately post-Brexit the compliance requirements for direct selling companies in terms of both their businesses and their products are expected to remain the same.

Product Regulation

The extent to which Brexit may affect the regulation of a direct selling company’s products will depend on the nature of those products and how and where they are marketed and sold.

For products subject to relatively limited regulation and where the product standards and other regulatory aspects are similar between the EU and the rest of the world, direct selling companies are unlikely to see any changes post-Brexit because the UK can be expected to remain in line with the EU and international standards; for example products such as greetings cards, arts and crafts products, and most jewellery items.

For products subject to more detailed regulation and where the EU’s regulatory regime differs from other international regulation, the question for direct selling companies is whether the UK will remain in line with EU standards or will move to other international standards; for example products such as cosmetics and food supplements.  Cosmetics producers will also wish to monitor whether post-Brexit the UK will continue to participate in the EU’s Cosmetics Product Notification Portal and consider the location of their ‘responsible person’.

As the UK moves to strike its own free trade agreements it may wish to align its own product regulatory standards with those of its major trading partners . It will be particularly interesting for US direct selling companies to watch whether the UK starts to move to US product standards which may facilitate US/UK trade and, if so, whether or not this will be advantageous for US direct selling companies already selling into the EU.

Brexit Clauses in Commercial Contracts

Should direct selling companies start to protect themselves against any adverse consequences of Brexit by including suitable ‘Brexit clauses’ in their commercial contracts?

As we have noted above, the direct selling business model is regulated on a national basis so a direct selling company’s contracts with its distributors or consultants in the UK should be UK-specific contracts anyway, and typically provide both for variations to the Policies & Procedures to be introduced by the company and for the contract to terminate if the company ceases to do business in that country; so we doubt the benefit of introducing a Brexit clause into those contracts— and we see a risk of unsettling the field in terms of the message this gives about the company’s future commitment to their country.

For other commercial contracts, there would be a comfort in having the right to withdraw from the contract if Brexit started to make life difficult; but it should be remembered that ‘force majeure’ provisions and the like have never been about protecting one party from a harder bargain but only from events which are genuinely outside its control, and so the counterparty may well be unreceptive to this proposal. Our advice is that a better approach is to identify the specific risks that Brexit may bring and to seek to mitigate those identified risks; for example by hedging against any currency risk, or by negotiating a specific break clause in the contract in exchange for accepting the agreed financial consequences of a termination for convenience provision.

Head Office and Employees

Most direct selling companies operate with a relatively streamlined head office staff and premises and, as we noted above, do not hold EU ‘business passports’, and so considerations as to whether to relocate a current UK head office elsewhere in the EU or to open a separate EU office, or whether a company operating in the EU with no UK office should open one, are probably less important for the direct selling industry than for more labour-intensive sectors reliant on highly-skilled workforces. Nevertheless, for pan-European direct selling companies this is an issue that should have your attention.

Opportunities and Risks

And we can’t resist ending with a quote from our own Nick Davis, CEO of Memery Crystal: “We have many clients talking to us about Brexit. What is clear to us is that those who look for opportunities will see opportunities and those who look for risks will see risks. So our focus is on looking for the opportunities.”