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Straight Talk Telecoms

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As the UK starts figuring out how to deal with the result of last week's referendum, businesses are wondering what Brexit will mean to them in practice. For telcos, the regulatory environment could look very much like the current one. However, the biggest question mark hangs over data protection rules, which will impact telcos and tech companies more generally.

If the UK leaves the EU, it will no longer be subject to the new general data protection regulation that was approved recently by the EU Parliament. This is likely to carry some disruption, particularly for EU companies storing personal data in the UK. The European Commission (EC) will have to be satisfied that the UK is a safe destination for EU citizens' personal data. This in turn will mean that UK legislation related to privacy and data protection will have to be deemed sufficiently protective of users' rights, and that businesses will have to apply sufficient safeguards when transferring personal data to the UK.

However, a lot will depend on the laws that the UK adopts on data collection for the purpose of tackling crime. Being free from the EU framework will mean that the UK could adopt legislation on data retention more easily; however, this could very likely trigger a clash similar to the one the EU has with the US. The power of US authorities to carry out the bulk collection of EU citizens' personal data continues to be an obstacle in agreeing a common framework for data transfer. Given that UK legislators have recently tried to implement laws expanding surveillance powers, it is likely that similar issues will arise in the relationship between the EU and the UK.

By contrast, the UK's regulatory environment for telcos is likely to face minimal impact, for at least two reasons. First, most importantly, the European approach to regulation actually borrows a great deal from the UK's experience of privatization and market liberalization. It is unlikely that the UK will adopt a radically different regulatory approach, which will still be characterized by regular market reviews. However, one aspect that could change is the frequency of such reviews. Ofcom could look to be more flexible about the time frames for reviewing markets once it is no longer bound to the EC's framework, which currently requires the regulator to review markets warranting regulation every three years. Second, while this aspect is yet to be determined, it is highly likely that the UK will continue to be part of the European Economic Area (EEA) to enjoy the benefits of access to the single market. As its counterparts in other EEA countries such as Norway do, Ofcom will likely follow a regulatory approach very close to the approach stemming from the EC's regulatory framework.

It is also unlikely that UK regulatory authorities will change their stance about the level of competition in the market, which in turn will affect their approach to mergers and acquisitions. It is worth remembering that, in the recent case of the proposed merger between Three and O2, both Ofcom and the Competition and Markets Authority (CMA) took a stance in line with the EC's final decision, explicitly proposing to block the merger. In particular, Ofcom showed data that suggested that the mobile operators' revenues were higher than their cost of capital at the time. If market conditions do not change, it is likely that regulators will want to keep four players in the mobile market.

Similarly, consumers are likely to see little difference in the offers available on the market. Ofcom has always been an example to follow for other European regulators in the field of consumer protection, and there is no reason to predict that this will stop. Also, it is expected that UK consumers will not lose the benefits of the "roam-like-at-home" regime recently implemented by the EC for international mobile roaming. If the UK remains part of the EEA, UK operators will still be subject to the EC's roaming regulation as are operators in Iceland, Liechtenstein, and Norway. Otherwise, market forces could still contribute to keeping roaming prices low because operators' recent offers have shown a tendency to package roaming to some destinations inside and outside the EU. Problems could arise if EU operators offered roaming at prices higher than the wholesale caps recently enforced by the EC, although this would only be a likely event if the UK decided not to be part of the EEA and would therefore not be subject to the EC's roaming regulation.

All the above scenarios will depend on the way in which the UK and the EU will carry out the process, and are likely to take a clear direction in the long run once negotiations have formally started. In the short run, uncertainty will continue to prevail as many details of the UK's departure from the EU are yet to be worked out; it is also still possible that Brexit might not happen after all. Such extreme uncertainty could have a paralyzing effect on the market, and force players to buy time and wait to see how the events unfold. Telefonica's announcement on Monday to delay the IPO of O2 because of the fear of market volatility already provides an example of how unclear things are going to be for some time.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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