UK government announces change to export licensing system

Posted on: December 22, 2020 by

If the end of year is necessarily a busy time, this has only been accentuated by the chaos wreaked by the pandemic and, for those in the UK, the impending end of the Brexit transition period (which expires on 31 December). We can certainly say that the UK’s Department for Digital, Culture, Media and Sport (DCMS) has been burning the midnight oil to get projects completed before the dreaded ‘end of year’: we saw the publication of the government’s response to the treasure consultation earlier this month and, more recently, the rather unceremonious announcement that the UK would be adopting the EU prohibition on unlawfully removed cultural goods. ‘Unceremonious’ because this rather important change in law was only announced via an amended paragraph at the end of a much longer existing DCMS guidance on import/export.

And now, at long last, we have seen a response from HM Government on the export consultation circulated two years ago – in another world frankly. The major change is that a proposed mechanism for a legally binding option agreement has been adopted by the government and will be added to the DCMS’s statutory guidance for export controls come 1 January 2021. This is promised to strengthen the process for retaining national treasures for the benefit of UK institutions. In the current system, the exporter has the ability to reject an offer for purchase by a UK entity, or withdraw an application, without legal penalty. The proposed option agreement creates a contractual obligation on the exporter to accept the offer. The government has also promised a new digital system for streamlining export licences in the new year.

On the binding offer mechanism, this wasn’t the first time the government has toyed with such a move. In fact, it was mooted in the 2003 Quinquennial Review of the UK’s export system, and several times since, but was rejected for fear that the change might violate the contractual and property rights of the exporter. The pressing reason that the change is now going through is that, according to the government’s response, over the past five years there have been eight instances where national treasures were ‘lost’ to UK collections because the exporter rejected a matching offer or withdrew an application during the export deferral period. An example of this occurred in 2017 when a work by Pontormo (image on right) fell beyond the reach of the National Gallery when the exporter refused the Gallery’s offer for the painting.

The IAL submitted a response to the consultation in early 2019. On the whole, we agreed with the proposal for a binding mechanism, but were keen to point out the need for it to be narrowly tailored so as to avoid infringing the rights of the owner (which of course had been the initial concern with such a scheme in the early 2000s). You can read our proposal here: we made suggestions we thought would keep the interference at a minimum, all while ‘closing the loop’ on the flaws of the current system.

For instance, we suggested that both first and second deferral periods should ideally be capped (e.g. the first at two months, the second at six months) in order to provide certainty and predictability in the system. For the same reason, we were also against the possibility of additional parties being able to benefit from the option agreement signed by the exporter after the first deferral period. Finally, we indicated the very real possibility that the implementation of a binding offer mechanism would place greater pressure on the current method of determining an object’s fair market price (this method is not very clear, as explained in an article published on the topic by solicitor Petra Warrington in 2016).

In the end, the government’s response did not take on board many of our suggestions, but this is understandable when it had received a total of 43 written responses to the consultation. Judging from the list of respondents, over a third represented public entities (most of whom were national institutions), who likely would have lobbied for the suggested change. Another third or so represented the art market. In total, 28 respondents were in favour of the binding offer mechanism (including IAL), so well over half. The government took this and ran with it.

As a result, we are going to see the introduction on 1 January of the binding offer mechanism. There are a few ways in which the original proposal has been softened by government, perhaps taking into account reservations held by a number of respondents. One example is the soft cap of six months on the second deferral period. It’s a ‘soft cap’ because the government has recommended that for exceptionally expensive items, the second deferral period may be extended owing to the challenges of fundraising. But in most cases, presumably, it will be six months. Another example is that only the body/bodies that sign(s) the option agreement with the exporter will draw a contractual benefit therefrom. However, there remains the possibility of a third party making an offer at the set price during the second deferral period. Though not contractually binding, if the exporter refuses this new offer, the export licence may very well be refused.

There are a number of details in the government statement showing that the new change will be rather far-reaching. For one, it will apply regardless of the value of the object in question. Therefore the government did not limit itself to the £100,000 threshold set out in the proposal, nor indeed to the threshold of £1 million suggested by IAL (and it seems other respondents). In addition, the mechanism will apply not only for UK public institutions, but also private purchasers. It was felt by government that since such ‘Ridley purchasers’ have obligations to keep the work on display and in good condition, the UK public would benefit from including them in the scheme.

Keep in mind this new binding offer mechanism won’t apply to all exporters of cultural objects from the UK. The vast majority of UK exports never make it to the deferral period stage. For instance in the year ending 30 April 2018 (the last year for which data is available), there were over 10,000 individual export licence applications and only 18 of these went before the Reviewing Committee on the Export of Works of Art, resulting in only seven objects being acquired by UK institutions. If these sorts of numbers persist, it means only about 0.0007% of export applicants would have to sign option agreements each year. So nothing to get too hung up about.

Therefore the export licensing system as a whole will not be enormously affected by these changes. The intention, as reiterated many times by government in its response, was simply to correct a ‘flaw’ in the system. The flaw was that, in certain instances, old fashioned ‘gentlemen’s agreements’ were no longer being upheld. Something needed to be done. So now we’ll have a binding offer system to allow institutions to enforce their rights against recalcitrant exporters. We can’t fault the government on that.

However, it’s possible that some of the wrinkles we had highlighted in our 2019 response have not been fully ironed out. For instance, the possibility of a dark knight swooping in and making an offer during the second deferral period. And also the point about updating the method for determining fair market price, which will only become more contentious with this new binding offer mechanism. As a result, we may yet see new challenges for the system in 2021 and beyond.