EVA_BATInterview with Eva Nikolic, head of legal at British American Tobacco

As Head of Central European Legal Cluster for British American Tobacco, Eva Nikolic has her hands full with regulatory and business issues. An extroverted and enthusiastic lawyer she has extensive experience in civil law legal systems and multinational environment, including participation in major cross-border transactions and managing lawyers in multiple jurisdictions. But in her role at BAT Nikolic is responsible for covering 12 end-markets and faces a barrage of local and EU restrictions while finding solutions to maximize business opportunities.

 

 

 

Tell us about the day to day of your position.

 

It is very difficult to describe a particular day, because usually each one differs from the other and brings other challenges and issues to the table. As an in-house counsel, you need to be a generalist and deal with various issues ranging from corporate law to commercial law, employment matters, IP law related issues, etc.

BAT is also special in a way that Heads of Legals are also members of executive teams on local/cluster/regional level and are therefore very much involved in the daily business of the company. The primary objective is to enable the company to win in the respective market(s) and provide related legal support and solutions to the organization.

The role of lawyers in BAT is to find solutions and maximize business opportunities, while minimizing risks and ensuring that various kinds of risk that we take are at an acceptable level. Tobacco is a highly regulated industry, therefore in order to make the right balance between making sure that laws are being complied with, whereas at the same time business targets are being met, it is essential that we also have a business mind-set and are therefore capable of being partners to the business, rather than only “creating” obstacles.

What are the biggest challenges facing the tobacco industry in the EU?

 

It is important to note that BAT supports all sound tobacco related regulation that is balanced, evidence/science based and delivers its policy aims and is effective, provided that it does not infringe on our legal rights as a business and/or does not impede our ability to compete.

Accordingly, we believe that regulations that fail to meet the intended regulatory aim have adverse and unintended consequences.

As to the challenges we are facing, it is obviously the newly enacted Tobacco and Related Products Directive (TPD), that I will speak about in more details later on. Besides this, proposals on the introduction of plain packaging in the UK and Ireland, as well as public display bans of tobacco products are also extremely important. All these measures will require changes to the way we are doing business today. At the same time, they already have and in the future might have a further serious impact on the illicit trade of tobacco products that is already causing a serious issue for both industry players and governments because of lost revenues and taxes.

There are estimates that illicit trade of tobacco products causes EU-wide a loss of around 10 billion EUR in lost taxes on a yearly basis. Illicit trade is already the biggest competitor to all legitimate, legal players in the tobacco industry and presents one of the most serious problems for us in the Central European Cluster (primarily Hungary, Serbia, Bulgaria, Kosovo), as well as in the UK and Baltics.

By way of example, the duty not paid segment in total tobacco (FMC — factory made cigarettes and FC — fine cut) in 2014 is projected to assume 16 percent of the market in Hungary, 25 percent in Serbia and 28 percent in Bulgaria. A close cooperation with law enforcement agencies and regulators across Europe is therefore paramount for successfully tackling the problem and we are continuously working on improving that relationship. We have found that the governments across Central Europe are being partners in developing measures in order to combat the duty not paid segment, but this is a long journey,because various regulatory measures — including local excise regimes and restrictive regulations and practices — have a direct impact on pricing and availability of products, which further influences the size of the black market.

How much impact will the new EU Tobacco Products Directive have on your industry?

 

Although the enacted version of the TPD that entered into force May 19 is better than the original proposal, it still fails to meet the principles of proportionality and balance, as well as effectiveness. It lacks clear evidence and science-based data on a number of introduced changes, therefore it is unlikely to believe that its objectives and policy aims will be met.

This is why we believe it will not be effective and will further open the door to duty-not paid/unregulated tobacco products. The changes ahead of us are going to be significant and numerous and therefore it is impossible to explain and list all of them for the purposes of this interview. I will just try to give you a flavor of all the challenges that we as an industry are to face. Among others, one of the biggest impacts that we will have to deal with is the ban on menthol as of 2020 onwards, as well as the ban on flavorings and slim packs from 2016 onwards. For example, this in practice means that while slim cigarettes will remain in our portfolio, slim packs will no longer be allowed after the grace period has ended, which means that we will need to introduce new manufacturing/packaging techniques, that will surely influence the increase of related costs.

By way of example, approximately 18 months are required for the testing of a new packaging, and this is only one aspect of the impact the new regulation will bring. Also, the new TPD sets forth the requirement of a 65 percent pictorial and textual health warning on both sides of a pack, that in our view again raises serious IP rights concerns and infringements. Furthermore, from 2016, the minimum content of a cigarette pack will be 20 sticks – this yet again – together with the excise policy – will have a direct impact on pricing.

Having in mind that consumers in the Central European Cluster are very price sensitive we see a continuous growth in the down-trading from cigarettes to fine-cut tobacco and this will again in our view push them towards the black market and lead to the increase of illicit trade. There are also still many things that need to be clarified since certain provisions of the TPD require the European Commission to adopt further EU legislation called “Implementing Acts” to fully clarify requirements.

For example, these acts will define the technology standards for track and trace and specify the content of health warnings, as well ingredients reporting and testing and health warnings. We need to carefully review also our portfolio of local brands and assess whether any of our brands/SKU variant names would be threatened under the provisions of the TPD. There is a lot of interpreting to be done, lots of engagement in general because even today there are a lot of discrepancies across Europe with respect to the size of the health warnings as well as regarding the pictorials that are being used, but also on the interpretation of certain provisions by the local regulators. On the other hand, we need to ensure that those provisions, which may be directly implemented by the member states are not introduced before the compliance deadlines as set forth by the TPD. Due to the complexity of the numerous measures introduced by the TPD, we must have enough time to comply.

Right now, Hungary is looking at heavy EU fines unless it amends current legislation on Tobacco and alcohol. Can you explain the current situation to our readers?

 

I believe you are referring to the infringement procedure initiated against Hungary for its anti-forestalling legislation because according to the European Commission, the anti-forestalling measures adopted by Hungary and imposing a time-limit for the marketability of tobacco products with old tax stamps are not in line with harmonized EU rules on excise duties.

Since Hungary’s amendments to the referred regulation were not in accordance with the commission’s earlier formal notice in 2013, DG TAXUD continued the infringement proceedings. Accordingly, in April 2014, the commission announced the second phase in the infringement procedure against Hungary and restated that irrespective of the commission’s request to Hungary to amend its legislation that applies a sales restriction on tobacco products already released for consumption,

Hungary continues to restrict the marketability of tobacco products by limiting the sale of tobacco products with old tax rate tax markings by wholesalers and importers to 15 days following the entry into force of the new tax rate. Since the EU Excise Directive does not allow the restrictions of the trade in tobacco products once they are released for consumption, the commission stated that it may refer the matter to the European Court of Justice in case Hungary does not bring this legislation into conformity with EU laws within two months. As far as I know, the Hungarian Government is in the process of consultations with the EU on this.

How have reforms in the tobacco retailing industry helped your company?

 

I assume that you are referring to the recent introduction of the tobacco retail monopoly system in Hungary. For the time being, I would be reluctant to give any specific answers or draw any conclusions because not even a year has passed since the implementation of the system. It surely introduced a lots of changes and required a tremendous amount of legal work to be done in order to adapt to the new environment, however we need more time in order to be able to do serious and fact based analysis and reach conclusions.

BAT is obviously a global company, but just closed its last processing plant in Britain. Where does the company want to focus production operations and what are your biggest markets in the future?

 

Obviously, business reality, optimization of costs and continued pursuit of growth require every business to continuously re-evaluate its processes and ways of working in order to deliver at its best. This applies to both operations and commercial part of our business. Currently BAT has seven manufacturing plants in the Western European Region and for the time being there are no plans to change that. As a matter of fact, BAT has invested into a new plant in Hungary in the amount of around 30 million EUR, that will in the future focus on the production of fine-cut tobacco and innovative products.

Cigarettes and related tobacco products (traditional tobacco products) continue to remain our core business and focus, however we are taking all necessary steps towards developing further our harm-reduction platform, which includes next generation products. There is no doubt that we will always need manufacturing technology that responds to market demand and innovation and technology at its best, like for instance what we have in Germany, where we actually have our biggest manufacturing facility in Western Europe.

In terms of BAT’s biggest markets in the future, I would differentiate between the European Union and the rest of the world. Germany, Italy, UK and Romania are among our biggest EU markets, whereas globally I would highlight South-East Asia, Middle East and Africa, Brasil and Russia.

What is the the future of electronic cigarettes in your opinion? Do you envision new EU rules or litigation?

 

BAT is at the forefront of developing a portfolio of less risky, next-generation products, which includes e-cigarettes and new types of inhaled nicotine products, as well as heat-not-burn tobacco products. We are seriously investing in R&D, since it is our firm belief that informed consumer choice is the key to harm reduction. As part of that, we are aiming to introduce a range of reduced-risk tobacco and nicotine products. We are recognized leaders when it comes to new product development, since BAT in 2013 became the first international tobacco company to launch an e-cigarette – Vype – in the UK. Vype uses a nicotine e-liquid that is made in the UK under current Good Manufacturing Practice standards and contains only pharmaceutical grade nicotine. Our research shows that e-cigarettes have the potential to provide real alternative to smokers without most of the risks associated with regular cigarettes.

The new TPD also regulates e-cigarettes and the final provisions are a result of a compromise between MEPs and national governments. In a nutshell, the TPD stipulates that only e-cigarettes which make medicinal claims to be licensed as medicinal products, whereas e-cigarettes that do not make such claims will be regulated as general consumer products, be subject to certain advertising restrictions and a maximum nicotine limit of 20mg/ml.

Member states may ban specific refillable cartridges, if the ban can be justified by safety concerns. In case three member states adopt a ban on a specific cartridge, the European Commission may unilaterally impose an EU-level ban, without the prior approval by Parliament or member states.

Having said the above, it is very important to note a recent report coming from an e-cigarette research in UK, that was chiefly funded by Cancer Research UK and authored by Professor Robert West of University College London’s Department of Epidemiology&Public Health. The findings of the report are very much in line with our views regarding tobacco harm reduction, e-cigarettes and regulation of this category. According to the research, smokers trying to quit are 60 percent more likely to succeed if they switch to e-cigarettes than if they use nicotine products like patches or gum, or just willpower and 20 percent of people trying to quit with the aid of e-cigarettes reported having stopped smoking traditional cigarettes (as opposed to 10.1 percent of those using over-the-counter aids such as nicotine replacement patches or gums).

The above clearly shows the long-term potential of our harm reduction approach that at the same time offers the opportunity for a continuing sustainability and profitable growth of our business.

Are you facing pressure over plain packaging?

 

As you may know, Australia has last year introduced regulation to restrict the colors, designs and trademarks that can be used on tobacco packaging (“plain packaging regulation”). This April, UK and Ireland have also decided to introduce plain packaging on the basis of a recently issued Chantler Report, claiming that the introduction of plain packaging in the UK would result in a “modest but important” reduction in smoking. Accordingly, the governments in both countries are shortly expected to publish draft regulations and launch further consultations.

Obviously, the draft legislation will have to be also notified to the EU, so the matter is far from being final and closed, nevertheless these moves might encourage other governments also to consider the introduction of plain packaging.

BAT has strongly opposed the Chantler Report, which itself admits that “there are limitations to the evidence currently available”. The data available to us from Australia clearly shows that plain packaging has not had a positive effect on public health , but has to the contrary lead to the increase of illicit tobacco trade and increase in the amount of sold tobacco (the first increase in Australian tobacco volumes in over five years), as well as AUSD 1 billion in lost taxes to the Australian government. Very importantly, we firmly believe that plain packaging fails to respect our minimum guaranteed rights on trade mark protection under EU trade mark law and WTO law, contravenes EU law in terms of interfering with property rights guaranteed by EU law. Furthermore, it would create barriers to entry and distort competition — clearly contrary to the EU Treaty and affects property rights under UK law and infringes UK’s obligations under international law.

It has to be noted also that five countries have already challenged Australia’s decision to introduce plain packaging via the World Trade Organization. Finally, we believe that plain packaging is disproportionate and unjustified and would result in increased illicit trade and down trading, while there is no evidence that plain packaging would achieve a public health benefit. Finally, should plain packaging be introduced in the EU, it would also surely risk damaging the EU’s trade interests and its international trade and intellectual property credentials.

Why is it that when I buy a pack of cigarettes in Budapest there is always one cigarette missing?

 

Actually, no cigarette is missing 🙂 Pursuant to applicable regulation, the minimum content of a pack in Hungary is 19 sticks and this has lead all market players to decrease the number of cigarettes contained in a pack to 19 sticks.

Eva Nikolic is head of Legal Central European Cluster at British American Tobacco

The Nikolic File

Location: Hungary

Joined BAT: June, 2012

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Law School: Univeristy of Szeged, Hungary