“All men have secrets and here is mine so let it be known”: I have spent a bit of time pondering the implications of the Brexit referendum on 23 June 2016. Who knew The Smiths’ epic was the perfect Brexit tune?
In or out, results day is unlikely to bring immediate seismic change for most firms. However, markets and consumers may be spooked both before and after and, looking longer term, life may well be different. Regulators will want to see evidence of firms’ awareness of and preparedness for this.
Just what will it all look like after the vote? Will there be much ado about nothing or a few years riding a rollercoaster hurtling towards negotiation of an overwhelming number of international bi-lateral agreements?
Good governance suggests firms should keep more than a weather eye on this. The process of herding the Brexit cats may feel like a diversion from real business activity but it should reveal benefits in the long term.
- Clearly identify your priority markets and expansion plans as well as areas that could be rationalised.
- Be clear what the continuum of outcomes looks like.
- Analyse scenario modelling to identify pressure points from outcomes and market uncertainty.
- Consider how Brexit pressure points are already addressed within current business continuity or recovery plans and stress testing. Extend and amend such planning appropriately.
- Identify possible interim contingency plans and enduring solutions. These would need to be achievable within the time taken to negotiate UK withdrawal (expected to be two years).
- There will be implications from an “in” vote, although fewer. Can these be used to position a business competitively?
- Collect the right management information – what do you need and what might the regulator need? Do you need to also brief key stakeholders?
- Can you be agile and flexible to move at speed when the outcomes become clearer?
- Do you know your business? Who are core customers and suppliers?
- Do you need to message clients? PR and communications teams may need to be ready with a well-judged response to the outcome.
Each business will have its own insights and considerations depending on its business structure, so here is a quick round up of thoughts from us:
- Market volatility can have wider, knock on effects into capital and liquidity funding.
- Losing passporting rights is a prominent risk. All firms need access to customers, investors and markets. Most lines of thought identify that an “out” vote could squeeze this access in some way. Could Brexit trigger a need for the business to relocate or revise its business model? Will a firm do this at any cost (e.g. additional prudential arrangements, duplication of effort for regulatory compliance)?
- Staff – if a firm cannot passport or fly-in, will staff want to move permanently to the new establishment? Can you readily and easily recruit staff to resource an establishment in your major EU markets? Will firms in the UK face a brain drain or a brain crunch as immigration laws change? Do business model changes bring redundancy issues if a role is no longer viable? Do terms of employment change? Will there be upwards pressure on wages as non-UK nationals seek danger money for an uncertain status during any exit process?
- It may not be viable to move from a branch or fly-ins model to an establishment basis. In addition to commerciality considerations (e.g. the capital costs), outgoing UK firms are likely to face some restrictions (akin to non-EEA firms). A consideration will be how clients of a branch that needed to become an establishment would be migrated.
- What law and jurisdiction provisions are relevant to the firm’s major commercial agreements and standard terms and conditions? How many contracts have been formed on this basis? Are there any termination or other provisions that may affect continuity of supply?
- Firms need data to operate. In what way does data flow around an organisation? In what way would Brexit potentially interfere with that stream?
- Regulatory uncertainty is nothing new but is likely to be exacerbated. Major EU legislation is in train. Firms should continue with implementation projects (such as MiFID II or PSD2) notwithstanding the referendum and possible Brexit as many of their component elements are apparent in the current PRA and FCA regimes or common law. MiFID II, for example, is likely to be applicable in some form whatever the outcome of the vote. A firm’s response to such change will still be an integral part of preparedness for any outcome.
- Business profits will clearly continue to be taxed, but it is unclear whether Brexit would lead to any material changes in tax policy and application.
- On the one hand, many aspects of the UK tax code have been influenced or directed by core EU principles such as freedom of establishment and free movement of capital (e.g. loss relief for UK companies with branches elsewhere in the EU) and removal of those constraints could enable a tightening of tax policy to protect the UK fiscal base.
- On the other hand, EU membership arguably introduces constraints in areas of the UK tax code that could be more competitive without those shackles (e.g. VAT, the core principles of which are harmonised across the EU, and venture capital investment reliefs, which are subject to EU State Aid rule restrictions).
However, a post-Brexit UK would still be subject to international commitments to initiatives such as the OECD’s Base Erosion and Profit Shifting (BEPS) project, which is already leading to tighter taxation rules for international businesses operating in the UK, and it seems unlikely that trend would cease. Additionally, any international arrangements (e.g. EEA entry, EFTA membership or other bilateral agreements) could well come with conditions that include requirements to toe-the-line in matters of tax policy.
- If the firm has an acquisitive modus operandi, it may be possible to identify possible targets to scoop if other firms divest non-core businesses.
- Does the firm need to mitigate risks for customers? Does the investment management team have a strategy for client portfolios or advice? Is a Brexit “in” or “out” vote factored into product governance and development discussions?
Will Brexit affect just UK based companies, facing retrenched markets or lost opportunities for cross border business? Will the UK remain open to firms on an incoming basis? Will they lose incoming passporting rights? Is reciprocity of access likely to be a pivotal negotiation point? The UK is a significant economic force in the EU and there is a school of thought that the UK is the voice of moderation and, in its absence, the EU might lean towards more regulation and possibly become more protectionist. It will take some time for both sides to pinpoint what “out” actually represents for them. Firms in the rump of the EU will need to plan too.
In or out? We’ll leave the discussion on what is best to the ballot box. But while nothing is certain but death and taxes, the uncertainty should not prevent firms having an awareness of the main business risks. A limited amount of advanced planning can help navigation in the aftermath and may help firms to take opportunities.