Uncertainty is said to be the enemy of business, and the Brexit referendum has created plenty of doubt about what the future may hold. As the UK and 27 EU member states gear up for exit talks, I doubt things will become much clearer in the short term. Indeed, political manoeuvring on both sides of the Channel is tending to further confuse an already cloudy picture, while doing little to shed light on what the UK's new trading relationship with the EU-27 will be.
At times like this, additional speculation is unhelpful. But informed analysis can help show us in which direction the world is likely to head.
That's what Beyond Brexit is all about. We've brought together a group of notable businesspeople, academics, Brussels insiders, analysts and our lawyers around the world and asked for their expert views on a variety of Brexit-related issues. There is a lot of commentary already out there on what will happen between now and exit day, so instead we challenged our group to focus on life after 2019.
Most were given the same question: `What will the world look like once the UK has left the European Union?' Their answers cover a wide range of topics, from regulation to supply chain dynamics and the resolution of business disputes, and include a vision for a reformed, smaller European Union as well as a formula for tackling damaging business groupthink.
Our other contributors were asked for their perspectives on two issues closer to the here and now how to run a business in a time of turmoil, and what the global rise of populism seen in the referendum result
really means for multinational corporations.
Taken together, I hope their views will help you prepare for what could be around the corner. They have certainly given me plenty of food for thought.
Because while it can be challenging to navigate through times of uncertainty, unexpected forces can also be the catalyst for positive change. As the American theoretical physicist Richard Feynman one of the most respected thinkers of the 20th century once wrote: `It is imperative to have uncertainty as a fundamental part of your inner nature.' Feynman embraced doubt and used it as a source of inspiration, so much so that his collected works were titled: The Pleasure of Finding Things Out.
I would like to thank all our contributors for their time and for the clarity of their thinking. They have certainly responded to the current uncertainty with exceptional creativity.
Senior Partner, Freshfields
Informed analysis can help show us in which direction the world is likely to head
1 THE RISE OF POPULISM
Baroness Patience Wheatcroft
Politician and former editor-in-chief of 'The Wall Street Journal Europe' p.5
Professor of Politics and International Relations p.8
4 FINANCE AND CAPITAL
Angela Knight CBE
Non-executive director of Tullett Prebon Plc and Brewin Dolphin Plc and chair of the Office of Tax Simplification p.18
OPERATING IN UNCERTAINTY
Sir Ian Cheshire
Chairman of Debenhams plc p.11
TRADE AND INVESTMENT
Dr Markus Kerber
Chief executive officer and director general of the Federation of German Industries p.14
Partner at Global Counsel p.16
Chief executive of the Centre For European Policy Studies p.24
Helena Morrissey CBE
Chair of Newton Investment Management p.20
6 SUPPLY CHAIN
Chief executive officer of ADS Group p.28
Partner at Flint Global p.26
7 TALENT AND MIGRATION
Chairman of Korn Ferry board services practice p.30
8 INTERNATIONAL DISPUTE RESOLUTION
Adrian Briggs QC
Professor of Private International Law at the University of Oxford p.32
1 THE RISE OF POPULISM
A new, more interventionist era has arrived
Business has failed to convey why it is a force for good. That has to change
W hatever else Brexit may mean, it presages a very different climate for business. The vote was not just about sovereignty or the various failings of the European Commission. One of the strongest determinants of how people would vote was their answer to the question of whether they thought it true that `overall, life in Britain today is better than it was 30 years ago'. A `yes' signalled a vote to remain. Overwhelmingly, those who voted to leave thought life in Britain had got worse.
For many of these people, immigration became a proxy for their dissatisfaction, but alongside that was a distrust of big business. Theresa May wasted no time in playing to that theme. Almost before she was over the threshold at No. 10 she was promising to curb executive pay and put worker directors on boards. She has continued to lambast the failings of business, while just occasionally admitting that not every company is a pariah.
Business is going to have to adjust to a very different and far more interventionist climate. To some extent, it has only itself to blame. The differentials between the pay of people at the top of big businesses and the
average worker have continued to grow in recent years despite understandable anger.
According to the High Pay Centre, in 2014 the average pay of a FTSE 100 chief executive was 183 times that of the average worker. Just 20 years ago that multiple was 47, and five years ago it stood at 139. So the gap has been getting wider, despite the growing clamour for change. Shareholders have been largely unprepared to tackle companies over remuneration and, where they have, there has been little discernible shift in policy.
And while they have been feeling hard done by over inequality, the average voter also feels unfairly treated by banks, energy providers, telecoms operators, rail companies and just about everyone else they have to deal with in their daily lives. Not all their gripes are justified, but a fair few are, and the new Prime Minister has placed herself firmly on the side of the consumer in bringing about reform.
THE PM'S `MANDATE FOR CHANGE' Mrs May promised `change in the way our country works' and that is, undoubtedly, what is coming. Even though she came to power as a result of the referendum vote, she is interpreting it as a mandate for wholesale change in the positioning of the country. She is clear that markets only work up to a point and that the job of government is to intervene to protect `the ordinary people' when those markets are making life difficult for them.
Patience Wheatcroft, Baroness Wheatcroft, is a journalist and Conservative politician and former editor-in-chief of `The Wall Street Journal Europe'
16 THE RISE OF POPULISM
Her rhetoric is fiercely `us and them' with `them' being business and `us' being the government and the voters she is pledged to support. So she itemises `the boss who earns a fortune but doesn't look after his staff'; the international company `that regards paying its taxes as an optional extra'; and the director who `takes out massive dividends while knowing that the pension fund is going bust'.
Having been so impassioned in her condemnation, she will have to prescribe change. Utility companies will certainly find themselves under tougher regulation. There may also be further changes in employment law the Prime Minister has already had swipes at zero-hours contracts, for instance. More broadly though, her attitude is going to support the increasingly populist view that bigger business has to be reined in; that global corporations are exploitative; and that `the workers' should have more control.
EXECUTIVE PAY IN THE CROSSHAIRS This is, superficially, wonderfully contradictory coming from a Conservative government, but the developments of recent years, with sky-high executive salaries and scandals such as PPI, have combined to give business a dire reputation with those whom Mrs May now refers to as `ordinary people'.
Companies will need to think carefully about how they position themselves in this new environment. Pay, in particular, is under scrutiny and simply complying with the new disclosure rules will not be enough. What the referendum made clear was that many people felt the financial crisis was to blame for the UK's recent problems and that the individuals who were responsible had not paid the price. They hate bankers and do not want to see anything put in place that would enable them to flourish, such as potential passporting deals with Europe.
Business has failed to convey why it is a force for good. The fact that it runs trains on time, puts wonderfully varied food on shelves and develops life-saving drugs is taken for granted. No acknowledgement is given to the extraordinary variety of positive contributions that business makes beyond the workplace, through sponsorship, mentoring and local community support. Companies are far too low-key about what they do to help the communities in which they work, activities that bolster local
society but also give their staff important, mind-broadening experiences.
They are going to have to shout louder now. The vote on 23 June is being interpreted as a vote to rein in business. Mrs May, in her speech to the Conservative conference, said: `Today, too many people in positions of power behave as if they have more in common with international elites than the people down the road, the people they employ...' Campaigning during the referendum, I was made well aware that bankers were squarely blamed for the crash and there was a widespread fury that they did not appear to be paying the price for the mayhem that followed.
In the new environment, business is going to have to be seen not merely as doing its job but being a good corporate citizen. The difficulty is that there are no rules as to what that means. So companies have to behave well, in the hope that a new, interventionist government will do the same.
Theresa May is clear that markets only work up to a point, and that the government must intervene to protect `ordinary people'
THE BATTLE FOR HEARTS AND MINDS
With the spotlight on corporate conduct, compliance is key
T he irony behind the current populist movement and its expressions in favour of closing borders and building walls is that the movement itself is the direct result of a world that is more fundamentally connected than at any point in history. We are all so closely related that events halfway around the planet ripple through our daily lives. The exhortations to put up barriers and halt commerce have come about because some people resent these ripples which are now part of the social fabric. But the fact that events in one region continue to have such clear effects further afield means that the response of the more extreme populist politicians could never hope to meet their objectives. We are way beyond the building of walls and the closing of borders. The trajectory of history is moving in one direction towards further internationalisation, the development of emerging markets and greater cross-border trade and co-operation. But progress is never smooth, and we are currently in the middle of a particularly rough period where one might question, at least momentarily, whether progress will be merely curtailed or actually reversed. Populism which can explain the Brexit referendum result and the popularity of figures such as Donald Trump and Marine Le Pen is not just about nationalism. It's also about the `big guy versus the
We are way beyond the building of walls. The trajectory of history is towards internationalisation
little guy'. It is driven by the belief that large institutions not only have too much control over the lives of the average person but are also fundamentally greedy. In the US, as elsewhere, there is a seemingly growing concern that corporations, and banks in particular, are governed not by calculations of what is right but what they can get away with. This means that regulators, many of whom are politically accountable, are likely to pursue corporate misconduct with even more fervour. There is enormous pressure not just to hold institutions liable but to hold the human beings who run such institutions to account. There is a desire to see heads roll. Yet in the current economic climate, multinational businesses will continue to invest in emerging markets because the potential rates of return are so much higher than they are in Europe and the US. Some emerging markets, however because their legal systems are also developing along with their economies present increased legal risk. As the populist backlash against institutions and the desire to see people punished is strong in both mature and emerging markets, it has never been more important for institutions to have appropriate compliance programmes in place as they expand their operations.
INCENTIVISE GOOD BEHAVIOUR So what does good compliance look like? Sophisticated due diligence is essential before entering into an overseas joint venture. Policies and procedures need to show that senior executives are asking the right
questions and responding to the answers appropriately. But more important than the policies, businesses have to convince their employees they actually want them to be compliant, not just appear to be so. It's the battle for the hearts and minds of the sales force when someone misbehaves they should be punished, and when someone doesn't do a deal and passes on an opportunity because they're playing by the rules they should be rewarded. This is how employees come to learn that the company means what it says. And the compliance programme must be tailored to the actual risks and must evolve as new perspectives on those risks are revealed. The rise of populism cannot undo years of human history and put us back to the days of trade embargoes and high tariffs. For multinational businesses, it's a question of understanding and managing the risks while we ride out this current challenging period.
Partner, Freshfields Global Investigations
18 THE RISE OF POPULISM
A great force is reshaping
Businesses must heed the rise of populism and respond in a way that resonates
T he rise of populism is one of the most striking developments in Western democracies. Whether reflected in the vote for Brexit, the candidacy of Donald Trump, support for Marine Le Pen in France or the meteoric rise of Five Star in Italy; populism continues to demonstrate its power and appeal.
Though populists often come from different ideological traditions they are united in wanting to disrupt established politics, pitch the native majority against minorities, close down the deliberative centre ground and fuel public distrust of the mainstream elite, including business. While their restrictive policies on immigration would no doubt dramatically affect labour markets, in many countries populists also advocate protectionism, claiming to want to defend the `pure' workers from a `corrupt' or `self-serving' capitalist elite.
Populists pose a challenge because of the deeper trends they represent. Charismatic politicians such as Trump and Le Pen should be viewed as a symptom of an underlying divide between different groups, particularly between citizens who lack the skills and qualifications to compete in the modern global economy, and those that have mobility and flexibility in the marketplace. The divide
has been a long time coming, will harden in coming years, and will present significant challenges to those in politics and business.
The economic and value divides that fuel populism were reflected in the 2016 vote for Brexit. Consider the findings on who voted for Brexit and why. `Brexiteers' tended to be old, white, had few qualifications, identified themselves as English, not British, and over recent decades have been left behind by rapid economic development. In households with incomes of less than 20,000 per year the average support for Brexit was 58 per cent but in households with incomes of more than 60,000 it was just 35 per cent. Similarly, among people in low-skilled manual jobs the average vote for Brexit was 71 per cent but among those in secure professional jobs it was 41 per cent.
The vote for Brexit was also a powerful reminder of how the most important divide is education. Among those who left school at the earliest opportunity, support for Brexit was 75 per cent, but among those with a postgraduate degree it was 27 per cent. People with few qualifications were far more likely to support Brexit than those who had benefitted from university, just as those with fewer educational opportunities are more likely to vote for Le Pen, Trump and other populists. This educational inequality should be at the forefront of any debate about where we are today and where we are going tomorrow.
ANGER OF THE ABANDONED That a feeling of being left behind is central to explaining this political backlash is underlined by the fact that support for Brexit was much stronger among people who said
Matthew Goodwin is Professor of Politics and International Relations at the University of Kent and senior visiting fellow at Chatham House
The backlash against liberal policies is fuelling anti-business sentiment
their household finances had deteriorated over the previous year. Those who support populists believe that the future will be worse than the past these voters were struggling to get by before the collapse of Lehman Brothers and then got hit the hardest by the post-2008 financial crisis.
Business would be wrong to conclude that this is simply an economic story. This sharp educational inequality matters for another reason it is encouraging another conflict in our societies that is as much about values as economics. Like those who vote for populists, those who endorsed Brexit are not only left behind in an objective sense but subjectively feel as though their values are no longer represented by `the mainstream', including businesses that are attacked by populists as no longer defending the interests of native workers. Though many businesses strive to reflect the modern values that dominate our cities, media and also the political elite, the values of those who support populists are profoundly different they are notably less supportive of equality for women and same-sex couples, more supportive of the death penalty, want stiffer sentences for criminals and are more likely to subscribe to a less inclusive and ethnic conception of identity.
The divide between authoritarians and liberals will govern our debate for many years to come and make the political world a more polarised and volatile place, stripping away support for catch-all politicians who claim to speak for the centre ground and leaving a ready constituency of voters who want to cause a backlash against the liberal values and policies that now dominate our conversations. Such values will also provide a ready audience for anti-business sentiment. Corporations will increasingly find themselves at the centre of a strident debate between economically affluent, socially mobile and liberal citizens and the `left behind'.
DISPARATE GROUPS UNITE As the pace of social, demographic and economic change accelerates, the populist claim that global corporations and business
are no longer serving the interests of the national community will resonate increasingly strongly among more insecure and precarious workers. A preview of what is to come can be seen in France where Marine Le Pen presents herself as the champion of public services and the protector of workers and farmers in the face of `wild and anarchic globalisation'.
Fast-forward to the 2019 European Parliament elections and the themes of antiglobalisation and economic protectionism look set to unite populists on both the left and right. They are likely to encourage
sections of the mainstream to try to protect their political space by calling for limits on executive pay, bankers' bonuses and the role of private companies in public service provision. Some populists also advocate strong environmental policies as part of their quest for a more `organic' conception of the state, and in this respect might also seek to bear down on corporate social responsibility. Business and politics will thus be tasked with finding a response that resonates among both of these large groups of voters a task that will not be easy, but is now more urgent than ever.
OPERATING IN UNCERTAINTY
The future belongs to the most agile, flexible businesses
O n the morning after the EU referendum vote, I saw immediately the severe impact the decision to leave will have on British businesses. Shares in Debenhams, the company I chair, dropped by 25 per cent within three hours and have stayed pretty much at that level ever since.
The reason was the sharp fall in the value of the pound against the US dollar, because we buy in dollars and sell in pounds. But the drop in the pound's value against the euro will clearly make life harder for companies that import from the Continent, too.
Within this atmosphere of uncertainty, a new, lower level for the pound is one of the two certainties one can identify. And with this there will of course be winners too businesses that export to the States and the eurozone will be able to offer lower prices to their buyers.
But the second `certainty' is even more worrying. Trade with the EU will be much less frictionless than before. Firms with significant European supply chains or customers must urgently start to find alternative sources of supply from countries that will be keen to step in and fill the gap. Whether this is central and eastern Europe, North Africa, or South-east Asia, businesses will have to rethink their options and fast.
On top of these two certain implications will come myriad other uncertainties that can only crystallise as we trigger Article 50 and enter full negotiations with the rest of the European Union.
Sir Ian Cheshire
Sir Ian Cheshire is chairman of Debenhams plc and the government's lead non-executive
FOCUS ON ADAPTABILITY Companies are used to dealing with uncertainty but a seismic shock of this scale and I would rank it alongside the 2008 credit crunch will force them to embark on a whole reassessment of the entire international dimension of their business.
Whether we can continue to hire workers from the EU, understanding which laws and
As Rahm Emanuel once said: `Never let a serious crisis go to waste'
regulations apply, and the impact on what is already a spider's web of international suppliers used by many firms are just three of the challenges.
But while there are clearly hazards there are also opportunities. As Barack Obama's former chief of staff Rahm Emanuel said: `You never let a serious crisis go to waste... it's an opportunity to do things you think you could not do before.'
Survival of the
212 OPER ATING IN UNCERTAINT Y
Quick-thinking companies will be able to take advantage of changes to product, capital and labour markets
The traditional mantra that big businesses will thrive because of the sheer scale of their operations has been replaced by a priority on flexibility, adaptivity and resilience. In times of volatility, scale can be a handicap when it leads to rigidity.
Brexit is entirely consistent with structural changes to the business environment that were already under way: the blurring of sector boundaries, technological disruption to traditional models and shifts in customer bases.
Quick-thinking companies will be able to take advantage of the changes these will bring to product, services, capital and labour markets. It presents a once-in-a-lifetime opportunity to redesign strategies, find new markets and test innovative offers to clients.
Businesses need to institutionalise that agility by setting up working groups to think through how they should remodel their strategy. They must keep their employees and stakeholders informed, run scenarios, and design contingency plans for all aspects of their business.
ENGAGEMENT IS KEY At the same time, chief executives and business organisations must immediately start to engage with politicians as they grapple with issues for which there is no established precedent waiting in a civil servant's filing cabinet.
Executives need to engage constantly with politicians and officials to explain the reality on the ground, even if no one immediately has the answers.
When the world changes you need to change your approach and the world has comprehensively changed. The solutions will be different for each company and for each part of every business. It is important, therefore, that business managers select the right approach to strategy and the correct execution for each segment. There is no point sitting around and whingeing about it you have to make it work for you.
TIME FOR BROADER HORIZONS
Business leaders should look beyond Europe and think about competition on the global stage
T he world was troubled and uncertain before the Brexit referendum. The fallout is one of many challenges businesses currently face. As such, its impact on some of the companies we work with has been disruptive rather than severe, but that is sectorspecific and much will happen between now and 2019. Given that most businesses would have preferred to remain in the EU, the referendum result is undoubtedly a disappointment. But there is also a willingness to address the questions it raises, with boards and management teams setting their personal views aside to focus on what comes next. The repercussions of Brexit differ by industry: the City's financial institutions will be more affected than a business listed in London but operating outside the UK, such as a global mining company. There are also companies that have the majority of sales outside the UK but that have concerns about the movement of talented people. The pharmaceutical sector, where the UK is a big player, will be particularly affected. Science and research are collaborative international ventures, and the availability of academic research funding is often linked to European research. Medicines are approved to a common European standard, with the UK currently the key regulatory jurisdiction for Europe. Post-Brexit, the question for big pharma is what impact is there
Partner, Freshfields - M&A
on research and development investment and what will it mean for the launch of new medicines if the UK is a much smaller market? Many business leaders will face a similar quandary: which parts of a business can continue in the UK? And what happens to those parts that can't? Similarly, investment decisions between jurisdictions will be made not in terms of how things were done before, but how the business will be best served in the future. These decisions will have long-term consequences. Ensuring that the UK remains an attractive place to invest will be an ongoing challenge for the UK government. But it is also a challenge for the business community, which will need to find ways to work with the government to maintain the UK's position. Multi-party negotiations are never easy, making it vital that all sides engage with one another in the right spirit and recognise that every negotiation entails compromise. It is important to remember that this is about the UK's position in the world as well as its relationship with Europe. The question is not only about how companies can continue to operate within the European Union and trade with Europe, but how they can be competitive on the global stage.
314 TR ADE AND INVESTMENT
Why calm must follow
Dr Markus Kerber
Dr Markus Kerber is chief executive officer and director general of the Federation of German Industries (BDI)
The potential damage of Brexit can be reduced with a pragmatic approach to negotiations
T he German reaction to Brexit has shifted from anger to pragmatism as businesses try to make the best of what comes next. If Europe's political leaders take a similar approach to negotiations, then there is hope for the future.
As the political debate continues over what sort of Brexit the UK wants, it is looking more likely that it will end up leaving the European single market.
This will have huge implications for businesses that invest in or trade with the UK, and will affect economic growth on both sides of the Channel.
Companies in both the UK and Europe will be forced to look to alternative solutions, but whether that involves the UK as a member of the customs union or a free trade agreement remains to be seen.
Many companies have made it clear that if the UK government wants to nullify or infringe the principle of free movement of people, then it cannot remain a member of the single market. This is a serious issue for them.
In terms of the potential economic impact one needs to distinguish between investors companies that have assets in the UK
and those that simply import or export. Companies that invest in Britain are
not thinking about withdrawing at the moment. But the question now is whether they will choose to invest more into the UK or look elsewhere.
The most likely scenario is that they will just sit and wait. That might be commercially prudent but it is unlikely to lead to more growth in the future once we have reached an agreement on Brexit.
During the two years of negotiations, other economies will receive more investment and will develop more rapidly. In that `wait and see' period, companies may want assurances from the UK government that they will not be worse off in the future.
Companies that trade between the UK and Europe, such as industrial groups, pharmaceutical businesses, internet providers and financial institutions, also want to know if there is any chance the current guiding principles of the single market will continue to be the UK's guiding principles post-Brexit.
It will be interesting to see how banks, fund managers and large service firms located in the UK for whom the European single market is very important will react. Based on what their industrial counterparts have said, I think we can expect that they too will be concerned about losing that access.
The best hope is that the `wait and see' period will be reduced if the UK government produces a Brexit roadmap and timetable when it invokes Article 50. This would give companies a much clearer view of the future than they have today.
Any country with the power to set its own trade regulations will be forced to make compromises
While nothing will change until the UK officially leaves, what if by 2021 the European Union has altered some of the rules of the single market? Will the UK be able to adapt to that?
The challenge will be to make sure that goods and services produced in both the single market and the UK can be shipped back and forth without interruption.
REVERSING A 50-YEAR TREND Supporters of Brexit have said they are not concerned if no deal is struck within the two-year timetable of Article 50, as the UK can fall back on WTO rules. The EU-27 would then have to apply its tariff rates under the WTO's `most favoured nation' rules.
There are two problems here. First, the UK will have to detach itself from the EU and negotiate its position within the WTO before it can sign its own trade agreements. Second, once it's in, the other WTO members would be able to arbitrate against it if they believe the UK is breaking the rules. Any country that has the power to set its own trade regulations will, over time, be forced to make compromises with its partners.
Whether the UK sees its primary export market as the EU-27, the US or another group of countries such as China, Brazil and Australia, it will have to match the standards and regulations of all those countries.
It is also important to remember that for 50 years, countries have sought to pool sovereignty in order to gain access to bigger markets. The UK will be the first country to go in the opposite direction and will therefore become a test case.
Since Margaret Thatcher's premiership, the UK has been one of the world's foremost proponents of open-market economies and globalisation. It has pushed for economic integration in Europe via the single market and for EU enlargement, but has always resisted political integration. Yet the political costs of the single market and globalisation both UK successes seem to be behind the recent U-turn to prioritise immigration over trade.
Looking forward, policymakers on both sides of the Channel must set emotion aside during negotiations because relationships between the UK and Europe economic, social and more are too important.
Just as business relationships are based on trust, so policymakers should trust each other. The BDI's role is to weigh facts and figures rather than political emotions, and as a result we emphasise economic rationality on both sides.
316 TR ADE AND INVESTMENT
T he next four years will be a test, both of the UK's relationships with EU member states and of the British union itself. Brexit will strain the UK to breaking point, while its long-term impact on domestic party politics is unclear. The referendum result has brought the country to the brink of what is essentially political civil war.
The road to Brexit the negotiations, the diplomacy, the media scrutiny will exhaust Whitehall. But merely surviving the process is not enough; it's vital that the UK emerges from it with a sense of optimism and the energy to capitalise on all potential opportunities.
Despite the inevitable short-term disruption and medium-term challenges, the UK can of course prosper outside the EU. As the UK government increasingly contemplates a more detached future from the European single market, we face several years of profound uncertainty. At the same time it will become clearer what the demands of adjustment will be.
This volatility will continue in 2017 when the focus will be on the downside risks facing the UK economy. But the point of greatest danger will come when Article 50 is triggered and the government has to clarify its intentions. If ending the free movement of people remains nonnegotiable and a hard Brexit results, we will see more pressure on sterling and possibly even a currency collapse.
Much will thereafter depend on how the negotiations proceed. If both sides take entrenched positions it could look a lot like the Greek bailout crisis, with ambiguous agreements reached after a series of bruising summits. If this is what is to come over the next two years then the patience of the markets will probably be exhausted quickly, and businesses will inevitably assume the worst in terms of contingency planning.
It is in everybody's best interests to run an orderly process that restores
Can the UK preserve the energy to thrive?
Brexit will exhaust Whitehall but optimism must prevail if the country is to seize new opportunities
Stephen Adams is a partner at Global Counsel specialising in European political and regulatory affairs
certainty as quickly as possible and enables businesses to invest and plan for the future. That will include the UK accepting revised terms of market access, and the sooner this happens the more constructive the process will be.
Whatever arrangements emerge after 2019, change is coming. There are fundamental differences between being in a single market and having access to it from the outside. Those differences are in part about market access but just as much about the extent to which rights and freedoms are protected in law and enforceable in EU courts.
WHAT CHANGES CAN WE EXPECT? There's a reasonable chance that trade in physical goods will look a lot like it does now, given that neither side has much
There are fundamental differences between being in a single market and having access to it from the outside
interest in imposing tariffs on trade that is currently tariff-free. But current crossborder trade in services such as finance will be more difficult to replicate, and there is some complacency over the extent to which businesses in London may be able to use entities inside the EU to maintain market rights while keeping the bulk of their operations in the UK.
The best chance for London on the passporting issue is that the EU-27 conclude that it is in their best interests to maintain the City of London as the wider EU's key financial services hub. But the odds are against this for political and prudential reasons.
Similar issues will arise in discussions regarding the UK's future access and role in the digital single market arguably the most important evolution of the European project since its inception.
While it is possible that the EU might want to maintain links to London's financial services expertise, there's no reason why it would want to see UK businesses remain part of a key EU platform for broadcast goods and cultural products. We've already seen Germany try to tempt London tech companies to move to Berlin, and the DSM (Deutscher Startup Monitor) may become a powerful incentive as life on the outside begins to take shape.
It will take years and a co-operative, calm approach for the UK to extract itself and shape new relationships with the EU and its individual member states.
WHY THE GOVERNMENT MUST AIM FOR `CANADA-PLUS'
If the UK falls back on WTO rules, the future looks bleak. But a beneficial arrangement with the EU could be found
W hether the UK suffers a fall or enjoys a rebound in trade and investment will be decided in the two years of talks between Article 50 being triggered and the UK exiting the EU. In the worst-case scenario those negotiations will end with no substantive deal and both sides will fall back on the default international trade rules administered by the World Trade Organisation. I say worst-case scenario because if this happens the prospects for the future are very bleak indeed a Treasury analysis of the different post-Brexit models found the WTO system would reduce UK GDP by 7.5 per cent over 15 years. I very much hope therefore that the government can firstly negotiate a transitional agreement that preserves our current status beyond 2019, and then strike a bilateral accord that's at least as good as the agreement negotiated between the EU and Canada (minus the non-trade provisions notably on investment protection that have proved so controversial). However, this deal covers neither trade in services nor the passporting rights that allow financial institutions to sell products across the EU. In an ideal world, therefore, we would negotiate a `Canada-plus' arrangement that would also take advantage of the more elaborate Trade in Services Agreement currently being negotiated between the EU and 22 other states under
the auspices of the WTO, which does include financial services, and build in passporting rights. While that partially covers trade, inward investment is a different matter. Over the past decade the UK has been one of the greatest beneficiaries of foreign direct investment, a significant proportion of which has been predicated on access to the European single market. If the reports that the government has decided to leave the single market are true, future investment flows can only suffer as a result. The one bright spot on the horizon is that Theresa May is being cautious, and has come down hard on her ministers who have publicly stated that the UK does indeed intend to exit the single market. I think that this is the correct approach, as revealing one's position at this stage would be a foolhardy way to begin negotiations. And while clarity will be in short supply over the next two years, there is no substitute for being an early mover. Companies need to think now about how they position themselves for Brexit, using all expertise at their disposal to map how it will affect their supply chains, their people, their contractual relationships, their regulatory positions and their business models themselves.
Senior consultant, Freshfields, former legal adviser to HM Treasury
418 FINANCE AND CAPITAL
London will be changed
but not necessarily weakened
The City finances Europe's businesses and Europe's governments. Ensuring it remains strong is in everyone's interests
Angela Knight CBE
Angela Knight is a non-executive director of Tullett Prebon Plc and Brewin Dolphin Plc and is chair of the Office of Tax Simplification
I am optimistic about the potential of the UK financial services sector to thrive outside the EU. Change is certainly coming, but businesses have the opportunity to shape a future where the UK remains competitive because of its skills and expertise.
Brexit might mean the end of passporting as we know it today, but that doesn't automatically spell disaster for the City. London has many enduring advantages over its rivals, from its timezone to its language. It also has a ready supply of first-class lawyers, auditors and good regulation, and a huge diversity of financial services from banks to hedge funds and insurers
to private equity. Other European centres have some but not all of these services and are therefore unlikely to emerge as true competitors able to provide everything the customer seeks in the foreseeable future. But New York could gain ground, and that's something policymakers and regulators will need to take seriously.
Now that the shock of the referendum result has passed, it's worth remembering
that UK financial institutions were engaged with Europe long before the single market was created and before passporting even existed. It's therefore vital that those same firms now focus on how to remain competitive after 2019, whatever the Brexit `shape' may be. This could involve harnessing technology and ideas from the new Fintech sector, and so using innovation to cut costs and reshape service delivery.
It is also important to note that in some areas of financial services the EU has been talking about recognising overseas regulatory regimes that are equivalent to its own, and so allowing firms in that jurisdiction free access to the single market, as well as having agreements with the EEA countries.
So although I recognise that the City was overwhelmingly in favour of staying in the EU and the single market, City organisations should now be working with the government to devise a new structure that shows foreignowned firms that the UK is still the right place for their biggest European operations. Brexit does not have to be a binary `hard or soft' choice and getting into the detail of how the new relationship and structures can work for both the UK and EU is the vital ingredient for the City. Let's call it `Sensible Brexit'.
London can harness technology to remain competitive
From a practical perspective companies should be thinking through potential post-Brexit operational models in a way that reduces uncertainty, which in turn will help preserve the UK's international position. The City may lose some jobs but it's vital to retain the advantages that make it Europe's hub of financial creativity.
Having put together a coherent and realistic strategy, the UK must then try to build support across Europe. As long as the proposition is not motivated by pure selfinterest but recognises the needs of Europe as a whole, this is not as unrealistic as it sounds. Central to the plan should be to show how the governments and companies of other European countries are best financed out of London, as many are today.
The biggest challenge presented by Brexit is to find a way for the UK to work with Europe that's beneficial to all member states. But there's a very real threat that Europe's leaders will try to make an example of the UK in an attempt to make sure that Brexit is not the first of many similar breakaways. The UK's future
and that of the City will therefore be shaped as much by Europe's politicians as it will by those in Westminster.
The UK's financial services sector cannot simply leave its future in the hands of government negotiators. It must play a full part in shaping a vision of the financial world in 2019 and beyond. I believe London will remain one of the world's biggest capital markets but for this to happen the
City must engage now to ensure that UK regulations are of the highest quality.
One thing we can be sure of is that the current uncertainty will continue for some time and with the financial markets driven by sentiment and confidence, we're in for a bumpy ride. But they're also driven by facts, and at present there are very few of those. Apart from that we're at the start of a long and difficult political process.
420 FINANCE AND CAPITAL
Business was wrong. Let's make it right
Finance is in need of radical thinking and radical reform like never before
G roupthink is the enemy of progress. History shows us that when orthodoxy is rejected, great things can happen from Copernicus and Galileo to Charles Darwin and John Snow, whose scepticism pinpointed cholera's cause to contaminated water rather than bad air.
More recently when the credit crisis blew up in 2008 for example the consensus that the financial world would carry on regardless was utterly and cataclysmically wrong. Afterwards there was much wringing of hands and an acknowledgement that groupthink was largely to blame for the crisis itself. Yet despite a wake-up call that was perhaps louder than any in recent history, nothing much has changed.
It's worth pointing out that the definition of groupthink is not simply mass accord around a single idea, but a more pernicious state of affairs in which dissenting views are excluded and even ridiculed. The term was first coined by the American sociologist and writer William H Whyte in 1952 but it is as relevant today as it has ever been.
On the big political issues of the year, the consensus among business has been wrong almost without exception. Brexit, the rise of Donald Trump, the explosion of populism across Europe all are symptoms of a huge shift in power to which many business leaders are either oblivious or in denial.
Technology has heralded a revolution in communications and exponentially increased the amount of information available to us all. In turn, this has
transformed our individual and collective ability to influence and network, eroding hierarchical power structures and replacing them with more diffuse, democratic frameworks.
As we stand on the brink of a new era for the UK and for Europe, business and in particular financial services must heed the lessons of the past. The public will no longer be told what to do by a small group of people they don't particularly trust. Headlines about the City demanding special treatment in the Brexit negotiations will be counterproductive the message needs to be more nuanced, more subtle. The industry needs to remind itself that no matter how important it is to the UK economy, it will always be a service.
Now is the time to reject orthodoxy and focus not on what the UK has to lose from Brexit, but what it stands to gain. Bold thinking is required, such as a more radical cut to corporation tax at a time when the EU is pressuring member
Helena Morrissey CBE
Helena Morrissey is chair of Newton Investment Management and the Investment Association, the trade body that represents UK investment managers
states to harmonise rates. We also need to redouble our efforts to forge stronger financial ties with the world's growth markets, building on programmes that are already successful. I'm on the board of the Financial Services Trade and Investment Board, a Treasury body that was set up before the referendum to promote the export of UK financial services. Its three areas of geographic focus are China, the US and India an acknowledgment that the best opportunities have been outside the EU for some time and progress is being made
towards mutual fund recognition that would enable London-based firms greater access to the Chinese market and vice versa.
Radical thinking in the financial world is nothing new after all it has been shaped by unconventional minds in much the same way as science. Take Mike Milken, who confounded the accepted wisdom by creating a huge market for high-yield bonds when most thought investors wouldn't take the risk. I've met Mike who has now shifted his focus towards cancer and education and he is always looking to turn things upside down
Now is the time to reject orthodoxy and focus not on what the UK has to lose, but what it stands to gain
when they're not working the right way up. Finance needs another upside-down
moment, yet groupthink prevails just as it did in the run-up to the referendum. Nowhere was this more evident than at a City gathering I attended before the vote many people I like and respect were there, and they had done a smart thing by commissioning a respected polling firm to run a series of focus groups. The conclusion was that the messages about Brexit's potential to damage trade and the economy simply weren't resonating. The response in the room? To shout louder rather than change the message.
It has been uncomfortable for me to take the counter view to most business leaders that Brexit could be good for the UK. I was accused after the referendum result of having `ruined the economy', but I was motivated by the genuine concern that the business consensus to favour Remain could lead the country to make a long-term economic mistake.
422 FINANCE AND CAPITAL
My problem with the EU in its current form is that it isn't built to generate economic growth, support business or encourage entrepreneurship and jobcreation. I want the UK to be an outwardlooking, flexible and progressive country, yet few people would engage with me on these terms. Instead, I was accused of being inwardlooking, regressive and anti-immigration.
My challenge to the consensus before the referendum was that we need to think about where the world is going and what kind of country we want to live in. Nothing that's happened since 23 June has changed my point of view.
In truth, we won't know who was right for some time and should therefore explore the future with an open mind. In the City we can either fight for existing business or turn our gaze to the horizon. The former offers a
world of diminishing returns, the latter one of new opportunities.
I am encouraged that one of Theresa May's first acts as Prime Minister has been to launch a review of corporate governance and the composition of boards. This in my view is where the future starts. I firmly believe that greater diversity is essential if we're to break the groupthink cycle, which is why I set up the 30 Per Cent Club in 2010 to promote gender equality in the boardroom. But we need to move beyond concepts of identity diversity towards welcoming different viewpoints round the table, different ways of thinking and different experiences. It's not a question of allowing more women into a men's club but of allowing those women to be women, and allowing all other types of people to be themselves and challenge the accepted norms.
This is not a choice but the price business must pay to be relevant, modern, desirable to consumers, globally competitive and attractive to great talent. Brexit is a huge change, and we must seize the opportunity to make it one for the better.
We need to think about where the world is going and what kind of country we want to live in
ANY LONDON LOSS MAY NOT BE EUROPE'S GAIN
New York, Singapore and Hong Kong could be the big winners
T he City of London has a uniquely attractive concentration of financial institutions, private equity and hedge funds, related service providers and talent, serving the needs of the real economy across the whole of Europe and beyond. Yet some financial institutions suggest that Brexit could force them to shift activities away from London. Those noises got louder in the wake of the Conservative conference, which pointed to an administration that's leaning towards a `hard Brexit' and a more interventionist approach to business. The UK government feels under pressure to limit the free movement of people, but doing so poses the very real risk of significantly restricting the UK-based financial sector's access to the European single market. The practical hurdles to relocation of financial-services business lines are relatively low once the relevant licences are in place. Moving all or parts of a financial institution is then largely about moving people and that is far easier and quicker than it is to close down a factory and build another somewhere else. Having said that, it's unclear which activities might relocate and which continental jurisdictions would be capable of hosting them if passporting rights are curbed. Paris, Dublin and (though less
London's position as a listing venue for emerging market issuers and a trading venue for debt securities is set to continue
forcefully on the surface) Frankfurt are all making attempts to attract financial institutions from London. France will have to overcome scepticism about its tax and labour laws. The same is true, to a lesser extent, for Germany. Ireland has the benefit of the English language, but has limited infrastructure and may not feel comfortable as a host for banks with large balance sheets given the size of its economy. Which business lines might be most affected? Pressure will mount on the ECB to concentrate euro clearing in the Eurozone, with London currently hosting 75 per cent. In contrast, I believe that Brexit is unlikely to affect London's clout as a listing venue for nonEuropean companies, in particular emerging market issuers, for as long as asset management remains attracted to the City. Also, as a trading venue for debt securities, London is unlikely to be greatly harmed. Continental issuers prefer to list their debt on continental exchanges and bonds will likely continue to be investable by asset managers sitting in the UK the EU will not make it harder for European companies to seek debt investors outside the EU. However, debt underwriting on the Continent may be affected for UK-licensed banks losing passporting rights. Similarly, continental loan books and the staff to generate and manage them may move to EU-licensed banks if no sensible solution can be found to uphold passporting rights or other forms of mutual recognition. On the other hand, I can't see investment managers or London-based funds businesses relocating to the Continent. The choice here is more likely to be between London and New York,
Hong Kong or Singapore; a battle that will be decided by London's success at maintaining its inherent attractiveness as a financial centre. Any potential `gains' for continental financial centres from Brexit are unlikely to be as large as losses for London, as the hubs for some financial services may gravitate to other regions of the world. In addition, European financial markets would become more fragmented, less efficient and liquid, and overall regulatory cost would increase. None of that is in the interests of either the UK or the remaining EU member states. Given the most recent noises from both sides, it will take considerable political will and leadership for politicians to strike a sensible deal over the terms of Brexit that averts those dangers. However, I remain optimistic and am counting on the traditional British commercial sense and political pragmatism to drive things in the right direction.
Christoph L Gleske
Partner, Freshfields Financial Institutions
The future? Let more
The best hope for prosperity after 2020 is open-mindedness, not dogma
U K voters have made their decision and now the politicians must make theirs, because the future of the European Union and Europe more broadly is without doubt a matter of choice.
The path we are on leads to a Europe that looks a lot like it does today, only worse. Cars will be more expensive, and the City of London will lose. It's true that other financial centres will gain but the overall result will be negative.
There is another potential outcome but to get there requires creativity, positivity and open-mindedness. With these qualities I believe it is possible to design a new Europe that benefits both the UK and the remaining EU member states, however many there are.
There is a precedent for this kind of thinking. The UK referendum result is the most significant moment for Europe since the fall of the Berlin Wall. Then, Europe reacted with optimism rather than the inwardlooking, isolationist response we have seen since 23 June. The collapse of Communism was heralded as a profoundly positive event and Europe moved quickly to in-depth discussions on how to bring the former Comintern countries of Eastern Europe in from the cold. If we could summon some of that spirit today we could set ourselves on a path to greater prosperity.
Karel Lannoo is chief executive of the Brussels-based think tank Centre for European Policy Studies (CEPS)
The post-Brexit world will be shaped by the trade talks that will begin between the triggering of Article 50 and the UK's formal exit from the EU. Those negotiations, and ultimately deals, will govern more than the sale of goods and services across borders they will inform regulation, drive economic growth, determine migration patterns and set the tone for diplomatic relations worldwide for decades to come.
With creative thinking a trade deal could be forged that spans not just the EU and the UK but also the European Economic Area and the European Free Trade Association, extending as a result to encompass Iceland, Norway and Switzerland. An even bolder approach could consider how to reform the current customs agreement with Turkey and build closer ties with Ukraine, Moldova and Georgia, which are all keen to be more involved with Europe.
Here lies the principal intellectual barrier that EU leaders need to cross. Their best hope for the future is not uniformity but flexibility. There are countries with plenty to offer but for whom the EU's guiding principles are not appropriate. And there are others, such as the UK, that have chosen not to accept them. By keeping the former at arm's length and cutting off the latter in an attempt to discourage others you narrow the horizons for everyone. However, by engaging with them you can fashion a more positive future.
Accepting this logic requires bravery, because others could follow the UK's lead the Czech Republic, Hungary, Denmark and probably Sweden appear to want less Europe in its current form. We should therefore be thinking about creating a new European Free Trade area for these countries along with Iceland, Norway, Turkey and the others linked to a smaller EU core.
The remaining `full' EU of between 20 and 25 member states would be interconnected with the outer nations rather like how the North American Free Trade Agreement unites the US, Canada and Mexico. Again there is a lesson here, as NAFTA fosters growth through the free movement of capital, services and goods but not people.
The talks on such a trade group which could also incorporate other countries not part of any current agreement could begin as soon as Article 50 is invoked. But to do so the negativity surrounding Brexit would have to be set aside. I work in Brussels and there is no sense of positivity, no `wow, we can move forward'. The European institutions are still digesting Brexit and are somewhat in a state
of denial. Negativity prevails and we look set to go backwards as a result.
It's important to stress that this problem is not solely of the Continent's making. Theresa May's conference speech was a step to the right and towards isolationism, so much so that it could have been given by Marine Le Pen. She didn't seem to care too much about the rest of Europe and her words are likely to lead to more barriers of the type the EU has tried so hard to break down.
A positive outcome will require all sides to approach negotiations in a spirit of compromise and stop talking about a period of reckoning. I suspect we will see a couple of bad years before everyone comes to their senses, but if they don't and the UK decides to initiate bilateral trade talks with individual countries it could be 10 or even 20 years before the situation is resolved.
Brexit will result in severe challenges for the UK financial services sector, which accounts for more than eight per cent of the country's GDP. Putting a mutually acceptable regime in place will take years and will allow UK firms much less access than they enjoy today. But the fact that there's a deal between the EU and Switzerland on insurance shows that a similar bilateral arrangement for UK financial firms is not out of the question.
The UK government will, however, have to overcome the animosity that prevails in the EU towards any special deal, particularly one involving financial services. Perhaps its best hope lies in persuading member states that maintaining London as a global financial centre is vital for the European economy as a whole.
Ultimately, the referendum result should be seen for what it is: an opportunity to engage in a broader debate on what 21st-century Europe needs to look like. These discussions should encompass not only trade and economic growth but also freedom of movement and social integration. The challenge now is whether there is sufficient creativity, and sufficient will, to do so.
We need more of the optimism and bravery of 1989
THE EU NEEDS CROSS-CHANNEL INFLUENCE
The UK has been good for EU regulation. Despite Brexit, it must not walk away
I n many ways Brussels functions as it did before the Brexit referendum and will continue to do so until March 2019. The result may have altered the political dynamic, but the myriad working groups tasked with creating new EU-wide regulations are still doing their job. However, there's a danger that the 'way' they do that job could change when the UK's authority in Brussels begins to wane. Formally, the UK can continue to exercise its influence until the Brexit process is complete: it is, after all, still a full member. But psychologically that may be difficult if its diplomats feel they have lost their right to intervene or if their European counterparts stop listening. It is important to understand that there is still a lot of work to be done on significant pieces of financial regulation between now and the UK's exit. Rules governing, among other things, over-the-counter derivatives, bank capital requirements, recovery and resolution regimes, benchmarks and solvency standards for insurers will all be reviewed and drafted over the next two and a half years. An EU without the UK's free-market thinking could quite easily evolve into a more heavily regulated, protectionist jurisdiction. Europe needs the experience of the City and its regulators if it is to create rules that work for both business and the market. The UK's expertise will for instance be vital in working through the sophisticated calculations necessary to draft new bank capital requirements, which will have a direct impact on lending to the real economy. And because of the Great Repeal Bill, the UK will be
Head of EU Regulatory and Public Affairs, Freshfields
applying those very same EU rules from the moment it officially leaves and potentially much longer if it wants to benefit from EU equivalence regimes that allow overseas financial institutions access to the single market. For these reasons it makes no sense for the UK to give up its seat at the table until it absolutely has to. But Brexit doesn't have to mean the end of UK influence across the Channel. The EU holds regular talks with important third-country jurisdictions to align financial rules Switzerland, for example, was heavily consulted in the drafting of the Solvency II regulations. The post-Brexit deal with the UK should therefore include a structured arrangement that preserves London's voice in Brussels, with an intensity and depth in line with the importance of the City to European finance. For this to happen the UK government will need to make clear when it triggers Article 50 that it intends to maintain a relationship with the internal market. This by extension will mean applying the EU's rules in one way or another, and the UK would therefore want a say on how those rules are made. The UK has no choice but to remain engaged with the EU, which quite simply cannot and should not be supplanted by China and the US overnight. Likewise, the EU needs the UK but to craft a mutually beneficial relationship will require leadership on both sides.
Get ready for a very messy break-up
Once the rules start to diverge it will get complex and quickly
F rom the day the UK formally leaves the EU, regulations on both sides of the Channel will start to diverge. Politicians therefore need to craft civil, workable and flexible solutions that allow trade to continue and business must be part of the discussion.
Brexit is the result of a democratic decision, but as someone who worked at the European Commission for 34 years I believe it is a tragedy. Even if you accept the argument that UK companies could benefit from some deregulation (marking an end to UK gold-plating), barriers to trade with the EU single market will carry an unprecedented cost. Any attempt by the UK to craft a regulatory advantage will be countered by the EU in terms of reduced market access.
There are literally hundreds of regulations that apply to goods, services, labour and capital. The internal market regime is complex and has wide scope, and we will not know how it might change for many years. Uncertainty is the enemy of markets and in the short term there will be plenty of it as businesses wait to see what arrangements are negotiated between the UK and the remaining member states.
If the UK leaves the customs union it will need to build borders with the EU-27. This result will be overwhelmingly negative, and not just from a commercial perspective.
There could be heavy social and political costs, too, not least if a `hard' border is re-established between Northern Ireland and the Irish Republic.
Right now we are in limbo the first circle of Dante's Inferno as the UK government establishes its negotiating position. Yet we are already starting to see the effect of the referendum result on currency markets and investment, as decisions on new capital expenditure are shelved until more is known about what Brexit means for market access.
REGULATIONS MAY DIVERGE The moment the UK leaves the EU, the government will repeal the European Communities Act, which gives EU legislation automatic effect in the UK. While the so-called Great Repeal Bill will also incorporate all existing EU law into UK law, from that point on it could begin to be unpicked, with whole sections scrapped and others amended.
We're not even close to seeing any detail on which parts are in the firing line, but if major changes are made then UK businesses could find that their access to the single market is even more restricted.
The divergence will begin to happen anyway as new regulations are passed by Europe that will not be reflected in UK law. As a result, whatever trading regime emerges post-Brexit, UK businesses will have some
David Wright is a partner at business advisory firm Flint Global and a former deputy
director-general at the European Commission
serious regulatory fragmentation issues to contend with.
Take cars, for example. The European rules on environmental performance and safety go into such detail that they specify the diameter of the tailpipe and the precise collision impact standards. If these rules start to drift apart then any company that wants to sell in both markets will either have to continue manufacturing to the higher standard or produce two different products. Unless the EU and UK can work out a mature and sensible way forward, things are going to get very messy very quickly.
The situation becomes even more challenging when you look at how financial markets are regulated. The ability of UK-incorporated financial institutions to sell services across the single market is in many cases governed by passporting rules.
As a former secretary general of the International Organization of Securities and Commissions, my experience tells me that if UK and EU financial regulations start to move apart it could be immensely complex to find a satisfactory outcome that does not inhibit trade flows. Reliance by the UK in the future on equivalence regimes is risky; bilateral trade arrangements, if possible, will take a long time to negotiate and implement. They must not discriminate against other WTO members either, and the WTO's trade coverage of financial services is rudimentary and insufficient for the UK to rely on as a major financial market.
INSTITUTIONAL KNOWLEDGE IS VITAL The UK has few desirable options, and UK businesses must start thinking now about what effect regulatory changes will have on their trading operations. This will require detailed insights on how the European institutions work, and the sooner this is understood, the better, as time is getting short. Once the government tables its formal position next year the die is cast, and I know from my own discussions that many business leaders are extremely concerned about what they are hearing.
As a former policymaker who was at the heart of Europe for many years, I would say that one thing that Europe is good at is being creative. So politicians on both sides of the argument must give each other sufficient room to create arrangements that will benefit everyone. They must not dig into rigid positions and set out red lines that cannot be crossed. If they do, then life will become very difficult indeed.
Finally, and crucially, the negotiators have to trust each other during talks that will be fraught with difficulties. If they don't, the descent into Dante's Inferno will be rapid and irreversible.
When the government tables its formal position next year, the die is cast
WHY BREXIT MEANS MORE REGULATION
Leaving will wrap UK businesses in red tape, not free them from it
S tatements made during the referendum campaign implied that the UK could rid itself of burdensome EU regulations once it left. Nothing could be further from the truth. In reality, after 2019 the UK will need more regulations that will cover products from cars to pharmaceuticals, medical devices, sailing boats and even toys. Just as we hear about the importance of passporting for financial services, harmonisation is just as important for hundreds of thousands of goods that are traded between the UK and EU. If the UK wants its companies to retain access to EU markets, it will need to carry out a specific harmonisation procedure to make sure its rules are aligned with those of the EU. This will mean that companies will face both fragmented regulation and more rules the same will apply for EU-based producers looking to sell into the UK. Even assuming the UK government ensures its regulations are harmonised at the time of exit, companies will face fresh hurdles over the following years. A good example is the restriction on trade between the EU and the US because of differing rules on genetically modified organisms. This illustrates what could happen if the two sides' regulations diverge in the future. Indeed, once the UK leaves the EU, it is more likely that regulations will begin to separate. Britain has had a moderating effect on the
drafting of regulations in Brussels, and acted as a counterweight to countries that tend to call for tighter rules. It is therefore possible that regulations will get tighter without the UK's influence. As such, companies should analyse their exposure. Some have already taken steps to prepare for it, for example by relocating production facilities or subsidiaries to ensure they do not lose access to either the EU or UK markets. Looking ahead, I would like to be optimistic. History shows that the UK copes very well with these challenges and I hope Britain achieves both its goals retaining close links with the EU while taking a more open approach globally. But it will not be an easy ride and actors on both sides of the Channel should pay close attention to the details, both during and after the negotiations.
Companies should analyse their regulatory exposure and plan ahead
Partner, Freshfields Environment, Planning
628 SUPPLY CHAIN
T he UK's strategically important aerospace industry is a national success story, turning over 31bn annually and providing 128,000 high-value jobs. The anticipated rise in global aircraft traffic over the next 20 years looks set to drive demand for more than 33,000 commercial aircraft worth $5.2tn. With the largest aerospace industry in Europe, second globally to the US, UK companies have a major opportunity to increase their share of this lucrative market.
To achieve this, industry and government have been working closely through the Aerospace Growth Partnership (AGP) to deliver a successful UK aerospace industrial strategy. This is a genuine collaboration providing increased investment in R&D, skills and productivity improvements, all of which underpin UK competitiveness.
The UK's decision to leave the European Union has created significant uncertainty and this will continue until our new relationship has been determined. In the meantime, it is essential that industry plays a pragmatic and productive role in helping government secure the best possible deal for our future prosperity.
SUPPORT OF GOVERNMENT It is also important that the work the AGP has done is continued and that government uses every opportunity to signal long-term commitment to ensuring the UK remains a leading global aerospace player.
The Chancellor's upcoming Autumn
Statement will be a key opportunity to set out positive measures to encourage companies to invest now and maintain momentum across the economy. Targeted reforms aimed at encouraging investment in new innovation and technology such as raising investment allowances and R&D tax credits are measures that will help sustain UK competitiveness.
It is hoped that the Autumn Statement will deliver a boost to funding for a key AGP initiative, the Aerospace Technology Institute (ATI). The ATI helps encourage private-sector investment in valuable R&D programmes. It is currently receiving far more high-quality bids than it can resource, and extra government funding would bring a major boost to UK capability and would help UK businesses prepare for major new aerospace opportunities.
The AGP is also seeking the Chancellor's support for a major competitiveness improvement programme to help the UK supply chain to stay ahead and win new business. The aerospace industry has been working closely with colleagues in the automotive and rail industries to develop a high-impact programme that addresses the challenges in strategically important sectors; helping to boost productivity and secure new business.
In the longer term, industry needs to help and support government in achieving the best deal from Brexit negotiations. We need a relationship with Europe that retains access to the customers, suppliers, skills,
Don't break the chain
Industry and government must co-operate to ensure Brexit doesn't scupper complex cross-border projects
Paul Everitt is chief executive officer of ADS Group, a trade body representing the interests of the UK's
aerospace, defence and security industries
R&D and influence that underpins the ability of aerospace to win in tough global markets.
COLLABORATION TO COMPETE A leading priority for aerospace is ensuring the UK remains an influential part of the European Aviation Safety Agency (EASA), which certifies the safety of aircraft products for sale. Remaining a member of EASA is a far easier and less costly route than relying on the Civil Aviation Authority to develop the required certification.
The opportunity for UK companies to participate in EU R&D projects gives them a significant advantage in the global marketplace. The opportunity for collaboration, alongside access to funding and facilities, ensures UK companies can maximise their connections to both customers and suppliers.
Collaboration with European partners helps UK technologies to be highly competitive in the global market. Pooling expertise and funding, which the UK does not have access to on its own, develops technologies that can compete with products from established and emerging markets.
The harder the Brexit, the greater the commercial risk, and so the longer any transition should be
For aerospace, eliminating or minimising non-tariff barriers after Brexit is essential to maintaining global competitiveness. Quickly resolving the EU and UK's schedules at the World Trade Organisation (WTO) will be critical to ensuring aerospace is covered by a WTO agreement that removes tariffs on most aerospace goods.
New customs and border controls are likely to increase administration costs and potentially introduce commercial costs as a result of delays. Negotiations should seek to ensure the UK can retain membership of the single market or, at the very least, retain a customs union relationship with the EU.
The UK needs to remain attractive and flexible to the best researchers and engineers in order to stay at the leading edge of innovation, which is why retaining freedom of movement is so important. From an operational perspective, problems are often solved by mobile teams at sites across Europe and the UK. Curtailing this through increased administration would prove costly and onerous.
Whatever shape Brexit takes, on exiting the EU, UK industry will need a transition period to manage the inevitable commercial consequences. The harder the Brexit, the greater the commercial risk, and so the longer that transition should be. To ensure industries with pan-European supply chains and customers do not lose global competitiveness there needs to be a two-year period following Article 50 to agree transition arrangements until a comprehensive Brexit deal is in place.
In the interim, the pragmatic response means looking beyond political rhetoric and focusing on achieving the economic momentum and sustained investment needed to enable UK companies to thrive outside the EU.
WHAT WOULD A HARD EXIT LOOK LIKE?
Supply chains for lowmargin products could be badly affected
T he single market gives UK industry access to public and utility buying across Europe under EU directives that have been implemented into national law. The fundamental objectives are to ensure transparency, equal treatment and non-discrimination, prohibiting non-tariff barriers to trade, such as technical specifications that favour national suppliers. If the UK ends up with a `hard Brexit' and loses its single-market access, the default is the WTO Government Procurement Agreement (GPA), signed by 47 countries including the EU member states, the US, Canada and Japan. The UK could, with the consent of other signatories, adopt the same terms, but the mood of some is hostile, with France pressing for so-called `Fortress Europe' legislation to impose greater barriers to access by third countries. The UK has blocked such measures up to now but will no longer have the power of veto.
SIMPLER, NARROWER RULES The GPA is simpler than the EU rules but has more limited scope. Not all utilities caught by the EU regime are covered and defence is expressly excluded. The proposed Great Reform Bill would see the UK retain as national law all regulations derived from EU law, at least in the short term while decisions are made on reforms. Would the UK choose to repeal the EU-based defence regime? Possibly, given that it was opposed to the introduction of the Defence Directive in 2009, although the Ministry of Defence adopts public tendering for a significant proportion of its contracts to secure best value. Even if it did, high-value inter-government defence programmes such as the Eurofighter would be unaffected by a repeal of the EU Defence Directive given that they fall outside its scope.
Partner, Freshfields Engineering, Procurement
MORE ADMINISTRATION How can UK industry remain competitive in Europe with the threat of tariffs and customs duties, which would either raise costs for importers or need to be absorbed by exporters? The EU is a customs union with tariff-free trade within the single market. A hard Brexit under the WTO model would result in trade in goods being governed by the General Agreement on Tariffs and Trade, with the level of tariff varying by economic sector and country of origin. And it's not only tariffs that threaten the viability of supply chains for low-margin products; it's also the delays and administrative burden that would result from having to clear customs. The government has commissioned studies on the digitisation of customs clearance which suggest that an hour's delay at a border results in a five per cent drop in trade. Businesses with long-term contracts to supply goods that cross the UK/EU border should check whether those contracts address responsibility for customs and tariffs, or otherwise cater for the risk of a change in law. They may also need to revisit intra-group arrangements to ensure they continue to reflect arms-length terms under the transfer pricing rules. Groups established in both continental Europe and the UK may prefer to use their European subsidiaries to tender for EU contracts. The question now is whether the UK can negotiate trade deals with third countries that will compensate.
730 TALENT AND MIGR ATION
Preventing a post-Brexit brain drain
The flow of talent across borders has been a huge benefit to the UK and is now under threat
Oliver Pawle is the London-based chairman of Korn Ferry's board services practice, focusing on chairman, non-executive and executive board appointments
T he flow of skilled workers moving to the UK from the rest of Europe is the lifeblood of the British economy. There is a real danger that if that artery is severed as a result of Brexit, the long-term economic health of the country could be in jeopardy.
There is a clear risk that the new relationships negotiated by the British government and EU member states could put limits on the number of migrants able to enter this country. That would threaten the prospects of UK companies and in turn make them less able to attract talent from the rest of the world. Businesses want to know what new rules and limits there will be on immigration.
The rhetoric at the recent Conservative party conference around forcing companies to publish information on EU immigrant
I meet a lot of start-ups in all sectors particularly Fintech and am worried about their ability to get access to skilled young people
labour was very disturbing. Of course companies need to train UK workers more effectively and the British education system needs to equip school leavers and university graduates with the skills employers need in a modern technology driven economy. However, these changes particularly education reform will take many years to have an impact. In the meantime we need to ensure UK-based companies and those looking to invest in the UK are able to employ the requisite talent to enable them to remain competitive.
THREAT TO ENTREPRENEURS Whether it is financial services, automotive, retail, leisure, construction, the National Health Service, the care industry or agriculture, there is a real risk that Brexit will have profound and negative consequences for UK industry.
The City of London, the engine room of the UK economy and a major employer of EU talent, is under threat. Banks and financial institutions with branches in London are worried they will not be able to operate as freely within the EU, and we could see a number of layoffs as jobs are cut or people are relocated overseas.
I am also concerned about the threat to our fast-growing technology sector. I founded the New Entrepreneurs Foundation precisely to promote the next generation of
leading entrepreneurs. I meet a lot of startups in all sectors particularly in Fintech and am worried about their ability to get access to skilled young people and develop the next generation of business leaders.
Anything that stems the flow of talent is going to have consequences for our wider science and engineering base. Indeed, it may trigger a brain drain in the scientific faculties of our best universities. Our universities are among the best in the world but if the brightest students and academics from the EU find it harder to come to the UK, we will all lose. The UK is renowned for its pharma and manufacturing expertise, and anything that stymies the talent flow here will have widespread ramifications.
LOGIC SHOULD PREVAIL The answers to many of these questions will depend on the post-Brexit deal that Britain negotiates with the rest of the EU. If we do indeed end up with a `hard' Brexit, as implied by the Prime Minister, without significant access to European markets, then all bets are off.
But if the negotiations are handled well, Britain's innate economic advantages will ensure it is still attractive to talented individuals. London is, and will remain, by far the largest financial market in Europe. The idea of Paris or Frankfurt growing to match the City is a far-off dream.
Given the current uncertain outlook, it is imperative that employers make sure their voice is heard at the highest levels of government. They must operate as a unified lobbying force and put their core concerns to the forefront of policymakers' minds. While the political atmosphere is highly charged there are individuals on both sides of the divide who will be receptive to cogent arguments about how to minimise the impact on the real economy and on employment.
I am optimistic that logic will prevail among politicians. As major employers start to make decisions on future investment, the issue of talent and migration will rise rapidly up the agenda for our Brexit negotiators. Once they understand the implications of job losses in the UK (with employees being relocated to the EU or never coming here is the first place) they will listen to the people who actually create the wealth. The UK must be open for business, and that means being open to talent from overseas.
WHERE DO YOU DRAW THE LINE?
Rules to curb general immigration could have unintended consequences
T he British economy relies on attracting talent from Europe. Employers must lobby to secure a Brexit that leaves immigration rules as close as possible to the current free movement system. There is incredible diversity in the UK, particularly in London. Non-UK staff fit easily into the British workforce, which, in turn, makes it easier for companies to attract the best international talent to the UK. How Brexit will affect this diversity is of increasing concern to business. While no one can be sure of the UK government's intentions, recent statements from Theresa May suggest limits on the free movement of people are a priority in negotiations. The adverse ramifications of such a move would extend beyond the UK to the rest of Europe. Financial institutions, for example, may need to move some eurorelated clearing activities out of London to another financial centre within the EU. But if that precipitates further shrinking of the City, these roles may relocate to New York rather than Frankfurt or Paris, which will struggle to replicate the City's skills base in the short term. The UK's legal position has not yet changed but our clients are already exploring possible options for staff relocations. For them the main driver is as much the issue of access to the single market as it is tighter rules on immigration,
Partner, Freshfields Employment, Pensions
but the current uncertainty makes proper planning impossible. The rules needed to control general immigration may not adequately distinguish between skilled and mainstream workers. EU nationals may need immigration clearance before taking jobs in the UK. Even a relatively benign system of work permits would raise administrative hurdles, increase costs, and make the UK a less attractive place for multinational businesses to operate. And, of course, EU states may impose equivalent requirements on UK nationals wishing to work in the EU. The first few years after Brexit, when employers do not yet fully understand the procedures, will be the most difficult. Businesses must build a clear picture of their employment needs over the next two years. Few will avoid all immigration-related problems, but everyone can help manage the risks though good planning. Some might choose to advance recruitment procedures ahead of Brexit. And companies worried about changes to immigration should co-operate to lobby governments, both in the UK and in Europe, to limit the changes away from free movement.
Why English law isn't
8 INTERNATIONAL DISPUTE RESOLUTION
The benefits that have made law one of our great exports will not vanish after 2019
T hree months after the UK voted to leave the EU, the immediate post-Brexit excitement and gloom are moderating. Despite turbulence in the financial markets the world has not exploded and the City of London has not become a ghost town.
We have an indication from the Prime Minister as to how legislative Brexit will be achieved. There will be a Great Repeal Bill and, legal challenges aside, the PM will push the button on Article 50 next spring, meaning that the UK could be a nonmember state in 2019.
Contemplating the consequences of Brexit on private international law (the law governing civil cases between private parties where there is a foreign element), many people initially thought it would be a disaster disposing of 40 years of law without planning or warning.
On reflection, it is at least plausible that any changes will, in their practical effect, be controlled, and that where changes come, some may actually be for the better.
Whatever happens, some things will not alter. English law will remain attractive and London will almost certainly retain its position as the jurisdiction of choice, particularly for financial matters.
A TRUSTWORTHY, FAIR SYSTEM Parties choose English domestic law to govern their relationships because it is certain, predictable, full of answers to intricate questions and mature. Litigants choose London as the forum to resolve disputes because of its expertise we have clever judges who do not need to have complex matters explained to them, excellent lawyers and courts that are manifestly trustworthy and fair.
Rather obviously, the work of English courts is done in English which remains the language of international commerce across the Continent and beyond. This alone makes other courts in Europe
Adrian Briggs QC
Adrian Briggs is QC (Hon) at Blackstone Chambers, professor of Private International
Law at the University of Oxford, and a fellow of St Edmund Hall, Oxford
less attractive and less sensible as alternative place to litigate, unless (for example) the courts in Paris or Frankfurt are going to change the language in which they do business.
THE NEW SHOULD MIMIC THE OLD Whichever version of Brexit we end up with, it seems perfectly plausible that much of the new world of private international law will look rather similar to the old. After all, almost all of the rules of private international law made by the European Union were voted for by the UK, which suggests that they are not intrinsically objectionable and they will be retained where it is legally sensible to do so.
Take the rules that identify the law governing contractual and non-contractual obligations found in the Rome I and Rome II Regulations respectively. Rome I requires the courts of EU member states to respect the parties' choice of law, and so far as the courts in member states are concerned, the secession of the United Kingdom will not affect that legal duty.
Rome II focuses on applying the law of the place where the damage occurred, and member states will continue to apply that rule, even where the damage occurs in the United Kingdom. The UK will probably
retain these laws too, with the regulations reappearing via the Repeal Act.
Positively, Brexit will provide the opportunity to reconsider, and perhaps ditch, some elements of these rules, which, some feel, have introduced ambiguity and uncertainty into private international law, and in doing so make English law more attractive. By contrast, the idea that we might instead return our laws to their pre-European state, just to make a political point, is neither attractive nor rational.
THE ENFORCEABILITY QUESTION There is more difficulty with the law governing jurisdiction and enforcement of judgments in civil and commercial matters, which is covered by the Brussels Regulation. Here, the general rules are that defendants should be sued in the member state where they are domiciled, parallel or concurrent proceedings are not permitted, and member states must recognise and enforce each other's judgments.
As much of that regulation is founded on legal reciprocity, it cannot simply be remade in our law by a Repeal Act. So, here the law is bound to look different in 2019.
Yet once the UK secedes, where matters are adjudicated in London it is still likely that the decisions of the English courts will
still be internationally effective, even if the rules and means by which that happens are somewhat changed.
If judgments from courts in the UK are no longer automatically enforceable in the EU, it may make London a marginally less attractive place for some claimants to litigate against certain defendants.
However, if the parties have agreed to English jurisdiction, most foreign systems will, one way or another, recognise the resulting judgment. Moreover, most defendants sued in London will have assets either in London or accessible via London, so the fact that a claimant cannot directly enforce English judgments overseas may not be such an issue after all.
Litigants choose London as the forum to resolve disputes because of its expertise
When the legislative changes come to be made, only a small number of EU laws have a significant impact on private international law
It is not clear whether it would be possible for the United Kingdom to become a party in its own right to the Lugano Convention, which governs issues of jurisdiction and enforcement of judgments between the member states and the European Free Trade Association. If that could be negotiated and there would be advantages to all sides if it were the law would replicate over 95 per cent of what is now in the Brussels Regulation.
In addition, the UK will almost certainly become party to the Hague Convention of Choice of Court Agreements, which will mean that EU member states will give effect to jurisdiction agreements and to the judgments based on them.
More bothersome are the rules for dealing with cross-border insolvency and family issues, particularly parental responsibility, where there are material connections with another member state. But other law-making agencies (the UNCITRAL and the Hague Conference) have adopted decent and workable rules.
For lawyers and parties troubled by the prevailing uncertainty, the most risk-averse strategy might be to agree to arbitrate. The New York Convention on the recognition and enforcement of foreign arbitral awards is unperturbed by Brexit.
When the legislative changes come to be made, only a small number of EU laws have a significant impact on private international law.
It would not be hard for our various expert committees, particularly in the House of Lords, to go through Dicey, Morris & Collins on the Conf lict of Laws, and mark the laws that should be kept, dispensed with, or tweaked. There is no need to panic.
8 INTERNATIONAL DISPUTE RESOLUTION
A SYSTEM THAT IS WORTH PROTECTING
The fate of English law is in the government's hands
T he UK has a large and successful legal services market, which stems in large part from the attractiveness of English law and the English courts to international business. English law is the choice of law for many commercial contracts, and often for international commercial parties with little or no connection to the UK. They are drawn by the certainty and flexibility of English law and the respect accorded to the parties' agreement. In addition, English courts deliver a valuable combination of transparency and efficiency. None of this will change after Brexit, and we also now know that there will be no dramatic changes to the substance of English law. The Great Repeal Bill promises to incorporate all EU law into English law until Parliament decides otherwise. Companies will therefore have plenty of warning before English law changes in any particular respect. The ability to enforce English court judgments throughout the EU will, however, change. At present they can be enforced cost-free in all other EU member states. But when the UK is no longer one itself, the courts of other member states will not be obliged to recognise or enforce English court judgments in their jurisdiction. Clearly, this would make litigating in England (and possibly the choice of English law) less attractive than it is now, particularly for international corporations that are more likely to want to export their judgements and that are currently significant users of the English legal system. English law and English courts can no longer be the automatic default option for such parties, particularly if the contract will be in place for more than two years. This is something that can and
Partner, Freshfields Dispute Resolution
should be remedied. It seems likely that providing for the reciprocal recognition and enforcement of judgments -reflecting the current position - should be one of the easier tasks to settle when negotiations start. The UK government should indicate now its intention to sign up to a mutual enforcement convention with the EU, an important way to stop any loss of confidence in the effectiveness of English court judgments for international parties. The continued use of English law and courts is vital not only for the UK legal services sector but the vibrancy of English law itself. Without a flow of cases raising issues about current commercial practice, the law will develop more slowly. Politicians' first step should be to sign the UK up to the Hague Convention on Choice of Court Agreements, which offers at least some form of recognition of English court judgments throughout the EU (and Mexico and Singapore). The UK can do this unilaterally, providing a post-Brexit backstop. But this is hardly a perfect solution. The Hague Convention has technical shortcomings, in particular that it does not recognise non-exclusive jurisdiction clauses, which are used in many complex commercial contracts. Ultimately, the UK must negotiate a bilateral agreement with the EU on the allocation of court jurisdiction and the recognition and enforcement of judgments, replicating the current regime that UK lawyers did so much to shape. With political will this should be achievable but the UK government needs to signal its intent to do so now.
This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as `Freshfields'. For regulatory information please refer to www.freshfields.com/support/legalnotice.
The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC.
This material is for general information only and is not intended to provide legal advice.
Freshfields Bruckhaus Deringer LLP, November 2016
This publication was produced by Freshfields Bruckhaus Deringer LLP in collaboration with Raconteur.
To learn more about Freshfields' view on a post-Brexit world, please visit www.freshfields.com/brexit