The June 23 date for the EU referendum is almost upon us, and the decision of whether Britain stays in the European Union is in the hands of the British public. The effects of a vote to leave the 28-member union have been widely speculated but are not known for certain, and for businesses, the main question is how best to prepare for an unknown event. It isn’t exactly disaster planning, but without any planning, you never know….
At Brickendon we aren’t making a case for or against Britain leaving the EU, but rather want to ensure we have identified, prepared for, and mitigated against Britain’s exit, should it occur. So, what would a decision to leave mean for London’s financial services sector?
Firstly, we should probably remind ourselves of what the EU is, and what impact it has on the UK’s financial services industry.
The EU is an economic and political partnership involving 28 European countries, which began after World War II with the aim of fostering economic cooperation. The idea was that countries which trade together are more likely to avoid going to war with each other. The partnership has since grown to become a ‘single market’ allowing goods and people to move around, basically as if the member states were one country. It has its own currency – used by 19 member states – its own parliament, a judiciary, and it now sets rules in a wide range of areas, including on the environment, transport and consumer rights.
For business, it means access to a $16.6 trillion-a-year single market of 500 million people, with no import or export tariffs, free movement of labour and a political and economic status which allows increased power and standing for negotiating and developing global trade. Without the creation of the EU, the global economic environment would likely have looked very different.
Earlier this year, British Prime Minister David Cameron changed the terms of Britain’s membership of the EU, negotiating changes to some of the legislation surrounding what many Britons consider to be the controversial areas of EU membership, in particular relating to immigration. If Britain decides to stay in the EU on June 23rd, these changes will start immediately, though many people are sceptical about how they will play out in reality.
Several of these special areas will affect the business community: firstly Cameron’s pledge never to join the euro and assurances from the Eurozone communities that they will not discriminate against Britain for having a different currency; and secondly the assurance that any British money spent bailing out the Eurozone nations that get into trouble will be reimbursed. In addition, there is a protection for the City of London, which safeguards Britain’s financial services industry preventing Eurozone regulations being imposed on it.
As previously mentioned, one of the main concerns surrounding the EU vote is the uncertainty. Of course a vote to leave would not change the world overnight. Such a vote would trigger a process of negotiating the terms of the UK’s future relationship with Europe and beyond. This could formally take two years or more, and implementing the changes would take longer, quite possibly the best part of a decade. During this two-year period, there will undoubtedly be increased volatility in the financial markets and a likely shrinkage in the UK economy. In the longer term there would be significant changes to licencing agreements, sales contracts, employment arrangements, and in some cases, even the need to move staff or offices.
It is also important to consider that the EU itself may change without Britain’s membership. Without the UK’s voice, some people believe the EU’s political and economic culture will shift towards heavier regulation and possibly protectionism.
So, irrespective of the predicted outcome, what should you be doing now? The most important thing is to identify which aspects of your business would be affected. Because of the uncertainty, detailed long-term planning is not yet feasible, but knowing where the issues may lie would give you a head start on planning when the time comes.
The areas likely to be affected include: people and staffing; taxation; business accounting; regulation; business planning and costs; import/export (or international trade); and insurance.
- People and staffing: plan for people change. Ask your HR team to look at how and from where they recruit your labour force to understand if your labour costs could rise.
- Regulation: Ensure you know which regulations affect which parts of your business and how these parts would operate if these were to change. Little change is expected in the financial regulatory environment, but uncertainty will undoubtedly have an impact.
- Taxation: The impacts on our tax system are likely to be limited and any changes that might occur need to be balanced against what the final settlement with the EU looks like.
- Supply chains: Every company should ensure they have a clear picture of where their supply chains come from, and what would happen to them post-exit. International companies also need to work through a plan for incorporation which would allow them to trade internationally no matter which model the UK adopts. Scenario planning is critical in this area.
- Trade agreements: The loss of free trade access to the EU is a worrying concept, let alone the wider implications of no longer being part of the EU’s 53 global FTAs. Whether it is a disaster or an economic inconvenience, divides opinion, but there is consensus that consumer costs will rise if free trade access is lost.
- Business costs: Contingency plans should be made based on an expectation of market turbulence, lower economic growth and increased cost
One thing is for sure, and that’s that the uncertainty of whether Britain is going to be ‘in’ or ‘out’ after June 23 is having an impact. Many businesses have already scaled back some of their investment and adopted a ‘wait and see’ approach, and there are concerns, that this may take a while to turnaround even if we remain in the EU. Uncertainty is not a healthy thing, and how long businesses take to invest again after June 23 remains to be seen.
It is even possible that the uncertainty will continue after the vote, especially given the likelihood of it being a very close result, meaning that any preparation you do will be rewarded one way or another.