Toward a Post-Brexit Business Landscape: A Financial Services Perspective

Transcription

1 Toward a Post-Brexit Busiess Ladscape: A Fiacial Services Perspective Abstract While Brexit has caused a certai amout of ucertaity for eterprises across idustries i the UK, it also brigs with it big opportuities by establishig ew trade relatioships with coutries outside the Europea Uio (EU). We are yet to see how egotiatios betwee the UK ad Europe will pa out, but acial services rms i particular eed a cohesive roadmap to avigate the post- Brexit ladscape. I this article, we outlie some of the issues the acial services sector is facig ad how busiesses i this sector ad govermet could approach the challeges ahead.

2 Reachig a Agreemet For starters, promotig ad protectig the acial services idustry across Europe should be a key priority for trade egotiators. This will be challegig, as the UK ad EU have still ot reached a agreemet regardig the acial services market. At the time of writig, the Europea Commissio has rejected the City of Lodo s proposal to strike a post-brexit free trade deal o acial services a major blow to Britai s hopes of esurig full access to EU markets for oe of the world s top two acial cetres. The mai driver for a smooth arragemet will be the EU acial istitutios who operate i Lodo ad are costraied by EU rules. The UK ruled that EU baks operatig through braches ca cotiue without creatig subsidiaries, which is a expesive process. Busiesses Must Pla Now to Trasitio to the Post-Brexit Eviromet While o the regulatory frot, may acial service providers are registerig speci cally with EU regulators to avoid segregatio, trasitioig to a post-brexit sceario is provig to be tough. This is exacerbated by the fact that may eterprises are dealig with ifrastructure issues, especially i the eld of capital markets. Cotributig 7.2% of the UK s GVA ad more tha oe millio jobs across the UK, the acial services sector uderpis the success of the broader ecoomy. For several decades, acial services have bee oe of the UK s strogest assets, deliverig a trade surplus of more tha 60b per year ad more tha 1 25 billio i tax reveues. Lodo s success as the global acial cetre has bee primarily due to the idustry s itegratio across borders. Whe the UK leaves the EU, large volumes of cross-border trade i bakig ad capital markets services betwee Britai ad the bloc will be categorized uder iteratioal trade, rather tha iteral ecoomic activity withi the Sigle Market. Britai s ew status as a third coutry will therefore have farreachig cosequeces. Achievig a effective post-brexit arragemet for acial services will be importat to Europe too. The UK accouts for 41% of isurace/reisurace, 26% of asset maagemet, ad

3 24% of the bakig market. This domiace might yet reiforce the City of Lodo as the cetre for o-eu markets. Over time, it ca itroduce ew regulatios that facilitates the establishmet of acial services from Asia ad o-eu Europea coutries. Esurig Ope Access Across the EU Preservig a high level of cross-border market access is a priority for the sector. This ca be achieved oly by reproducig elemets that work today i a future bilateral free trade agreemet (FTA) betwee Britai ad the EU. This will apply to: EU istitutios established i the UK No-EU istitutios whose UK presece was the basis of their expasio ito the EU UK istitutios that operate i the EU Although trade i acial services has, i the past, rarely bee covered by FTAs, the importace to both ecoomies of a dyamic, global acial services idustry should led itself a reewed focus durig the upcomig talks. UK Fiace is callig for a framework for trade i bakig ad capital markets services based o mutual recogitio, whereby both sides alig their regulatory practices ad cooperate closely o regulatio ad supervisio. Without such a agreemet that is based o cooperatio, UKbased acial services compaies could, at worst, be required to esure compliace with EU rules from their EU base. It is iterestig to ote that the aoucemets of trasfers of activities to Dubli, Frakfurt, Paris, ad Amsterdam remai limited i scope ad staff trasfer. Whatever the outcome, the UK ad the EU will eed to esure that acial services rms have suf ciet time to trasitio to these ew arragemets. The complexity of both global compliace ad systems chages i large orgaizatios will require time to avigate, ad the 19-moth period proposed to trasitio from the Sigle Market is ulikely to be eough for this idustry.

4 Chalkig Out a Trasitio Roadmap Negotiatios betwee the UK ad the EU are ogoig, ad there is a wide rage of outcomes that could affect UK-based, EU-based, ad iteratioally-based busiesses i a umber of ways (see Table 1). Busiess Locatio UK Europe Rest of the World UK No Chage Providig services to the EU will be impacted if the UK losses its curret Europea Ecoomic Area (EEA) status. Cosequetly, possible market access optios could be: Ÿ Need to seek authorizatio as per third-coutry equivalece regime uder various regulatios Providig services to RoW coutries will be impacted as UK eeds to egotiate 100+ bilateral agreemets with early 60 o-eu coutries. Presetly there are covered uder Free Trade Agreemet with EU. Home Coutry or Ÿ Set up subsidiaries i EU ad obtai permissible passportig rights for coutries withi EU Europe Providig services to the UK will be impacted ad subject to the al Brexit agreemet. No Chage No Chage Rest of the World Service ad market access to be determied as per fresh bilateral agreemet betwee RoW coutries with UK No Chage No Chage Table 1: Outcomes for Fiacial Services Firms based o Locatio With the al Brexit deal some time away, it is dif cult for rms to make a detailed pla to hadle the differet trasitio scearios. However, ow is the time for rms to start outliig their core operatig models for the post-brexit era.

5 For the acial services rms workig from the UK as their mai Europea base, there are six key risks to address as part of the cotigecy plaig: Potetial loss of passportig ad licesig requiremets for EU market access Likely fragmetatio of existig UK busiess ad operatios Additioal regulatory compliace requiremets Icreased operatioal ad acial costs as well as trasitioal risks Immigratio rule ucertaity ad staf g costraits Ecoomic dowtur i the UK i the evet of o deal These risks will take time to mitigate ad pla for, so preparatory work should begi ow if it is ot already uderway. Preparig for Reform Post Brexit As acial services regulatios become more complex coupled with other issues aroud data, itellectual property (IP), ad employmet laws the UK govermet must resolve a rage of issues before Brexit takes effect. There are also some key aspects of the EU law where the UK might choose to diverge from curret stadards makig it more attractive for ivestmet, or harder to do busiess from the EU. The UK Parliamet is curretly cosiderig a Bill that would traspose all existig EU legislatio ito UK law after Brexit, esurig cotiuity of legal treatmet. Some of the issues up for discussio about reform after Brexit iclude: Data protectio: The GDPR will apply by May 25, 2018, leavig the UK with two choices. Either it must adhere to these regulatory chages over which it will have o i uece from outside the EU, or adopt UK-speci c laws. Accordig to the Iformatio Commissioer s Of ce (ICO), the UK s ew data protectio rules largely trasposes Geeral Data Protectio Regulatio (GDPR) ito its law ad will apply post Brexit. Data protectio, distributio, ad techology will be at the cetre of this egotiatio.

6 Itellectual property: The EU has a sigle IP law, which the UK could choose to diverge from after Brexit. However, a hard Brexit might lead to the UK s removal from the protectio of this law if there is a risk of rights-holders beig deprived of protectio uder diverget UK laws. A clear agreemet eeds to be i place for IP liceses ad IP agreemets, as they are territorially operated i the Europea Ecoomic Area (EEA) as this could affect the scope of cotracts ad rights. Ledig restructurig ad commercial cotract terms: The EU rules o material adverse chages, the locatio of paymet systems, illegality provisios i cotracts, ad isolvecy have bee the subject of political debate i the UK. There are suggestios that this could lead to regulatory divergece after Brexit. Ati-trust: The UK Competitio Act 1998 ad Eterprise Act 2002 closely alig with existig EU regulatios, but ay chages to these after Brexit could lead to divergece. The UK is ulikely to de e ati-trust as EU-wide, but restrict it withi itself. O merger rules, UK-acquired turover might ot cout towards the EU s regulatio thresholds. All deals ivolvig the UK would eed to be assessed uder a ew atioal mergers regime, broadly impactig other relevat acquisitios. Ay ew UK rules o eforcig M&A could also result i divergece. However, for acial services istitutios that operate both i the EU ad UK, the EU will remai competet for the approval of mergers that impact the competitio across their ow markets. Tax: While direct taxatio is a member state competece ad ot EU policy, tax laws must comply with certai basic priciples of EU law. The UK govermet could choose to sigi catly chage its tax rules for example, aroud corporatio tax i order to make the UK a more attractive place to ivest. But this could lead to the itroductio of tariff or o-tariff barriers as retaliatory measures i the evet of divergece.

7 What Lies Ahead for Fiacial Services Firms Despite the cotiued ucertaity, which is likely to persist util the egotiatios betwee the UK ad Brussels have cocluded, acial services rms should start puttig a pla i place for Day 1, coverig key elemets of their operatig model ad ifrastructure (Figure 1). Trasitio Plaig Imperitives Locatio Suitability Aalysis Legal Structure Evaluatio Regulatory Compliace Assessmet Operatig Model ad IT Assessmet Fiacial Costs ad Risk Assessmet Workforce Realigmet Aalysis Ÿ Locatioal suitability: strategic customers proximity, regulatory ad political eviromet Ÿ Evaluatio of Sigle Hub or pa-europea set-up Ÿ Licesig approval/ authorizatio requiremets Ÿ Legal structure optimizatio ad group orgaizatio aligmet Ÿ Corporate Tax implicatios Ÿ Third party cotractual legal agreemet review ad egotiatios Ÿ Passportig ad Equivalece coditios Ÿ Dual/multi jurisdictio regulatory compliace/ reportig requiremets from survivig regulatios Ÿ Evaluatio of optimal Hub/Distributed Operatig Model Ÿ Eablig IT systems ifrastructure plaig Ÿ Eterprise Data ifrastructure, residecy ad segregatio plaig Ÿ Vedors ad Thirdparty providers arragemet Ÿ Additioal liquidity/cash maagemet requiremets Ÿ Forex/currecy rate volatility implicatios Ÿ Risk i ivestmet portfolio trasfer Ÿ Icreased operatioal costs Ÿ Requiremets of skilled ad specialized resources ad availability coditios Ÿ Staf g of operatios - employees/ cotractors uder ucertai immigratio rules Ÿ Relocatio/ iductio of staff for realiged model Figure 1: Plaig Imperatives for Fiacial Services The log ad ucertai egotiatio process provides a opportuity for rms to reassess their busiess architecture, operatig model, core process, ad uderlyig IT ifrastructure. Achievig the much-eed cosolidatio ad optimisatio of operatioal process ad IT platforms ad a overhaul of busiess architecture with a customer-cetric desig would be helpful i this challegig period for busiesses. Refereces [1] Of ce for Natioal Statistics, accessed March 22, 2018,

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