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Tuesday 12 December 2017

BREAKING NEWS

BREXIT CONTINGENCY PLANNING: Wheels in motion

Written by Graham Buck
September 2017

As the UK’s March 2019 departure from the European Union nears, companies’ questions on the shape of the post-Brexit business world are slowly getting answers. Graham Buck reports on the key developments and emerging reactions

A slow moving machine, putting together details of the new post-Brexit trading environment in which businesses will operate is a painstaking process. The UK’s exit from the European Union is scheduled for March 2019, and a few cogs are beginning to turn.
Brexit contingency planning is starting to happen – albeit in small numbers. An Institute of Directors (IoD) poll of nearly 1,000 UK business leaders found that 57 per cent had drawn up a plan but only 11 per cent had begun implementation, with many firms adopting a ‘wait and see’ approach until negotiations on the UK’s future relationship with the EU were more advanced. However, the poll also showed one in three businesses stating that they did not expect to undertake any Brexit contingency planning.

“Uncertainty over the UK’s future trading status with the EU continues to rank among companies’ top concerns,” said the IoD’s director general, Stephen Martin. “While businesses are preparing for Brexit, most have not made any concrete changes yet, so there is still a window of opportunity for the government to convince them to hold off triggering contingency plans.”

Yet is procrastination a sensible policy? The Business Continuity Institute promotes the message that all organisations should be prepared for any potential disruption that may come their way – including Brexit.

It says businesses should conduct a business impact analysis to see how Brexit could have an impact on various aspects of their organisation, whether it is their supply chain, their staffing arrangements, their governance and other factors and then consider what arrangements they should put in place to continue operating as normal as possible throughout that disruption.

Yet the task wasn’t helped by the summer’s snap election called by Prime Minister Theresa May and the unexpected rebuff that voters delivered to her administration. Instead of the promised ‘strong and stable’ government, ministers seemed more divided than ever over the summer.

A belated response

The post-election period has offered tentative signs that the message is finally being heeded by Westminster. The government’s recent publication of a position paper on goods on the market on point of EU exit was welcomed by the Food and Drink Federation (FDF), representative body for what is still the UK’s biggest manufacturing sector with four million employees.

FDF director general, Ian Wright, emphasised Europe’s position as “an essential market” for exports by its member companies and expressed relief that ministers recognised the challenges faced by the food and drink sector and were considering how to mitigate against a ‘worst case’ scenario. At the same time, it urged them “to secure a transition deal swiftly to protect consumer choice and to prevent any necessary disruption”.

Many of the Federation’s concerns are revealed in a just-published survey from trade bodies across the sector’s supply chain; above all its need for reassurance on the future employment of EU workers post-Brexit. “EU nationals number two million across the UK economy, with 20 per cent of these workers employed across the food and drink supply chain,” noted the FSB.

The survey found that 47 per cent of the businesses surveyed reported that EU nationals working in the UK were considering leaving due to uncertainty over their future. A small number feared they would become unviable if they no longer had access to these particular workers.

The survey’s publication date coincided with the release of figures indicating a “Brexodus” of EU workers from the UK; net migration falling by 81,000 to 246,000 in the year to March 2017. Matthew Percival, head of employment for the Confederation of British Industry (CBI) expressed alarm at the data and emphasised the “crucial contribution” of EU nationals to economic growth and job creation.

The government since confirmed that the free movement of people between the EU and the UK won’t be extended beyond March 2019, which will require EU workers moving to the UK to register until a permanent post-Brexit immigration policy is introduced. Home secretary Amber Rudd has reassured UK companies employing foreign workers that there will be no ‘cliff edge’ and assessment will reflect analysis of the costs and benefits.

Meanwhile, the fall in the value of sterling since June 2016 has boosted sales for major UK corporates and exporters. The pound’s descent against the euro brings parity between the two currencies ever closer.

Associated British Foods (ABF), owner of brands such as Primark and Ovaltine as well as the Primark budget fashion chain, derives two thirds of its revenue and profits from outside the UK. ABF’s chief executive, George Weston, spoke after the EU referendum result of the “mixed opportunities and threats” that it presented, in July ABF reported quarterly sales 20 per cent higher than a year earlier and added that without the benefit of a weaker pound, the rise would have been 13 per cent.

Perhaps the highest-profile of the sector’s pro-Brexiteers is Tim Martin, chairman of the JD Wetherspoon bars chain, who maintains that the UK should declare a readiness to walk away from a deal with the EU and instead trade under World Trade Organisation (WTO) terms.

Priorities and challenges

The retail industry’s representative body, the British Retail Consortium (BRC) has also been swift in its response to government position papers on Brexit.

In April, the Consortium published its ‘Brexit tariff roadmap’ for the next government, outlining resultant short-term risks and longer-term opportunities for UK retailers and consumers. BRC chief executive Helen Dickinson singled out as a priority preserving tariff-free trade between the UK and the EU to prevent food prices spiking, followed by the need to replicate the EU’s existing deals with developing countries. “Only then, should the government look to realise the opportunities presented by new trading relationships with the rest of the world,” she added. The BRC’s follow-up ‘Customs roadmap’ was scheduled for publication late August.

In the financial services sector, the recent focus has been on banks and insurers announcing the chosen location for their post-Brexit EU hub. Given its past opposition to the Solvency II capital adequacy regime, which emanated from Brussels, it is perhaps ironic that Lloyd’s of London has chosen the city for setting up a subsidiary office in January 2019.

Less publicised has been the recent pronouncements from sector watchdog the Financial Conduct Authority (FCA), which in May contacted the UK’s major asset managers to query their Brexit contingency plans. A letter from the FCA comprised 30 questions on how their business models would be affected and included whether there were plans to transfer operations or staff away from the UK, how any Brexit contingency plans would impact on their capital base or IT systems, and whether they have submitted applications to other national regulators for new licences.

Scrutiny hasn’t come only from the FCA. The European Securities and Markets Authority (ESMA) has already issued guidance on ‘delegation’, or the practice of a manager in one country overseeing assets in another. ESMA’s aim is to nip in the bud any plans for London-based firms to set up an ‘empty shell’ company in an EU location, without transferring to it a substantial proportion of their operations and workforce.

Meanwhile, the potential loss of EU passporting rights for UK private equity and venture capital industries post-Brexit threatens to cut off a source of financing for small and medium-sized enterprises, the Federation of Small Businesses (FSB) has warned. FSB chairman Mike Cherry has said that maintaining passporting rights for firms in both sectors is an essential part of any transitional arrangement and wants the British Business Bank, the economic development bank launched by the government four years ago, to step up its support.

As he notes: “If we want to see a step change in productivity post-Brexit, ensuring small businesses can access long-term finance at the right time in their lifecycles will be critical.”


This article was published in the September 2017 issue of CIR Magazine.

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