FEATURE: BREXIT -- Redrawing the lines

Amid ongoing uncertainty following the Brexit vote, how should UK businesses begin to review the potential impact on trade and regulatory risks? David Adams investigates

Entrepreneurs running start-ups might enjoy encountering the unexpected, but most business leaders crave economic and political stability. This year has not offered very much of either. Businesses could be forgiven for feeling as if they are adrift amid huge ocean swells, unsure as to which way to swim, or what lies over the next great wave rolling towards them. Yet somehow they must try to assess how Brexit will affect their operations and strategy, including how it could alter the operational, financial and regulatory risks they face.

The greatest problem at the time of writing is that although Prime Minister Theresa May has declared that “Brexit means Brexit”, no-one yet really knows what else Brexit means. Might we have some kind of ‘soft Brexit’ deal that still allows access to the EU single market, despite the political difficulty of retaining free movement of labour? Or a blank slate and new trade deals with countries across the globe? Whatever happens, the process is likely to take at least five years.

The good news is that the deep recession that some predicted would follow the vote to Leave in June’s Referendum does not seem to have materialised. Some observers suggest that a relatively positive economic performance of the UK economy in July was due in part to the falling pound boosting exports and to efforts by the Treasury and the Bank of England to steady the ship. The economic data remains ambiguous.

Amid this uncertainty, how should UK businesses begin to review the potential impact of Brexit on trade and regulatory risks? Rick Cudworth is a partner at Deloitte and head of the company’s Brexit Centre, which is supporting and advising clients from all industries on planning and operations during the Brexit period. Deloitte has created a risk value map to help, focusing on four key areas: movement of people, restrictions to market access, costs of market access and market opportunities.

Risks relating to movement of people include issues around residency and working rights for existing and potential employees. Some sectors could be affected much more than others because they tend to have a more international workforce: financial services and life sciences, for example, suggests Cudworth.

Questions around restrictions to market access relate in part to regulatory issues. Deloitte is also advising clients to consider the potential impact of additional costs to market access even if it is possible, such as increased tariffs or more stringent border check processes.

In August a survey run by the Institute of Export (IOE) highlighted exporters’ biggest fears about Brexit. They included increased tax and duty costs, exchange rate issues and overseas suppliers developing a more negative view of the UK. Many respondents expressed a hope that any deal on Brexit would either retain or streamline current export controls and licensing processes, with SME exporters particularly concerned over the possibility of increased administration costs.

Exporters may also need to review marine and air cargo, professional and product liability risks, depending on individual circumstances, suggests IOE director general Lesley Batchelor. She also highlights the issue of managing credit insurance effectively while currencies are in flux and imported raw materials are expensive because of the weak pound.

It is also certainly the case that any exporter will need to keep a close eye on how the Brexit process affects supply chain risks: in relation to the potential impact in the longer term of changes in bureaucratic arrangements in ports, for example. Batchelor believes exporters will have to become “more self-reliant”: those outsourcing paperwork and logistics functions should review service level agreements to ensure they reflect changing circumstances.

Anne Keogh, head of external relations at Siemens, which campaigned for Brexit but has made a public commitment to its investments in the UK, says it is extremely difficult to predict what impact Brexit might have on operational and regulatory risks. However, she adds, a ‘soft’ Brexit with continued access to the Single Market would lessen the impact significantly for companies like Siemens.

Clearly, Brexit will affect some sectors more than others. In August the Financial Times reported that key figures in the City of London were now resigned to the impossibility of retaining full access to the Single Market. They now plan to meet the government in September to set out proposals for a “bespoke” deal, possibly resembling in some respects the arrangement FS companies in Switzerland have with the EU.

But such a deal would probably not include a passporting arrangement to allow London-based banks and other businesses to do business across the EU. Without passporting it is possible that a significant number of FS jobs in London may be moved to other financial centres in the EU, such as Paris, Frankfurt, or Dublin.

Five out of the 20 largest global investment banks have cited passporting as a crucial factor in decision-making about the scale of their presence in the UK, according to the EY Brexit Tracker, which tracks public statements made by 232 of the largest financial services companies with significant UK operations. If there is indeed an outflow of financial services jobs this will increase risks of many different types for many other UK companies.

More reassuringly, the EY Tracker also shows that over 40 per cent of the largest insurance companies in the UK have stated that the Brexit vote will not have a material impact on their businesses and over 10 per cent of insurers have identified potential opportunities. Only 16 per cent have expressed concerns over potential negative impacts.

Organisations in most sectors might be wise to work on the basis that if Brexit is indeed set to be a long term process and they intend to continue trading within the EU, they will probably need to continue to work within regulatory constraints set by the EU.

For example, any organisation that handles personal data should still be working towards compliance with the EU’s General Data Protection Regulation (GDPR), which comes into force in May 2018. As GDPR is a Regulation, not a Directive, all EU Member States (almost certainly still including the UK in May 2018) will automatically adopt its terms in national law without needing to pass new legislation. Even after the UK has left the EU, non-EU businesses will still subject to GDPR if they offer goods or services to individuals based in the EU.

A similar pattern could well be repeated in relation to many other existing and pending EU regulations. “After 40 years of EU membership UK law is inextricably interwoven with EU law, on topics ranging from company to employment law,” says Keogh. “Much of this is likely to be carried over – it would be very challenging for the UK to begin a wholesale rewrite of swathes of law.”

Nonetheless, she suggests, it is possible the UK might have to begin such a process at some stage. “This is something that companies need to be aware of and be prepared to adjust for”.

Meanwhile, Cudworth points out that if UK and EU regulatory regimes eventually diverge this could lead to further restrictions on the participation of UK businesses in trade with customers and business partners in the EU.

Overall, says Cudworth, although no-one knows what Brexit will eventually mean, organisations would be well-advised to plan for ‘most change’ scenarios. But business should also be considering potential business opportunities, and opportunities to improve operational effectiveness, including through improved risk management.

Businesses considering moving some or all of their operations to another EU Member State should begin planning for this scenario and management of related risks now, says Cudworth. Such a move could offer an opportunity to change operations more fundamentally by investing in new processes or technologies.

On the other hand, UK companies should also be investigating risks that could be associated with doing business in those countries outside the EU with which the UK is most likely to seek trade deals post-Brexit, including India, China, Australia, Canada and Japan.

With sensible planning, says Cudworth, there is no reason why UK businesses can’t enjoy a prosperous future. “There’s uncertainty, but we can’t let that block decisions and investments going forward,” he says. “The sooner organisations understand the issues and have a timeline in place to manage change, the better.”

This article was published in the September 2016 issue of CIR Magazine.

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