PIMFA
BREXIT: BREAKING UP IS HARD TO DO
PIMFA has followed the ongoing spate of conflicting and often contradictory political, economic, and technical statements on Brexit with interest, trepidation, and concern over what some have identified as the increasing possibility of a hard or a no deal Brexit and the abrupt change and disruption that could bring to business flows and relationships.
We believe this should be avoided.
We have long argued for a three-phase approach to Brexit negotiations and a one-step change to operating businesses in and from a non-EU member state. This means ensuring after formal exit from the EU (phase 1) a proper transitional period close to the current status quo and as near to two years’ duration as possible (phase 2), with the final, phase 3 post-transition EU/UK agreement being known as much as in advance as can be to give firms time and knowledge to adapt as required.
Despite all this, and the common thinking that PIMFA shares on these issues with many commercial businesses and other representational bodies, it appears that financial services, the UK’s largest industry, biggest taxpayer, major exporter and largest employer, is still having to fight on both sides of the Channel for recognition of its key role in the EU economic enterprise.
The main recent UK developments in the form of the Chequers Agreement, adopted by Cabinet but publicly rubbished by two of its members as they resigned, and the Government White Paper, promulgated as the solution to differences but unacceptable to EU negotiators, have perversely led to the prospect of No Deal being raised once again – far from the “principled and practical Brexit” with a new relationship with the EU which is “broader in scope than any other that exists between the EU and a third country” which they were supposed to presage.
More recently still, the proposals raised by ex-cabinet ministers for a second referendum have further muddied the waters. The much publicised Commons vote on the pro-EU rebels’ amendment to the Trade Bill which could have legally bound the UK to seeking a customs union with the EU went against by a mere 307 to 301 (assisted by the absence from the vote of the Liberal Democrat leader who would surely have been in favour). This showed pretty clearly that Parliament, far from being unified in an understanding of the national interest, is as divided as the country with MPs intent on fighting their respective corners. And in this torrid environment the prospect of a General Election is never far from certain commentators’ lips.
And for financial services the nub of the problem remains the question of how common regulation can apply if the UK is not in the single market. Without common regulation and the application to all 28 member states of the acquis of EU law, with its associated cross-border enforceability both for contract and against misdemeanour, how can services be applied across border without restriction or limitation, as now?
Politicians appear to have shown a marked and arguably regrettable disregard for the fact that 80% of the UK’s GDP lies in services, of which the financial services sector is the biggest and most rewarding to state coffers, and that services’ cross-border supply and overseas market access depends not on common tariffs but on common regulation. They have made a half-hearted stab at dealing with this with the vague ”enhanced equivalence” concepts in the White Paper, but there is a long way to go before these become a broad-based and enforceable framework for business operations.
And even if they do, the private investor and the firms that deal with him/her do not look like being included. All nations are jealous to protect their citizens, so in the dismantling of the systems for cross-border financial services access the first to go are the mechanisms that help firms to assist private clients in investing their money wisely and effectively. Conversely, in the replacement of those systems by some new device the individual and family, and the cross-border means to help them, are the last to be considered. Sometimes they never are.
So the result of all this is that whatever happens with Brexit, the part of the financial services industry most concerned with helping individuals and families, who are most likely to be adversely affected if the Brexit process goes wrong, is the one least likely to benefit from measures to mitigate any costs. There is nothing in the White Paper or any other proposals for handling the changes that Brexit will bring that helps professional work to alleviate stresses that may rise for private investors and their assets. And this is regardless of whether there is a deal or a no deal: apart from issues of timing, the two are much the same for the PIMFA community.
So the UK private client investment, brokerage and advice sector in financial services is going to have to develop new approaches all round to dealing with its EU business once we are out of the EU. This may even in some cases go so far as having to shed clients in other EU member states, including UK expatriates, and hand them to firms with bases already in the other EU 27 who can continue unaffected with business as before.
If UK firms do wish to access those clients they will have to develop new entities in other EU countries to do so. That will cost and the clients will have to pay – not a good start for new, globally competitive UK. Meanwhile access to products such as funds for retail investment, or to continental exchanges to trade EU equity, will also be more difficult; this will put new sand into the works and risk piling up the extra payments clients will have to make. Unsurprisingly, some firms and investors are thinking of shifting their operations and assets to other shores.
Taken with the reduction in the value of the £ and the associated lowering of the comparative value of individuals’ sterling assets, as well as other factors such as the relatively smaller UK economy (than it would otherwise have been) and (so the Bank of England tell us) lower household incomes, this seems to suggest that the risks and costs of Brexit have got well ahead of any potential gains. For PIMFA, it is very important for both the UK economy and individuals and families that the Government recognises this and ensures that measures are in the pipeline to compensate and rectify.
The Parliamentary 6 week Summer Recess is now upon us and, while this provides the opportunity for a short period of reflection, it leaves hardly any time for further debate before the European Special Summit of the full 28 EU members to discuss Brexit on 20 September, and the crucial European Council on 25/26 October when a decision will be taken on whether to send the Withdrawal Agreement (including the transition period) for ratification by the end of the Article 50 notification period (12 midnight CET on 29 March, 11.00 pm BST).
For the EU, Michel Barnier has ruled out the UK’s proposed customs arrangement as a means of resolving the Irish hard border issue, saying “The EU cannot — and the EU will not — delegate the application of its customs policy and rules, VAT and excise duty collection, to a non-member who would not be subject to the EU’s governance structures”.
Most recently, UK International Trade Minister Liam Fox warned Theresa May not to extend Brexit negotiations, claiming that doing so would amount to a “complete betrayal” of Brexit voters. This contrasts sharply with the received understanding from most of UK business.
Against this potentially gloomy and highly unsettling background, PIMFA urge that good sense prevails so that a solid consensus may be achieved on how best to take the UK out of the EU in a manner avoiding serious damage to the UK and EU economy, not to mention to the hopes and aspirations of the generations of families and individuals to come
