Jim Pettigrew on the three stages of Brexit

canary wharf brexit
By Jim Pettigrew CA and Robert Outram

30 August 2016

Immediate past president of ICAS Jim Pettigrew CA spoke to The CA magazine’s editor, Robert Outram, about the implications of the UK’s vote to leave the European Union.

What does the Leave vote mean for business?

The result of the referendum was quite a shock for many people. There are three phases to ‘Brexit’, the first of which we are just coming to the end of. 

The first phase is the ‘acute’ stage during which the markets – for example, the foreign exchange and stock markets – reacted to the referendum result. 

Uncertainty is not the friend of the markets, and it is not the friend of business generally.

We’ve now [at the end of July] seen the FTSE 100 slightly up on where it was before 23 June, while the FTSE 250 is still slightly down. The sterling exchange rate will, I believe, continue to be an issue into the second phase. 

This second phase, which we are now entering, represents the medium term. It is a period of uncertainty; for example, we don’t know when Article 50 [the process, under the Treaty of Lisbon, under which a member state gives formal notice of its intention to leave the EU] will be triggered or how long it will be before an exit package is agreed. The likelihood is that this could well be a lengthy process. 

Uncertainty is not the friend of the markets, and it is not the friend of business generally. 

Over the second phase, we can expect to see signs of a slowdown in the economic data coming out; some economists expect that we’ll see UK growth falling from around 2 per cent to 1 per cent. When people are uncertain, they tend to put off decisions and delay investment where there is discretion to do so, and this is likely to affect growth. 

The final phase is the long term and this will start once it is clear what our new relationship will be, with other European countries and with the rest of the world. What lies further out? There will be many opportunities in this phase, as well as many challenges. 

What might Brexit mean for Scotland? 

In Scotland, where there was a strong vote for Remain (62 per cent to 38 per cent), there is a question over what Scotland’s relationship with Europe might be, going forward and whether this will also affect Scotland’s relationship with the rest of the UK. 

The UK’s new Prime Minister, Theresa May, has said that she will not trigger Article 50 until there is an agreed UK approach and the objectives for negotiations are clear. That also implies that she does not want to go ahead until the Scottish element is resolved and it’s clear what the deal to the leave the EU might mean for the UK as a whole, including Scotland. 

Scottish businesses clearly wish to retain links with the rest of the EU – and with the rest of the world, and with the rest of the UK. 

What does it mean for the financial services sector? 

There will be opportunities for CAs, for example in managing interest rate risks and managing change. 

At a more detailed level there are questions over what will happen with “passporting”, under which financial institutions authorised in one member state of the European Economic Area are able to provide services to clients in other member states. You have to hope that this will be sorted out sensibly. 

Other European financial centres will be eyeing London’s role as a clearing house for trading in the euro, but London is in a great position for global financial trading. It is in a strategic time zone – between Asia and North America – and there is great infrastructure in London, for example in the professional services sector and the legal system. The City of London should not be complacent, however. 

What happens next? 

Right now we are in the holiday period. It will be interesting to see what people will do when they get back, in September and October, and what the economic statistics will be telling us at that time. 

The world was already complicated even before this, and the vote to leave the EU creates further complexity. The UK is now entering negotiations, not just with “Brussels”, but also with 27 other EU member states. 

It’s important to remember that, among the challenges, there are always opportunities.

Of course, we will need to understand what our trading relationship is going to be with Europe, but none of this prevents us from building relationships with other parts of the world now. 

It’s human nature that, where there is an element of uncertainty, people are wary of making decisions for the long-term. But businesses still need to be run. In the financial sector, businesses are looking for real efficiencies, and at how the implications of the revolution in digital technology might play out. Neither of those two issues is going to go away. 

What does business need to do, in the short-term? 

Business still has to go on. Companies will have to deal with market volatility, and that will be a challenge for CAs in treasury functions. They will need to be ready, for example, for further shifts in interest rates. In the UK it is expected that rates might fall to zero by the end this year. CAs should consider what the implications might be for your business?  

At the end of the day, whatever happens business must focus on growth. Ultimately it is growth that leads to the economic health of the country, and CAs, with their training and expertise, are well placed to help businesses achieve it. 

It’s important to remember that, among the challenges, there are always opportunities. 

Jim Pettigrew is Chairman of CYBG PLC, owner of Clydesdale Bank. He has more than 30 years’ experience as a chartered accountant and is immediate past president of ICAS. He is chairman of Scottish Financial Enterprise and a non-executive director of the Royal Bank of Canada.


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