What does the leave vote mean for UK business?
Robert Outram speaks to CAs and other experts after the Brexit vote to find out what the UK's future outside of the EU means for business.
Clear answers and decisive action should be priorities for the Government, following victory for the Leave campaign in the referendum on the UK’s membership of the European Union.
That was the message from ICAS chief executive Anton Colella on the morning of 24 June, after the historic vote in which the UK electorate chose, by a narrow margin of 51.9 per cent to 48.1 per cent, to leave the EU.
Anton said: “The result will create a sense of shock in Britain’s boardrooms. But we must respect the democratic will of the British people.
“What we need now is for the Government to act swiftly and decisively to bring clarity to key questions for business which were never answered during the campaign. This will reduce uncertainty and help business leaders respond with plans for the future which lay out how best to proceed for the good of British jobs, British businesses and the British economy.”
ICAS set out 20 questions, ranging from what short-term measures are in place to minimise the initial shock to the markets, to the impact of “Brexit” on a broad sweep of government policies.
Accountants have a key role in supporting their business clients through these choppy waters...The robustness, resilience and competitiveness of the UK will stand us in good stead, but you can’t put building a strong, successful economy on hold while all this is being worked out.
- Sandy Manson CA
A few of those questions were quickly answered. On the morning after the referendum, Bank of England governor Mark Carney announced a series of measures, including the provision of an emergency facility of £250bn, to ensure the liquidity of the UK banking system, and said that additional action would be taken if necessary.
ICAS had also queried when we might expect an emergency Budget, referred to by the Chancellor of the Exchequer ahead of the referendum. We now know that this will not take place until the election of a new Conservative Party leader – and therefore a new prime minister. The Tory leadership contest is expected to be concluded in early September, and it would be up to the new PM, taking account of the state of the economy and public finances at that time, to decide whether an emergency Budget is required.
An 'extraordinary state of uncertainty'
In the meantime, UK political life is undergoing a “perfect storm” with questions over the country’s economic and social links with not only Europe but the rest of the world, a leadership contest under way in the governing party and turmoil in the official opposition. The referendum has also reawakened debate over the future of Scotland and Northern Ireland within the UK.
Keith Cochrane CA, chief executive at multinational engineering business Weir Group, had spoken out for Remain. Now, he tells The CA: “We need to work through the consequences as quickly as possible. I fully respect the Prime Minister’s decision to stand down but, for the interest of businesses across the UK, we must seek a consensus around what the settlement negotiated with the EU is going to look like.
“The environment for making investment decisions will be challenging, and we know we will be in an extraordinary state of uncertainty.”
He also believes that drawing up a vision for the UK’s future relationship with Europe is too important a matter to be left to the politicians alone: business, the academic world and society in general must also be represented in this process.
Sandy Manson CA, chief executive at accountancy firm Johnston Carmichael, comments: “The challenge for planning is: what will Leave look like? Politically, it’s a time for steadying nerves. We need to get to a deal that allows us as much freedom to trade as possible.
“Both Europe and Britain have a lot to lose. We will still continue to trade, but the question is what those links will look like.”
Sandy adds: “Accountants have a key role in supporting their business clients through these choppy waters. For us, the number one priority will be supporting our clients.
“The robustness, resilience and competitiveness of the UK will stand us in good stead, but you can’t put building a strong, successful economy on hold while all this is being worked out.”
Businesses will again have to think through the risks associated with independence, and perhaps the opportunities too.
- Michael Moore CA
What happens next?
Under article 50 of the Treaty of Lisbon, a member state wishing to withdraw from the EU must formally give notice of its intention to do so. Once this has happened, formal talks on the terms for withdrawal can commence, up to a maximum of two years (or longer, if the other member states agree to extend the deadline).
Neither the official Leave campaign nor David Cameron have indicated any enthusiasm for invoking article 50 immediately. The UK Government would rather start informal talks first, but the response from Brussels and the other member states suggests that there is no appetite for negotiation until the UK formally serves notice and the clock starts ticking.
The EU side of the negotiations lies in the hands of the Council of Ministers, so the UK will not be negotiating with “Brussels” but with 27 other member states, not all of which will have the same views or interests. It is also unclear whether the other member states will be prepared to discuss the details of a future trading relationship before the terms of the “divorce” have been agreed.
Meanwhile the UK remains a full member of the EU for now. In the short term, nothing has changed as regards the rights of UK and EU citizens, or as regards access to the single market for UK business.
The UK’s membership would effectively be terminated by Parliament repealing the 1972 European Communities Act. Under the UK’s (unwritten) constitution, Parliament is sovereign, so it would be technically feasible for a Remain majority of MPs to refuse to do so. In practice, this would be a highly controversial step, politically, although some are now calling for a second referendum once the terms of the exit deal are known.
What are the options?
Ian Stewart, Deloitte’s chief UK economist, says: “Nobody on the Leave side during the referendum campaign favoured protectionism of any kind. So the question is how can we retain access to the European market, while increasing our trade with the rest of the world?”
As Ian points out, the focus of the debate so far has been on tariffs on imported goods, which have fallen significantly worldwide over the past 25 years, but regulation and services – not currently part of the EU single market – are also key parts of the trade equation.
He notes: “The main obstacles are regulatory. To sell into the single market you have to comply with EU regulations, and deal with customs and paperwork, which can prove a logistical barrier.”
The EU already has a variety of different arrangements with non-member states, which could serve as a template for the UK’s future trading relationship with the EU.
Norway, for example, as part of the European Economic Area (EEA), has access to the single market without being an EU member state. Norway has opted out of EU agriculture and fisheries policies, but accepts most other regulations and directives, without having much opportunity to influence them. Further, Norway pays an amount to the EU broadly similar, per capita, to what the UK pays now, and accepts free movement of labour.
To follow the Norwegian route, the UK would need the agreement of the EU member states, and would first need to join the European Free Trade Association.
Switzerland is not part of the EEA, but it has a number of bilateral agreements with the EU and pays for that access. As Switzerland is not subject to the European Court, it has arguably retained sovereignty, but it has also had to accept free movement of labour. Swiss voters approved a proposal to cap EU migration, in 2014, but the view from Brussels is that this is not compatible with existing treaties, and the EU has already withdrawn co-operation on a number of projects by way of sanction.
Turkey is also not part of the EEA but is in the European Customs Union, which means that its exports to the EU – with some major exceptions, such as agriculture and services – are tariff-free. There is no right for workers to move between Turkey and the EU. Turkey must apply the same tariffs to trade with non-EU countries as the EU does, and is not entitled to negotiate its own trade deals. For this reason, this option would probably not appeal to the UK.
Canada’s recently negotiated trade deal with the EU addresses both tariffs and regulatory barriers, although the financial services sector is not covered by the agreement. It may be the most attractive model for committed Leave campaigners, but it took seven years to negotiate and the UK may or may not have that much time.
What if a bespoke trade deal cannot be negotiated before the UK leaves?
ICAS advises that: “It is in both parties’ interests, specifically with regards to key nations such as Germany, for a trade deal to be struck. If, however, a deal is not struck, then the UK would most likely apply the World Trade Organization agreements that the EU has in place with its other trading partners.”
Financial services is a key sector for the UK. Although there is no single market in services as such, “passporting” currently makes it much easier for financial institutions in one part of the EU to operate in other member states.
Jim Coyle CA, a board director with HSBC, stresses: “We would prefer to remain within the single market.”
A wide range of existing UK policies, from support for agriculture to immigration and employment rights, are derived from or influenced by EU regulations. While some of these could be affected by the terms agreed going forward with the EU, the UK Government would have more leeway to set its own policies and there are clearly many issues on which UK business is looking to see clarity from government as early as possible.
Brexit might also affect the way the UK adopts international financial reporting standards, ICAS says, with the possibility that new standards could be adopted directly by the UK’s Financial Reporting Council rather than via the EU – with potential European opt-outs – as at present.
UK constitutional issues?
Both Scotland and Northern Ireland (as well as London) voted Remain and there have been calls for further referendums on Scottish independence and on a united Ireland. Could Brexit also lead to the break-up of the UK as we know it?
Scotland’s first minister, Nicola Sturgeon, has already stated that “a second referendum [on Scottish independence] must be on the table, and is on the table”.
Christine O’Neill, a partner with leading law firm Brodies LLP, says that legal opinion is divided as to whether the Scottish Parliament has the power to call a second independence referendum unilaterally, but adds that whether the UK Government or Parliament would give or withhold its consent is a political question.
As she points out: “The complexities and uncertainties of the Brexit process could make a ‘snap’ referendum difficult, as there could be real uncertainty about what a vote either way might mean... clarity on the post-Brexit UK-EU relationship may be seen as central to properly understanding any independence proposal.”
Michael Moore CA, former secretary of state for Scotland and now an adviser to PwC, comments: “Businesses will again have to think through the risks associated with independence, and perhaps the opportunities too.”
While business people might be hoping for a period of calm after the events of the past few weeks, they will also be depending on more answers than the frenetic state of political activity has produced so far.