Will the EU gamble pay off for UK businesses?
What will the immediate and long-term effects of Brexit be? And how can businesses plan ahead with so many imponderables?
With - at the time of writing - no date even for negotiations to commence, the shock of the referendum result in June has been followed by a prolonged period in which events are moving far more slowly.
Following the referendum, sterling underwent a severe and sudden devaluation, and the impact was felt in other ways, with the withdrawal, for example, of £2.8bn from UK equity funds and £1.4bn from property funds.
Leaving the EU is likely to bring about profound changes for business and for society as a whole. For now, however, the short-term challenge for business is simply uncertainty.
Jim Pettigrew CA, former ICAS President and Chairman of Clydesdale Bank and Scottish Financial Enterprise, has more than 30 years’ experience as a chartered accountant. He previously identified 'three phases of Brexit'.
The first 'acute' stage was what happened straight after the referendum result, with its immediate effect on sterling and on investor confidence.
We are now entering the second, medium-term phase of uncertainty. Jim said: “We don’t know when Article 50 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.”
During this phase, he believes, we can expect to see signs of a slowdown in the economy with investment decisions being cancelled or delayed.
“The final, third phase is the long term,” he added. “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.”
We asked CAs in senior positions in industry how the road to Brexit is affecting their organisations.
Nigel Stein CA is Chief Executive at GKN, a UK-based leading engineering and manufacturing business, employing 55,000 people in more than 30 countries.
He commented: “The devaluation of sterling will clearly help our reported results, although the expectation of lower interest rates has added to our pension deficit.
“Having said that, we do not see Brexit as good for the UK automotive and aerospace industries in the long run as the uncertainty it brings will be an added burden for the UK in the fiercely competitive race for foreign investment.
“The priorities of the UK government should be to keep the UK in the single market to as great an extent as possible; and also to protect the free movement of skilled people, to as great an extent as possible.
“The UK needs no additional handicaps in this fiercely competitive world, but we just have to make the most of it.”
Sally Brooks CA is Finance Director at Cobham Antenna Systems, a high-tech business based in Buckinghamshire and Texas.
Despite a boost to export earnings, she still has concerns.
She warned: “In the longer term, I am concerned about a potential weakening of our position as a largely UK-based manufacturing and engineering company, particularly on the military side of our business.
“I am also concerned about the UK’s attractiveness for foreign investment going forward and our ability to attract and retain leading edge technology and research funding.”
Control over migration was a key issue in the referendum campaign, with free movement of labour likely to be curtailed. Stuart Purves CA, an FD in the construction industry, believes that would hurt his sector.
He said: “We need free movement of labour, or nothing will get built. We have a chronic skills shortage in the UK and not enough graduates doing engineering to possibly fill our requirements.
"We have a constant need to recruit as projects start and finish, so a ‘points-based system’ and all the inevitable bureaucracy that goes with it will be far too slow, and simply won’t cut it.”
Of course, industry is also facing up to existing challenges that are unconnected to Brexit.
Bill Main, Group Financial Director at Balmoral Group, made the point that, for his company: “The bigger and more pressing issue is the low oil price. Brexit is an added uncertainty that we could do without.”
He added, however, that as much of the company’s order book is in US dollars, the exchange rate represents a short-term bonus.
People and passports in the financial sector
The financial services sector is looking with particular interest at the possible outcomes of the Brexit process. Financial services, including banking, accounts for an important share of employment in the UK and an even more significant share of the government’s tax take.
Can the sector thrive outside the EU? Jim Pettigrew said: “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. The City of London should not be complacent, however.”
Bill Rattray CA, Finance Director with Aberdeen Asset Management, said his organisation has weathered the short-term effect of the Brexit vote.
“Our assets under management and client base are diversified globally and we are well positioned operationally, with well-established and substantial businesses both in the UK and Luxembourg.
“UK open-end property funds have been affected by increased investor concerns about the impact on property values, particularly in London. The sector was already experiencing some outflows following a period of good performance, and investor concerns on valuations increased after the referendum and were exacerbated by the decision of a number of competitor funds to suspend dealing.
"However, the Aberdeen UK Property Fund was well positioned ahead of the referendum, with a high level of cash and we have continued to offer investors liquidity in the form of daily dealing.”
Bill believes that, from the point of view of the financial services sector, the UK government should prioritise objectives such as retaining existing passport rights, ensuring there are measures in place for EU citizens already living and working in the UK to continue to do so, and the same for British citizens in Europe.
Being the financial capital of Europe and the world’s leading international financial centre, without any say over how we are regulated, would cause major problems in the future.
Jim Coyle CA, non-executive Director of HSBC, also believes the global reach of one of the world’s largest banks, will stand it in good stead. He said: “HSBC is well capitalised and very international. It may be an opportunity for us - we will be prepared to lend while others may be less so.”
Passporting, another issue, not only does it make it easier for UK institutions to operate throughout Europe but also makes the UK an attractive location for non-EU institutions to base their European subsidiaries.
Anthony Browne, CEO of the British Bankers’ Association, said: “We are not calling for membership of the single market; what we want is full two-way access to EU markets.
"The so-called ‘Norway option’ of being in the European Economic Area would provide greatest continuity for banks and their customers, because basically the current passporting regime would continue to apply.
“However, as well as the wider political problems of retaining membership of the single market, it would mean the UK would have to accept financial services regulation that it has no control or influence over.
"Being the financial capital of Europe and the world’s leading international financial centre, without any say over how we are regulated, would cause major problems in the future, and could be a threat to financial stability.”
Recently the European Securities and Markets Authority decided to extend passporting rights to asset managers in nine non-EU jurisdictions, from Jersey and Guernsey to Singapore and the US. That could imply that where the local regulatory regime is deemed to be equivalent to that of the single market, passporting may be an option across a wider range of financial services.
Even so, a report published by PwC ahead of the referendum predicted that the UK financial sector’s contribution to the economy could be up to 9.5% less by 2020 than if the UK remained a member of the EU.
Advice for practice
For CAs in practice, the effects of Brexit are likely to be mixed. The large firms have appointed their own experts, and can look forward to a slew of assignments helping clients, including the UK Government.
The future of the EU’s audit market reforms is also now in question. The UK’s own regulators have been in favour of greater competition and more frequent retendering for audits of 'public interest' companies, but other measures such as mandatory rotation have been less popular.
Karen Briggs, Head of Brexit at KPMG, said: “Our advice to clients is to be very practical about it.
"KPMG advises that you should look at your Brexit planning in three timescales, the ‘2:2:2 model’. That’s two weeks, two months and two years, the latter being the time allowed for negotiations once Article 50 is triggered.”
Karen suggested creating a risk and opportunity 'heat map' to look at how changing rules on the movement of goods, services, capital and people might affect your business.
She added: “Look at the people working for you, the people you are hiring and at your supply chain.
"The performance of sterling in the currency markets will also have implications for imports and exports, and will provide opportunities for investment.”
She also argued that different businesses in the same sector need to develop a collective view if possible.
Many businesses were caught out by the referendum result, which the pollsters and markets had not predicted. Karen believes that attempting to call the result of complex processes is probably not helpful.
Instead, she said: “It’s better to focus on facts rather than speculation and to carry out scenario planning, looking at how the different possible outcomes might affect your business.”
The ICAS response
Mike McKeon CA is Chair of the ICAS Business Policy Committee and of the new Brexit Advisory Group, which is set to hold its first meeting early this month.
He stressed: “We are looking for opportunities as well as threats. This is not just about the negatives.”
The Advisory Group’s work programme is still to be determined but Mike believes it should not only have a role in helping to formulate the stance of ICAS, but also in providing practical help to our members and the government, as ministers and civil servants take on the huge task of negotiating the UK’s future position in the world.
He pointed out: “Leading up to the referendum, there did not appear to be a worked-through Plan B. It is, however, now clear that the process of negotiating Brexit is going to be challenging, long and costly; for example, more than 50 trade agreements between the EU and other countries will have to be replicated for the UK.
"The UK also has to find a way to carry on trading with the EU - and that works both ways, because they need to be able to trade with us.”
In the meantime, however, uncertainty is damaging business confidence. Mike added: “Businesses are being cautious, which is understandable but not good, because it means delaying investment decisions and hiring.”
ICAS is in a great position to provide practical help and expertise in fields such as taxation, pensions and financial services.
Mike said: “We have to move reasonably quickly, but we have to be timely and relevant. We are aiming to bring together the best people that we can to help bring this about.
“I am confident that the UK will land somewhere around the right place. The UK will likely be in a unique position in terms of its relationships with the EU - close but not ‘in’ - and we have to recognise we will probably not get all of the things we want.
"My personal expectation is that it could take five, maybe even 10, years for all this to pan out. So the work starts now.”
The full version of this article appears in the September 2016 edition of CA magazine.