Founder of Berwins Solicitors and Head of Commercial and Digital, Paul Berwin, explores what Brexit means for doing business in the UK.
On 23rd June 2016 a referendum majority in the UK of 51.9 : 48.1 voted to leave the European Union. This followed a campaign with a great deal of bitterness and accusations of dishonesty, and in which a young Member of Parliament was tragically murdered whilst campaigning in her constituency by an extreme nationalist.
The vote was simply whether to leave or remain in the EU, and therefore whereas a vote to remain would have preserved EU membership, a vote to leave opened up a whole range of questions about what followed.
The Leave vote was unexpected and the main political parties were broadly in favour of remaining. The Leave campaigners were from different parties and viewpoints too, and therefore conflicting promises and suggestions were made. The most powerful “Leave” slogan was around “Taking back control”, which centred on the rights for the UK to make its own rules and laws, as well as to control its own borders – there were strong anti-immigrant sentiments at play.
The Leave vote was unexpected
Immediately after the result, Prime Minister David Cameron, who had backed the “Remain” campaign, resigned. His successor was Theresa May, who had also been on the Remain side, but without actively campaigning. For many months after the result, little information came from the government as to its direction on what “Leave” really meant. Theresa May famously stated “Brexit means Brexit”, but in itself, that told little.
Since the vote there have been court challenges around Brexit, but not around the outcome of the vote. The court cases are largely around the right of Parliament to vote on starting the exit process and the legislature of Scotland, in particular, whose people voted to remain, have deep concerns about England (the biggest, by far, of the four “united” nations of the UK) dragging it out of the EU.
Under Article 50 of the Treaty of Lisbon (2007), the desire to leave the EU has to be initiated by a country giving notice of its intention to leave, with the departure happening after two years. It is expected that the UK will serve notice in March 2017.
What does Brexit mean?
Strictly the only decision made by the referendum was to leave the EU and there are several layers of membership which amount to less than the full European Union. The EU is generally spoken of as meaning the same thing as the Customs Union or the Single Market, but those are both less than the EU, which in reality consists of fewer countries in number than the European Economic Area – which also includes Norway, Iceland and Liechtenstein – or members of the European Free Trade Association; while greater in number than the Eurozone – those countries which use the Euro as their currency.
Talk around the UK about remaining part of the Customs Union or the Single Market was ruled out on 17th January 2017 by Prime Minister May, meaning that the UK looks set to pursue a policy which had been described as a “Hard Brexit” – full separation from EU institutions. The UK will therefore make its own trade treaties both with the EU and other trading partners.
What does Brexit not mean?
“Brexit” is sometimes lumped together with the protectionism of President Donald Trump in the USA. In reality however it is very unlikely that this will be its direction.
The UK is a significant world economy, but by no means a dominant one like the USA. It cannot pretend to go its own way. Indeed the UK is, by tradition and by economic need, a trading nation, and the stimulus of Brexit, with the substantial danger of economic damage, seems likely to stimulate a need for very vigorous action by government and business to minimise the damage and make up for lost markets.
The UK is still a big and economically vigorous market, with 64 million people and specific strengths including technology and financial services
For the EU, there is a desire not to make the Brexit path easy for the UK; however both European and British economies are closely bound up, and it is likely that there will be reluctance on both sides to cause damage which could well be mutual. For the UK, the EU market of 500 million people will be unavoidable; for the countries of the EU, the UK is still a big and economically vigorous market, with a population of some 64 million, and some very specific strengths including those in technology, learning, financial services and indeed the English language.
Brexit does not therefore mean an end to economic relationships between the EU and the UK; but they will not be as members of the same economic organisations.
What is the likely impact for non-UK technology and FinTech businesses?
The UK has been the pre-eminent financial centre of the EU – not just something which extends to London, but also to other cities including Edinburgh, Leeds, Manchester and Birmingham. The sector provides 300,000 jobs in the City of London, and around a million in the wider economy and many of the people in those industries are EU nationals but not UK nationals; London has become a hugely cosmopolitan city.
For non-UK technology and FinTech businesses, there are a number of issues at play. These include:
Freedom of movement – an essential component of the Single Market is freedom of movement for EU citizens. A key motive for Brexit is to control borders and immigration, and therefore a Hard Brexit denies free movement as exists between EU members. However, the government is well aware of the extent to which the inflow of talent to the UK remains a benefit, and we would expect to see a work permit system operating reasonably liberally for skilled workers – of the sort that are needed in finance, technology and learning institutions. To do otherwise would cause damage which the government will need to avoid. Interestingly, initial responses from countries to whom the UK has made overtures about future trade deals have seen those countries focussing on ease of movement for workers as an important component for trade deals.
Currency volatility – the Bank of England moved decisively, and with some effect, to protect the pound after the Brexit vote by reducing interest rates and re-introducing quantitative easing – the repurchase of government stocks and corporate bonds, to increase liquidity. Nonetheless, and as widely anticipated, the pound has fluctuated and significantly reduced in value since the Brexit vote, and currency instability is a concern for industry. This is going to be an ongoing issue.
However, Brexit has not yet started, and it may well be that the likely effects of the process have now been factored in to currency valuations. Stock markets have remained strong and the impending withdrawal from the EU is only one of many factors which might impact currencies, both the pound and other currencies in relation to the pound, and other currencies in relation to each other. The world awaits the impact of President Trump on the USA and the global economy and there are important elections in 2017 – especially in Germany, France and Italy, all of which will have an impact. The Euro too has its own issues which could lead to instability from factors including the performance of member countries. Currency values are therefore going to be important to watch; but the fluctuation could be in a number of directions and for a far greater number of reasons than Brexit.
Financial services regulation and expertise – the UK will in all likelihood need to maintain the highest standards of regulation to maintain its financial services position. The MiFID 2 regulations which have been long delayed but are due to come into force before Brexit happens. We regard it as highly unlikely that the UK will adopt lower standards and risk driving business away.
Where they do not already have them, financial Institutions will need establishments in the EU, but indications are that these will be specific to EU needs rather than wholesale moves, and that the central offices will remain in the UK.
On 18th January, the day after Theresa May’s “Hard Brexit” announcement, the Chief Executive of HSBC Stuart Gulliver announced that 1,000 jobs would be relocated to the European mainland. He pointed out, however that his bank was in no rush and added: "Specifically what will happen is those activities covered specifically by European financial regulation will need to move, looking at our own numbers … That's about 20% of the revenue”; going further to say : "I don't see the foreign exchange market moving, the investment grade bond market moving, the equity market moving and the high-yield bond market moving." Paris, Frankfurt and Dublin would like and are already working hard to capture London’s market; but we can expect very major efforts by the UK government – freed from restrictions on state aid – to support the sector.
It is likely that the vigour of the technology sector means it can continue to thrive in a post Brexit UK
Technology Sector - since the Brexit referendum, and in spite of the understandable misgivings ahead of the vote by the technology community, some of major US software giants – including Google and Facebook – have announced substantial growth in their UK presence, building on the talent and enterprise they see in the UK. They will attract talent; but they will also spawn and develop talent. Although the technology sector was largely against Brexit, it seems likely that the vigour of the sector can continue to survive and strive in a post Brexit UK.
Intellectual Property – this is increasingly internationalised, and there would be a danger for the UK if it became cut off from the regimes of Europe in relation to community-wide institutions. Much of this remains to be played out, but an early signal was given in November 2016 when the UK announced that it would ratify the Unified Patent Court Agreement, a key step needed to bring the unitary patent and Unified Patent Court into being. This took many by surprise as it was expected that the vote to leave the EU meant that Britain wouldn't be able to accept the supremacy of Europe's top court, the Court of Justice of the European Union, something the Unified Patent Court Agreement requires. It appears that when key decisions need to be made, the UK will not wilfully damage its economic interests when it comes to IP.
Data Protection – the EU data protection regime is considered to be a global “gold standard”. The General Data Protection Regulations (2016), which replace the Data Protection Directive of 1995, will be effective from May 2018, and the government has said “We will be members of the EU in 2018 and therefore it would be expected and quite normal for us to opt into the GDPR and then look later at how best we might be able to help British business with data protection while maintaining high levels of protection for members of the public.” Where the shortcomings of other countries’ data protection regimes have created barriers to business with those countries – including the USA – it can be expected that the UK will strive to maintain the data protection gold standard to protect its businesses.
From what we can currently see, based on actions already taken, and from trends and perspectives which are now emerging, it is our view that the UK will remain a strong and effective economy, and a substantial one after leaving the EU. This is based, we believe around the fact that the incentive to make sure it does so is huge; and the potential downside is so drastic.
There will undoubtedly be levels of uncertainty during negotiations, but technology and finance are key industries for the UK and it can be expected that both the UK government and business will take effective steps and devote resources to endure the country remains a favourable environment for inward investment, development and labour within and to the UK. There will be changes to get used to, but some of those might be a lessening of bureaucratic obstacles.
Whether or not we would have chosen Brexit as our preferred route forward for the UK, from the point of view of inward investment, and the UK as a market and base for businesses, our expectation is that the UK will remain a good place to do business.