On 23rd June 2016 a referendum majority in the UK of 51.9 : 48.1 voted to leave the European Union (EU). Immediately after the result, Prime Minister David Cameron, who had led the “Remain” campaign, resigned. His successor, Theresa May had also been on the ‘Remain’ side, but without actively campaigning, has shown a determination to deliver the referendum result.
Under Article 50 of the Treaty of Lisbon, 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. The UK gave formal notice to leave in March 2017, and negotiations are to start later in the year. Unless the time is extended, the UK will leave the EU on Friday 29th March 2019.
The UK wants to progress trade negotiations alongside negotiations on the terms for leaving. The EU however has indicated that it will not discuss the future relationship until the principal terms for exit have been agreed, particularly about the rights on EU citizens in the UK (and UK citizens in the EU), ), the status of the border with the Irish Republic, and the payment of the UK’s financial obligations to the EU. Whereas the UK is looking to show the success it can make of Brexit, it is in the EU’s interest to show that leaving the ‘club’ is disruptive, unwelcome and bears a heavy cost.
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 in fact less than the EU. The EU comprises fewer countries in number than the European Economic Area, which also include Norway, Iceland and Liechtenstein, members of the European Free Trade Association; and greater in number than the Eurozone – those countries which use the Euro as their currency.
Talk around the UK remaining part of the Customs Union or the Single Market was ruled out on 17th January 2017 by Mrs May, meaning that the UK will pursue a policy which had been described as a “Hard Brexit” – full separation from EU institutions. The UK will therefore look to make its own trade treaties both with the EU and other trading partners. The EU will not engage in those negotiations until its preconditions are met, and the UK cannot enter into negotiations with other countries whilst still a member of the EU.
The UK government called a general election in April 2017, due to be held on 8th June, seeking to strengthen its domestic support for its stance. This does not affect the negotiating position of the EU which was endorsed by the remaining 27 states at the end of April.
What does Brexit not mean?
“Brexit” is sometimes lumped together with the protectionism of Donald Trump in the USA. 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. It 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.
For the EU, there is a desire not to make the Brexit path easy for the UK; however the EU and British economies are closely bound up, and it is likely that there will be a mutual reluctance to cause potentially mutual damage. For the UK, the EU market of 500 million people will be unavoidable; for the countries of the EU, the UK remains a big and economically vigorous market, with some 64 million people, and some very specific strengths including those in technology, learning, financial services and in the English language.
Brexit does not therefore mean an end to economic relationship 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 – and not just London, but other cities including Edinburgh, Leeds, Manchester and Birmingham – has been long held the pre-eminent financial centre of the EU. The sector provides 300,000 jobs in the City of London, and around a million in the wider economy. Many of the people in those industries are EU nationals but not UK nationals; London has become a hugely cosmopolitan city. The City of London is not just the biggest financial centre in Europe; it is bigger than the whole of the rest of Europe, and with other cities competing to attract some of its business, it is unlikely that its pre-eminence will be affected. Some jobs will be lost, and UK headquartered banks have made plans to establish or use existing offices in different European centres to allow them to continue to provide financial services without the “passporting” rights which EU membership provided. It is not known whether these rights will be preserved after exit negotiations.
There are a number of issues here, some of which are these:
Freedom of movement – an essential component of the single market is freedom of movement for EU citizens. The UK 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, responses from countries to whom the UK has made overtures about future trade deals have those countries focussing on ease of movement for workers as an important component for trade deals. The UK cannot allow itself to close its borders.
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 will be in force before Brexit happens; we regard it as highly unlikely that the UK will adopt lower standards which therefore drive business away. Financial Institutions will need establishments in the EU where they do not already have these, but indications are that these will be specific to EU needs rather than wholesale moves, and that the central offices will remain in London. We can expect very major efforts by the UK government – freed also from restrictions on state aid – to support the sector.
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. To date, stock markets have remained strong. Impending Brexit is only one of very many factors which might impact currencies, not only the pound, but also other currencies in relation to the pound, and other currencies in relation to each other. Currency values are going to be important to watch; but the fluctuation could be in a number of directions and a far wider range of reasons than Brexit. The world impact of President Trump on the USA and the world remains uncertain. There are important elections in 2017 in Europe. The Euro has its own issues which could lead to instability from factors including the performance of member countries and election outcomes. the sector.
Technology Sector - since the Brexit vote, and in spite of the understandable misgivings ahead of the vote by the technology community, some of the 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 thrive in a post Brexit UK.
Intellectual Property (IP) – 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 institution. 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 (UPC) 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 (CJEU), something the Unified Patent Court Agreement (UPCA) 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 (GDPR) 2016, which replace the Data Protection Directive of 1995, will be effective from May 2018, and the government have 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, from 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. We think that it will be, because its incentive and those of its powerful businesses to make sure it does so is huge; and the potential downside is so drastic.
We sense that the expressed optimism of the UK government in its ability to negotiate a beneficial exit may be misplaced, and the UK will in the short and medium – and perhaps the long term, pay a substantial price for leaving the EU. The issues are far reaching and unpredictable, and the reduction of the referendum to a number of slogans may not have reflected the complexity and uncertainty of the UK’s future outside the EU.
There will be levels of uncertainty during negotiations, and it is even possible that the UK will leave the EU without a trade deal. That is unlikely to be good for the UK, despite some politicians pretending otherwise.
However technology and finance are key industries for the UK, and not everything depends either on governments or EU membership. It can be expected that not just the UK government, but also business itself 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. The confidence of the technology sector is a positive signal in this regard.
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.