Brexit, lessons, post-Brexit

Insights

The wise had already prepared for Brexit, but dealing with the aftermath of the UK’s decision is now a reality

It is important for Irish businesses to look quickly at the opportunities that arise from Brexit and take advantage of them.

With regards to the financial services industry, in particular, the opportunities may be offset by the negative implications for Ireland as a result of the landmark decision. But there are indeed some opportunities, and they must be seized.

We worked with many of our financial services clients who reviewed strategy fundamentally in the run up to the Brexit vote. What emerged was that no matter how the Brexit vote had gone, some FS companies recognised that they had to make some changes in their operating model.

The City of London is, and has been for many years, the number one FS location globally.  It is unlikely to lose that status overnight despite the outcome. In the EU its nearest rivals are Dublin, Luxembourg, Frankfurt and Paris.

What has emerged during corporate strategy reviews envisaging a post Brexit planning scenario is that some FS companies realised that while they have a clear global operating model for determining where they locate certain core operations and financial products, a review of what activities were situated where resulted in identifying weaknesses in their strategy and an over reliance on the UK as the location of choice. Some companies had begun to look outside of London to diversify their location risk.  More will be doing so now.

In Ireland in the last few months, both Credit Suisse and Citibank have moved people and activity to Ireland to build out their global footprint here, while clearly still keeping a significant footprint in London. It is a case of creating options on locations, rather than “keeping all your eggs in one basket”.

Stress testing the global operating model and ensuring there is diversification is key. For example, it was noted in the HSBC Annual 2015 report that “We run internal stress tests and scenario analyses, including reverse stress tests, on our portfolios that take into account geopolitical scenarios such as conflicts in countries where we have a significant presence, or political developments that could disrupt our operations, including the potential effect of a UK exit on our business model”. With hindsight, such stress testing has proven to be very wise.

EU Passport – access to the Single Market

A critical issue for FS companies is the ability to passport their operations from a regulatory perspective seamlessly from one EU location to another whether under EU regimes such as MiFiD, AIFMD, UCITS etc.  For example, being regulated as a Bank in the UK allows that bank to passport their banking activities into other EU countries without further regulatory authorisation procedures.  Therefore FS companies who only located their head office or their product platform in London for their insurance, banking or funds business, are now far more exposed than those who have a better diversification of their passporting activities across two or more EU locations.

For example, a company which has all of its investment fund products domiciled in the UK and currently sells those products across the EU under passporting, is today facing significant difficulties in future distribution of that fund product in the EU.

For that reason, many companies have already looked to see if they should broaden their product suite to include not just UK funds, but also Irish and Luxembourg funds (sometimes with similar investment strategies) to ensure diversification and avoid any disruption to their day to day business.

In a report by Sky News in February 2016, Stuart Gulliver, Chief Executive of HSBC, was quoted as saying about a post-Brexit situation: “We have 5,000 people in global banking and markets in London and I could imagine that around 20% of those would move to Paris.”  He also reiterated this point when he said Britain leaving the EU would have a ‘significant impact’ on jobs at HSBC such that they would need to move about 1,000 investment bankers, linked to operations governed by MiFid 11 (which deals with EU rules on financial instruments such as bonds, derivatives etc), from London to Paris.

Noted in the RBS Annual report of 2015 – “In the event of a result supporting the UK’s exit from the EU, the lack of precedent means that it is unclear how the UK’s access to the EU Single Market and the wider trading, legal and regulatory environment would be impacted and hence how this would affect the Group, its customers and investors.”

The robustness of the distribution model for FS products and services within the EU now faces severe scrutiny.

Over exposure to the UK as a trading partner/investment location

Sterling has seen an immediate and dramatic weakening post-Brexit and it is difficult to predict with certainty what the coming weeks hold.  Something as simple as buying sterling to pay for UK purchases has now become a game of roulette for banks and businesses alike. While clearly affecting all industries, the FS industry will be particularly affected by this volatility, because of investments held in sterling and UK stocks and investments.  Many clients have in the last few weeks and months been looking to hedging strategies to try and protect themselves as best as possible, but this was a challenging exercise, especially where the FS company has been heavily weighted towards UK investment/sterling assets/trade.  

Practical considerations

What is clear is that FS companies will need to look at all areas of their operations, both from a global operating model perspective, as well as the day to day operations.  This review will need to cover issues such as IT infrastructure, regulatory and tax impacts, data protection and AML, talent and free movement of people, as well as clearing/payment and settlement processes.

Ireland has a track record of a transparent tax system with a 12.5% rate for operations with substance here.  In the FS space it has been the nearshore hub for UK middle and back office functions for over 20 years, and therefore is proven to have the right infrastructure to support UK FS businesses considering expanding or establishing an EU footprint.  It has also been the location of choice for many UK and international FS companies who passport their financial services from Ireland throughout the EU.  There are over 400 international financial services businesses based in Ireland employing over 35,000 people. With the vote to leave, Ireland is now the only remaining English speaking member of the EU with a similar legal and regulatory approach to the UK.

The next few weeks will be a time to reflect as well as to plan and take action for the months and year ahead.  Much of this will hinge on how the UK negotiates its exit, which will not be known for some months.  In the meantime, FS companies are likely to make strategic decisions on key elements of their businesses.  Ireland is open for business as FS companies make key decisions around location of operations and implementation of their plans. 

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