Treasury Today Country Profiles in association with Citi

Brexit: the known and the unknown

British flag frozen with a question mark drawn into the ice

Even if the more encouraging reports from the past week are borne out, treasurers must still contend with a list of post-Brexit uncertainties.

It’s a mark of the craving for certainty in increasingly uncertain times that the financial markets enjoyed a brief burst of euphoria last week on an unconfirmed report of progress in the Brexit talks between the UK and the European Union (EU).

Tucked away on an inside page of The Times, rather than the front page lead, the report cited two ‘British officials’ who said that a tentative deal had been reached on giving London’s financial centre continued access to EU markets post-Brexit. It would, they suggested, be based on the EU’s existing system of financial market access known as ‘equivalence’ but with some extra concessions added specially for the UK.

Under the tentative deal, all aspects of a future partnership on services and also the exchange of data had been agreed but it had yet to be actually rubber-stamped. Despite this, the pound rose strongly on the report before a Downing Street response that there had been progress in the talks but no actual agreement brought it back to earth.

The past week has also seen Brexit secretary Dominic Raab tell Parliament that the UK could conclude a withdrawal agreement with the EU by 21st November, while The Times’s Sunday stablemate quoted “senior sources” who told the paper that Theresa May has been quietly making progress towards a breakthrough deal. It would include concessions enabling the whole of UK to remain in a customs deal and avoid any ‘hard border’ in Northern Ireland.

The same report added that May was also close to agreeing a future economic partnership (FEP) with the EU that could pave the way for a free trade deal similar to the Comprehensive Economic and Trade Agreement (CETA) concluded with Canada four years ago.

After the increasingly dire warnings on the consequences of no deal being in place next March, the possibility that a Brexit breakthrough might be imminent is encouraging. Yet there are still several major obstacles to be surmounted before treasurers’ concerns are alleviated and much of the finer detail is still lacking.

Michelle Price, the associate policy and technical director for the Association of Corporate Treasurers (ACT) says that ever since the June 2016 referendum result, as well as pulling Brexit plans together, members’ focus has been “to ensure liquidity is available through the Brexit break.

“At present there is insufficient information on the detail of the break to be able to take action other than to endeavour to ensure liquidity is available to cover a broad range of outcomes. Whatever companies do will be driven by their business requirements, which may change as businesses assess their markets and suppliers post-Brexit.

“We are receiving technical questions on specific Brexit issues from our members, which we are answering. Also we have a dedicated webpage on the topic with links to useful resources, which is available to non-members.” The ACT has been working with the Confederation of British Industry (CBI) to respond to issues raised by corporates and also to talk with regulators and financial services providers to identify answers “where they exist.”

“We have discussions with fellow associations to better understand the consequences, and we have discussions with regulatory agencies to explain the issues which different scenarios could bring to the fore,” says Price. The ACT is running a joint Brexit panel with its Irish counterpart the IACT in Belfast on Monday 26th November.

The prospect of repapering

One issue recently highlighted is the possibility that EU-based companies might be obliged to transfer syndicated loans, currency swaps and other derivatives taken out through UK banks to an EU-based entity once the divorce goes through. The process, known as ‘repapering’, could land them with both significant costs and paperwork.

The Wall Street Journal recently reported consulting firm Boston Consulting Group’s estimate that around €2.4trn of financial instruments would require shifting to EU-based banks in the event of a ‘hard Brexit’. The paper also cited Stephen Baseby, the ACT’s technical director, who warned that utilising sterling cash pools could also become more difficult if the UK doesn’t manage to strike a post-Brexit deal that affords it equivalence status.

He told the WSJ that European companies’ common practice of using a single pool for both sterling and euros might require additional short-term currency swaps as “the process wouldn’t be as fluid anymore”; thereby creating additional costs for companies and paperwork for banks.

But could the pain be offset by some gain? The Institute of Economic Affairs’ director general, Mark Littlewood, has suggested that the UK could also revisit EU regulation such as MiFID and Solvency II and question whether they actually represent the best way of regulation the financial sector. “The British government opposed the Agency Workers Directive, so is there really a case for retaining it when no longer obliged to?” he asked.

In the meantime, pending clarification on what exactly the post-Brexit landscape will look like, most treasurers are taking steps to diversify the products, currencies and banks they deal with. Baseby predicted that multinationals should be able to make the necessary changes to their financial instruments without too much disruption. “It’s the smaller companies, those that have fewer banking partners and a less diversified portfolio of financial products, that we are worried about,” he said.

It may be that by the end of this month some of the mists may have cleared. But in the meantime, the message from a Brexit breakfast briefing held by the ACT back in March remains no less relevant eight months on – you’re not preparing unless you’re preparing for a harder landing.