So much has happened since June 2016 when the UK voted to leave the European Union, it’s difficult to unpick what is and isn’t a consequence of Brexit. Notwithstanding it’s multi-stage implementation, extrapolating the Brexit impact from the pandemic, war in Europe and supply chain disruption, is challenging.
Still, eight years on and Treasury Today interviewees link a handful of key challenges to Brexit – namely enduring frustrations and costs around trade and payments and challenges recruiting. But they also say Brexit has fostered a resilience that serves them well in today’s new geopolitical landscape and that they’ve learnt to live with Brexit; they talk about it less, and its significance on corporate treasury has waned.
Bureaucracy and costs
There is no doubt Brexit has added to bureaucracy and costs. Like new customs rules and declarations that businesses must fill in which take time and resources and slow down trading operations. UK companies pay more duty on EU imports if they don’t qualify as tariff free trade under the EU-UK Trade and Cooperation Agreement (TCA) because they don’t fulfil rules of origin requirements. Up and coming SPS import checks on animal and plant imports from the EU will create another bottleneck.
Another challenge for UK corporates manifests in changes to the labour market. The end of freedom of movement means foreign workers require work permits creating an administrative burden for business – from whom calls for a relaxation of short-term business visa rules is growing louder. “There is a time and cost dimension for businesses getting the right talent in place at the right time,” says James Caldecourt, Head of International Trade at Deloitte.
Payment headaches
Elsewhere, Brexit has added to bureaucracy and costs around payments. Corporates that have online or point-of-sale (PoS) offerings – both UK companies that previously transacted with an EEA acquirer or Pan-European clients with a presence in both the UK and EEA – face extra costs and bureaucracy. For example, the latter now requires two separate acquirers instead of one, which could mean double the reconciliations needed from an added set of settlements, explains Sara Castelhano, Managing Director, Co-head of Payments & Commerce Solutions for EMEA, J.P. Morgan.
“Cross-border payments between the UK and EEA countries can no longer be defined as intra-EEA payments under PSD2,” she continues. “This implies that the principal on wire payments can no longer be protected from deductions, and therefore incur cross-border transaction fees. With that, we have seen fees increase in this space, which is another driver for corporates to locate their European entities in Europe,” she says, referencing another consequence of Brexit – a trend amongst large corporates to shift the location of their treasury centres and in-house banks from the UK to Europe to better support their businesses. “If a corporate had an Irish entity with a treasury structure in the UK, that has now shifted to Ireland.”
IBAN discrimination and additional data requirements under the EU’s Funds Transfer Regulation (FTR) is also impacting payment processes. “Post-Brexit, we continue to see scenarios where companies won’t accept SEPA payments and direct debits initiated from ‘GB’ IBANs. This holds particularly true in the case of tax payments where localisation of the accounts in-country (with an EU IBAN) is considered a must have despite the reachability that the SEPA zone offers.”
She adds that to ensure FTR compliance, businesses must supply additional data requirements to fulfil a payment journey between the UK and EU, adding to operational considerations for corporates when they onboard new customers.
Trade flows
Brexit is reshaping trading activity as firms change their business models and diversify to markets outside the EU. A trend captured in a recent Deloitte survey of 750 international UK firms, which found three quarters of businesses that had lost EU trade had experienced compensating gains with countries outside EU leading to an uptick of sentiment.
“It’s interesting how quickly some companies can shift their focus to outside Europe. Our recent survey data has shown that some businesses are starting to experience gains in non-EU markets and that business sentiment towards Brexit is starting to improve,” says Caldecourt.
One factor feeding into that optimism is new Free Trade Agreements. So far, the UK has only negotiated new FTAs with Australia and New Zealand with “limited opportunity.” But optimism is growing regarding opportunities inherent in CPTPP with 11 countries in the Pacific Rim. This agreement will come into force later this year in a staggered introduction that promises deeper access to markets like Malaysia. “The GDP boost will be small but the impact in niche areas could be significant. The CPTPP will become more effective as other countries join like Thailand,” he predicts.
New FTAs with India and the GCC offer potentially bigger wins. “India is in the late stages of a negotiation that is more focused on goods than services. It might not be tariff free but given the size of the market it could be a significant opportunity,” Caldecourt continues.
Elsewhere, the UK has written new bilateral agreements into UK law with countries like Vietnam, replacing previous agreements with Brussels. The legal framework has been transitioned across and companies have carried on without foreseeable changes. Next up, the UK will re-negotiate existing trade agreements with countries including Switzerland and Mexico, South Korea and Turkey.
Sentiment might be picking up amongst large corporates but for smaller business, the impact of Brexit on their ability to trade with Europe remains a key concern. Repeated confidence surveys from the Federation of Small Businesses finds SMEs are experiencing reduced export values and struggling to export to their biggest market.
“Europe remains the largest export market for SMEs. Only 5-6% of respondents said they are looking at new markets such as the US and Middle East,” explains Kate Foster, Head of International Affairs at the FSB. “The costs of trading in Europe is disproportionate for a small business compared to a large company, particularly because their exports are low volumes.” Still, she does link pockets of SME optimism to Brexit – like new SME clusters developing around innovative technology linked to smart borders in North Ireland. “Northern Ireland is in a unique position to accelerate the adoption of this kind of tech,” she says.
Europe remains the largest export market for SMEs. Only 5-6% of respondents said they are looking at new markets such as the US and Middle East.
Kate Foster, Head of International Affairs, FSB
The view from Europe
Talk to a large European company, and the impact of Brexit is a distant memory. For the treasury team at a German multinational, their biggest concern at the time was losing access to financial products and a choice of counterparties amongst their banking partners. This manifests particularly around concerns about their derivative exposure with UK and US banks acting out of London if neither party could agree on the recognition of each other’s derivatives trading venues under an equivalence regime.
Once these banks opened subsidiaries in cities like Frankfurt, Paris and Amsterdam corporates could write new ISDA contracts underpinning their derivative exposure. New bank subsidiaries initially carried counterparty risk because many had lower credit limits, but once banks started “pushing billions” into their subsidiaries, this soon changed.
“Creditworthiness was an issue,” recalls a member of the treasury team at the German multinational. “But today these subsidiaries have the same capital backstop as they had when operating out of the UK. We don’t trade with London-based banks anymore because all our banks have subsidiaries in Europe and offer the same products. Honestly, no one talks about Brexit.”
Their comments touch on another enduring consequence of Brexit. Today, UK corporates continue to use either UK or European banks for every kind of product or service because of the UK’s approach to open borders. European businesses, on the other hand, are now primarily serviced by European institutions. European banks with large branches in London are under increasing pressure from EU authorities to bring significant amounts of their business back to Europe.
EU pressure on the bloc’s banks is evident in new laws around interest rate derivatives, for example. Witness how Nasdaq Europe is set to expand derivatives clearing to include euro interest rate swaps, used by companies to hedge against adverse moves in borrowing costs. A new EU law will force European banks to have an “active account” at EU-based clearers for euro denominated interest rate swap transactions, reducing their reliance on the London Stock Exchange and enabling EU regulators oversight of these transactions.
Commentators don’t necessarily believe that new bank subsidiaries set up in Europe after Brexit will grow bigger still or suck more business out of London. They notice some banks are growing their desks, but this is countered by concerns around the ability to tap – and easily let go of – talent in European cities, plus questions around the depth of the wider ecosystem needed to support banks outside London. “Sure, London has lost business, but the City still exists; employs thousands of people and financial services are growing in London,” says Jonathan Herbst, Global Head of Financial Services at Norton Rose Fulbright.
Again, it is difficult to directly link the blossoming of London’s fintech and non-traditional finance sector to the post-Brexit shake-up in banking. But in another positive note, Lisa Dukes, Treasurer and Co-Founder of risk management specialist Dukes & King, believes the spike in innovation amongst financial services in recent years is a consequence of London’s diversification.
The city has emerged as a crypto and non-traditional finance centre and a myriad of fintech’s selling everything from TMS to hedging instruments have sprung up. “The direct link to Brexit is questionable, but diversification has offered the UK opportunities to focus on innovative sectors and emerging growth areas, potentially bolstering its resilience in the face of uncertainty,” she says.
Regulatory divergence?
Interviewees point to some examples of regulatory divergence. For example, the UK’s payments landscape post Brexit has shifted to tangibly strengthen consumer protection, positioning the UK ahead of Europe.
Like Consumer Duty, which began to come into force in 2023 and sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first. Elsewhere, the Payment Systems Regulator has introduced a new reimbursement requirement for Authorised Push Payment (APP) fraud within the Faster Payments system, notes Castelhano.
The requirement, which starts in October this year, will require payment firms to reimburse all in-scope customers who fall victim to APP fraud in most cases, and to provide additional protections for vulnerable customers. The UK’s APP reimbursement requirement has a wider scope than those proposed in the EUs’ draft PSR, which looks specifically at unauthorised transactions and bank employee impersonation, she says.
Still, commentators say they have yet to see significant regulatory divergence. The UK Financial Services and Markets Act 2023 which received Royal Assent in 2023 revokes EU-derived legislation relating to financial services and markets but did not generally repeal EU law embedded in UK primary legislation which has remained largely unchanged to date.
The UK’s Future of Payments Review and the EUs’ PSD3/PSR still broadly share common thematic goals of enhancing consumer protection and transparency, enhance and maximise open banking opportunities, improve regulatory oversight and alignment.
If the UK and EU’s regulatory systems significantly decouple, financial services and corporates will feel the impact of Brexit more keenly. As the EU continues to pump out large amounts of new regulation the UK could potentially position itself as a more competitive destination over time where doing business is easier, in line with the promises written into the Edinburgh Reforms.
Still, Herbst argues that regulation will play a smaller role in creating a dynamic financial hub and attracting banks and corporates to London than other factors like housing, taxation, and most importantly skills – where London continues to have an advantage over European rivals. “Don’t view legislation in isolation,” he says.
Nurturing resilience
Brexit has fostered a new resilience and ability to cope with a changing world where free trade and open borders are no longer certainties. Treasury teams have had to move to navigate a transformed geopolitical landscape, prompting critical reassessments of supply chains, market positioning, and expansion strategies that will stand them in good stead for today’s uncertain world. “Amidst rapidly evolving global trade dynamics and regulatory changes, adaptation becomes imperative for businesses seeking to thrive in the current era marked by market changing events,” says Dukes.
She says that despite the many complexities of Brexit, one potential positive outcome is the shift towards a more self-sufficient approach. Companies have had to streamline operations, optimise resources, and venture into new markets to sustain growth in the rapidly evolving global landscape.
“By redirecting focus internally and forging partnerships with partners on a bilateral basis, the UK positions itself favourably in a world transitioning towards trade tariffs and domestic focus. This adaptability may prove crucial in navigating an increasingly fragmented global trade dynamic.”
Norton Rose’s Herbst concludes with his take on the last eight years. “Brexit was not something everyone welcomed, and a lot of work has gone into it. But we have all learnt to live with it.”
