Slide 1

Brexit at Tiffany's

Published: Wednesday, 03 January 2018 09:28

Category: The Pamphleteers

Shortly after the referendum result I was involved in a number of scenario workshops to understand how the vote might turn into new directions for a number of sectors including financial services.

It is always important to consider low probability, high impact outcomes in any futures work, especially where the outcome may have 30-50-year impacts or even more as I believe Brexit will.

I’d like to share one of these ideas here as much of the media reporting is, in my opinion, too narrow and responsive to immediate events and lacks a narrative.

Let’s start with my own position, just to be clear on that. I agree with M. Barnier that there is no example of a Trade Deal for Financial Services. Therefore, I think that the idea that the UK and EU27 can deliver a deal in an area for which there are no templates much faster than in areas where the process is known and understood requires heroic assumptions that defy gravity to mix metaphors.

It is also clear that companies based in the City want to move as little as possible, as the lifestyle that London affords is hard to replace. However, the difficulties in recruiting talent are already apparent.

The starting positions are clear. For the EU27, there can be no bespoke deal. For the UK, only a bespoke deal will do. Both sides need and want an agreement. Both sides believe Brexit means Brexit but have differing views of what that entails. There will be a political fudge, there always will be. So, how might faces be saved so that each side can claim a win?

For me, the mistake is to think that the rest of the world is a disinterested onlooker and will wait patiently while the UK and EU27 grind through the gory detail.

To prevent the negotiations breaking down, the EU27 could offer the UK “talks about talks” on Financial Services. A 2-year scoping study to look at what might be possible at some vague point in the future could be sold as generous by the EU27, noting that they do take impact assessments seriously, and a climb down by the UK, to tabloid delight.

If this were to happen, I would expect Japan, Canada, US and others to argue that if the EU was prepared to offer the UK a deal on Financial Services, then they would want one too. I suspect that some soundings of this nature have already been made.

To protect the integrity of the Single market, the EU27 could invite others to join the scoping study. The EU27 interests in Tax Havens, Money Laundering, Tax shifting, FinTech and Systemic risk could all be advanced by this approach. What that would inevitably do is kick the solution into the long grass. We still haven’t implemented the full response to the 2007-8 crisis, 10 years after it started.

Many EU Cities attempting to wrestle Finance away from the City of London and the UK more widely might be very supportive of this too. How would the UK react?

This could put the international banks based in London on both sides of the negotiating table to protect their UK investments and prevent them losing EU privileges.  This could create pressure to get an agreement but at the same time provide a fall back for international businesses if no EU27-UK deal looks achievable on a reasonable timescale.

If the UK walks away from a scoping study on liberalising Financial Services while championing Free Trade, this could be a problem for the UK.

So, post March 2019, the UK leaves the EU and is in a 2-year implementation phase, but for Financial Services there is nothing to implement and by 2020 there still does not look likely to be an agreement till say 2023-25 at the earliest.

Investment decisions will need to be made against a background of continuing uncertainty and elongating timescales. Any crisis within the EU will take precedence over the UK position as a 3rd country.

So, if you were an advisor to the PM, whoever she/he may be by that time, what would you suggest that could be politically and economically acceptable? Stay in the implementation phase for longer? That would require EU unanimity. I suspect that the UK would be expected to pay into EU coffers and the rebate would go as a condition. I can’t see that being politically acceptable.

If the UK leaves the implementation phase and remains within the Financial Scoping Project that might be economically unacceptable without a guarantee of a deal on Finance on the table.

So, there will be a fudge, but looking that far out I wouldn’t want to guess what hands the parties might feel they have. There are far too many permutations.

Importantly, on current timescales the next election is due in 2022. So, if anything like this scenario looks likely would you suggest calling an election in say 2019 once in the implementation phase?

If you were a bank, how would you react? Insurance? Professional Services to the Finance Sector? Treasury? Bank of England? 10 Downing Street? A Tabloid Editor? You can add other potential stakeholders if you like.

If you are the betting type, what odds would you give on this type of outcome?

We live in interesting times. Best wishes for 2018.

 

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