Expect more questions than immediate answers following the “Brexit” vote, a decision that sees the United Kingdom leaving the European Union.
The margin of Brexit victory was a slim one, with a 52 to 48 percent split. Although non-binding, it is expected that the United Kingdom will move forward, notify the European Council, and begin a process that will unfold during the next two years. British Prime Minister David Cameron has already announced he will step down from his post, amid a backdrop of spooked investors and plummeting stock markets around the world.
While the country has its own regulatory regimes, including policies set by the Bank of England and the U.K. Bribery Act of 2010, it was also a party to many EU-wide regulations that may either stay in effect, be revised, or cast aside in favor of entirely new offerings. Expect plenty of confusion for U.K. and EU companies and for U.S. multinationals with a physical or online presence in England.
“It is not clear what’s happening next, and businesses will be reluctant to invest,” says Professor Christian Stadler professor of strategic management at Warwick Business School in the United Kingdom. “I don’t expect that there will be a massive exodus, but rather than expanding in the United Kingdom, companies are likely to do it in Europe, instead, particularly for businesses which export to the European Union.
"In the long term if the United Kingdom follows the Swiss model, which is essentially adopting EU regulation minus having a say in the decisions, this would be the better option for businesses as it puts dealing with the European Union more or less back to where it is at the moment,” he adds. “This will be an issue for some industries, like banking, as they won’t have much of an influence on regulation anymore. We see that in Switzerland for the pharma sector, for example. Politically this would be a difficult one to pull off, as people have to put up with the things they did not want—most prominently immigration.”
"If the United Kingdom takes a tougher stance on immigration, for businesses this will be a disaster as the European Union will retaliate,” Stadler says. “Access to the European Union will become difficult. For some companies, this means doing business in Europe won’t be attractive any more. Others will have to deal with complicated bureaucracy. In short: a nightmare.”
Among the questions that will await either answers or a strategic response:
How will negotiations between the European Union and United Kingdom proceed? Will other countries declare their exit as well?
How will the U.K. regulatory regime differ from EU rules? Will the enforcement regime change?
What will take place regarding intellectual property protections, consumer protection laws, life sciences and environmental rules, and employment law?
Will the European Union’s data privacy and protection rules be recast, and what will the exit mean for the still controversial U.S./EU safe harbor agreement for data transfers?
What of the EU General Data Protection Regulation, and its long-term approach to citizen privacy? In what ways should companies begin analyzing country-to-country data flows and cyber-security efforts?
Will there be changes or expanded authority for the Financial Conduct Authority?
What’s the future of MiFID II (the Markets in Financial Instruments Directive), sweeping financial regulations intended for the EU? How will the European Securities and Markets Authority and European Banking Authority adapt?
Will sanctions regimes remain the same or differ among the United Kingdom and Member States?
What effect will there be on EU competition law, M&A regulations and reviews, and anti-trust oversight?
Will business face a dual-track process for disclosures in the European Union and the United Kingdom?
What changes, if any, will there be to the EU’s REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) and RoHS (Restriction of Hazardous Substances Directive) requirements governing hazardous substances? What other environmental protocols may change?
Will the U.K. exit lead to any changes to the EU’s recently agreed-upon conflict minerals framework?
How will the European Union exit affect trade agreements, both existing and future?
For cross-border swaps deals and other financial transactions, how will Brexit affect equivalence standards and substituted compliance agreements?
London is the preeminent financial center in the European Union and crucial to the U.K.'s economy. “Post Brexit, financial services firms may be freed from the ‘single European rulebook’ and the supervision of the supervisory authorities—European Securities and Markets Authority, European Insurance and Occupational Pensions Authority, and European Banking Authority—with the latter currently based in London,” says a client alert from international law firm Dechert. “The United Kingdom may look to change some requirements it has never much liked but, subject to the shape of the final deal and any assessments of equivalence, firms may also lose crucial beneficial features such as passporting rights.”
Asset managers will need to “consider how their current client and distribution arrangements will be impacted if the [United Kingdom] becomes a ‘third country’ for financial services purposes,” Dechert adds. “Understanding how to make best use of third-country access rights, national private placement regimes, and targeted restructuring will give greater certainty to managers and their funds during the period of negotiation and under any new settlement.”
Dechert’s advice to companies is embodied in a series of questions:
Have we identified the potential changes relevant to our business?
Will those changes be an opportunity for us or a risk (or both)? Will those changes equally affect our competitors?
Are there any steps we could or should be taking immediately after a vote to mitigate adverse impacts?
Have we done enough to reassure our investors that we have considered and taken measures to best prepare for any anticipated risks? How will the legal and economic uncertainty of the negotiation period impact on us?
What do we want the priorities to be in the negotiation of U.K./EU future relations for our sector? Are there particular EU laws which it would be important to us that the U.K. should retain or replace?
Do we rely on any EU free-trade agreements with third countries, and how would we be affected if the United Kingdom ceases to benefit from them? How can we prepare for and mitigate the impact?
“With Brexit, companies will want to understand the impact of the loss of any investment—from the EU or from private investment in infrastructure —as well as the potential fragmentation of the regulatory environment in their particular sector," the firm advises. “Understanding the impact of existing bilateral investment treaties and the protections they afford can help firms to plan for and mitigate the potential risks.”
“Financial institutions are right to be worried,” says Gary Swiman, head of regulatory and compliance consulting in BDO International’s financial services advisory practice. BDO is an international network of public accounting, tax, and advisory firms.
“The extent of the impact on financial services will depend on what is put in place during the transition time while negotiations are worked out between the United Kingdom and European Union and what access is granted to EU clients,” Swiman says. “From a regulatory perspective, the biggest issue at stake for financial institutions is whether the passport system continues or ends. If it ends, the key will be whether there will be an allowance for U.K. products to be treated as an affiliate by the European Union. If an allowance isn’t made, then the regulatory burdens and requirements will be multijurisdictional and add significant complexity to in areas such as conflict of laws.”
U.S. companies would do well to brush up on Europe-focused risk mitigation strategies and risk-related disclosures to investors.
“For the U.S. economy, Brexit will at the very least lead to increased volatility in financial markets,” says National Association of Federal Credit Unions Chief Economist Curt Long. “Fed action is likely on hold until the fourth quarter at the earliest. As for credit unions, they should prepare for the present interest rate environment to persist for some time, as normalization is bound to proceed on an even more gradual path than the Fed has previously indicated. Credit unions are also likely to see a repeat of the second half of last year when market volatility led to a surge in share growth.”
Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more