By:
Chris Thackray, Periculum Associates
Bill Bandon, Hubashisan Solutions
Holly Verbil, Periculum Associates
The United Kingdom’s European Withdrawal law, colloquially called “Brexit,” was introduced in 2017 after the public approval of the Brexit referendum on 23rd June 2016, and has commanded headlines since.
A few facts about Brexit:
Brexit is scheduled to occur on 29th March 2019.
This date is written into UK law, so a delay or second referendum will require a change in the law, and time is running out to make this happen.
The UK and the governments of the EU want to avoid a hard border between Northern Ireland and the Republic of Ireland – efforts to maintain existing border controls are known as the “backstop”.
Simulations of the Brexit impact performed by The Bank of England indicates possible GDP contraction of up to 8.5%, which is greater than the financial crisis.
This situation is the first of its kind. A no-deal Brexit will result in chaos and uncertainty for the UK and the EU governments which will affect recovery timeframes.
With the vagueness of future policies, how does a business prepare for this type of unpredictable or fundamentally unknowable event?
The essential task is to divide the broad risk into smaller and smaller pieces until you can identify a previously encountered risk or find a set of definable data points among which the interdependencies are also definable.
It's also necessary to tackle this "how to eat the elephant" exercise by grouping the risks into categories of source and effect to create multi-dimensional matrices of analyses of the risks.
We view the Brexit impacts to a firm within a multi-dimensional risk matrix. This matrix approach examines the aggregated impacts through these four elements: the possible Brexit scenario; the firm’s primary jurisdiction of business; the industry in which the firm does business, and risk types applicable to that firm.
Brexit Scenarios
There are four possible Brexit outcomes in the run-up to 29th March:
The UK leaves with a deal wrapped up in an EU Withdrawal Agreement (or a form like it);
The UK delays Brexit but remains intent on making Brexit happen;
A second referendum, although he UK’s Parliament remains torn on what a second referendum would involve; or
The UK leaves the EU without an agreement and without a transition period.
Of these outcomes, the UK government is primarily weighing two: renegotiation of the EU Withdrawal Agreement to overcome backstop concerns or a no-deal outcome. The impasse in Parliament is severe and the levels of uncertainty high for businesses as there is no indication of probable outcomes and time is ticking with just over 40 days before the 29th March deadline.
Jurisdictions
Every business, regardless of industry, is exposed to Brexit. That said, there are some businesses that should be more concerned than others, in particular.
A US company doing business in the UK (especially if the firm uses a shared services infrastructure in, through or dependent on the EU)
a UK company doing business in the EU,
an EU company doing business in the UK.
Industries
A good starting point for establishing an industry sector matrix would be the sector category breakdown used in the University of Birmingham blog post below. Some industry sectors – notably, financial services firms – may be further along in the risk analysis than other industries.
Even so, the UK government reported it did not complete assessments on the potential sectoral impacts of Brexit on individual sectors. A recent City-REDI policy briefing showed:
For as many as 15 out of 54 industries, more than 20% of value added is at risk.
Slightly more than 2.5 million jobs are exposed
Industry examples:
Transportation. Currently the UK benefits from freedom of establishment rules that allow them to set up aviation business in the EU and operate without limitations on pricing, frequency or capacity. Unless other arrangements are made, the UK airlines enjoying this freedom will lose their right to fly to and from the EU and in the EU member states.
Logistics. 10% of commercial drivers in the UK are from other EU countries because of the freedom of movement allowed by EU member states. A no-deal Brexit will result in an even greater shortage in the haulage industry than it already faces if as residency rights are renegotiated.
Types of Risk
Legal, commercial and operations (e.g., shared services, supply chain, human resources, data management) risks are all concerns with a no-deal Brexit.
Executed contracts and issued regulations which had assumed the openness of UK as one of the EU member states will certainly be rendered obsolete or significantly impacted. Contracting parties will need to factor in both a reexamination of previously allocated risks as well as new risks which must be allocated between them. Regulated firms will need to reexamine their compliance posture to ensure the company is operating within the now-applicable law.
Commercially, negotiations regarding pricing already memorialized in existing agreements will likely need to be renegotiated due to the force majeure of Brexit’s market impact. Higher import or export duties, production and/or other delivery costs are likely to be either assumed by one or both of the contracting parties and ultimately passed down to consumers which could have a negative impact on spending, pricing and planning.
Operationally, the ability of companies to operate outside of the UK and within the UK will change. For example, current passporting rights will be vulnerable and that could trickle down to supply chains causing delivery delays, new tariffs and restricted flow of goods. Also, IT and data management infrastructures (including business resiliency) will need to factor in another layer of privacy regulation.
Summary
This is how we propose to tackle Brexit. Later blog posts will delve more specifically into one or more of these matrices and their application.
How are you thinking about your Brexit implications?
Written in conjunction with:
