By:
Bill Bandon Managing Director, Hubashisan Solutions
Christopher Thackray Managing Director, Periculum Associates
Holly Verbil Regulatory, Risk & Strategy Leader, Periculum Associates
The clock is ticking …
In our previous briefing, we outlined a matrixed approach which companies might use to address the implications for them of the various scenarios of Brexit.
Since then, the probability of a “no-deal Brexit” occurring has not diminished. It remains one of four options within the UK Government’s arsenal, and one of two that are perceived as most likely. The other would be a renegotiation of the previously proposed EU Withdrawal Agreement, with a focus on the “backstop arrangements”. UK Prime Minister Theresa May has committed to provide an update to Parliament on 26th February 2019 regarding the status of negotiations with the European Union.
We forecast that negotiations will not be resolved until the next EU summit on the 21st-22nd March. Why is that? Consider: the European Union are currently opposed to reopening the EU Withdrawal Agreement for renegotiation. However, as the threat of a no-deal scenario nears, so does the threat of a hard border between the Republic of Ireland and Northern Ireland – a result nearly no one wants. This may prompt the EU to allow for very specific changes to the proposed Agreement to help the UK Government pass the Agreement in Parliament - even if this means the UK Parliament will get only eight days to review, debate, and decide.
The UK Government retain two other options, the first of which is the cancellation of Brexit. This scenario carries substantial domestic political risk to the Government and is therefore currently considered the most unlikely scenario. The remaining scenario is an extension of the Brexit leave date. The UK Government is currently opposed to an extension beyond the 29th March, as an extension may provide the vehicle for a second referendum.
We currently forecast a small and purposeful extension to be agreed between the UK and EU Governments at the EU Summit. This will provide time for the UK and EU Parliaments to approve a revised Withdrawal Agreement addressing backstop issues.
But, to be sure, a no-deal is still very much on the table. And, without certainty of which scenario will ultimately play out, given its likelihood, how should you prepare for a no-deal Brexit if you’re a business in the UK (we’ll tackle businesses outside of the UK in a later Briefing)? From our last briefing, we outlined how a no-deal Brexit will lead to heightened operational risks (e.g., supply chain / shared services, logistics, HR, data transfers), financial risks, and legal / regulatory risks.
Here, we expand on a few key risks from that matrix for UK companies:
Assess risks to your supply chain
One of the most significant consequences of a no-deal is what it will do to exports and imports. Goods and services sourced inside and outside of the UK will be impacted in several ways. This will include delays in the processing of goods at UK and EU ports, increased cost of goods to account for tariffs and reduced logistical capacity as companies reduce their exposure to port delays.
To understand the implications, you should have a complete process inventory of your supply chain (i.e., each chain, each step, each provider), and have an understanding on which of those suppliers and subcontractors will be disproportionately impacted. From that, you should start to map out possible contingencies specific to each chain and create (and communicate) written contingency plans around how your firm proposes to adapt and recover from shocks to the continued supply of goods or services.
Ask yourself:
What are the dependencies we have on suppliers outside the UK? For example, which third party processes are wholly or partially provided from outside the UK?
Are any of my UK based suppliers exposed to people risks, such as European Union nationals wanting or needing to return to their country of origin?
What goods or services may involve customs delays and duties, and are any of my UK based suppliers exposed to these risks?
How long can we survive if we experience delays in the delivery of goods or services?
How will my UK based suppliers suffer in the event of prolonged impact resulting from a no-deal Brexit?
Consider your data
If the UK exits the EU without an express deal addressing data transfers, it will no longer be recognized as an EU state, and it will be regarded as a ‘third country’ and lose its GDPR adequacy status, presenting a data regulation risk. This status is important as it provides the framework for the transfer of EU data into the UK. UK businesses should take steps to safeguard the safe, legal and compliant transfer of data in/out of the European Economic Area presuming that, at least for a material period, the UK will be a third country as a result of a no-deal Brexit. While the UK Government would expect to achieve ‘adequacy’ status from the EU, thus preventing the implementation of additional safeguarding measures, the political uncertainties resulting from a no-deal Brexit may complicate matters.
As a UK Company, what steps are you taking to maintain your company’s compliance with GDPR regulations and the UK’s Data Protection Act 2018? We recommend including your suppliers in any effort to address potential data transfer risks.
Look at the financial impact
The BoE has predicted GDP contractions of 7.5% in the case of a no-deal Brexit. This number is higher than what occurred during the financial crisis of 2008-10, which means the predicted impact will be greater. Such a contraction could have significant financial consequences for companies across sectors – with some forecasts predicting the financial impact worse than the financial crisis.
Your first step – whether based in the UK or not – should be a “past-is-prologue” analysis; that is, what lessons did you learn from the financial crisis? And how can these lessons help prepare you for a no-deal Brexit?
There is an expectation that banks will change their lending appetite in the UK across a significant number of sectors. Banks in the UK are currently well capitalized and are subject to increasing oversight from the Financial Conduct Authority and the Prudential Regulatory Authority as the threat of a no-deal Brexit nears. The economic effects of a no-deal Brexit are expected to be severe – leaving banks and other investment vehicles with few options but to retain cash. We’ve already seen banks begin to adjust their lending appetite – with the most recent example being Carillion and the Kier Group. The UK housing market is expected to face extreme pressure and banks are adjusting their commercial exposure to this sector.
A no-deal Brexit would encourage banks to further reduce their lending appetite which could suffocate small and medium sized businesses in the UK that rely on loans and other credit facilities. As your customers enter financial pressure, their ability to pay invoices on-time may impact your revenues and ultimately your level of profitability. Has your company analyzed the effect of lengthening days-to-pay? Or a contraction of your credit lines?
Next, have you considered what the result of a changed exchange rate would mean to your business? Some predictions show the Pound could drop to $1.15. When running scenarios on what a 7.5% GDP contraction would mean for your business, you should combine that scenario with a significant deterioration in the Pound.
And, critically, as you explore your own financial risks, it’s worth asking whether your critical suppliers have assessed their financial risks. Operational resilience within the supply chain is essential to keeping the lights on – and is foundational to financial resilience. You should have frank dialogues with your suppliers on these topics.
Conclusion
Understanding at a detailed process level the financial, commercial and operational risks linked to a no-deal Brexit is fundamental to planning for such an event. But it’s only the first step – the results must then guide proactive development of appropriate contingency plans. As you develop contingency plans, be sure to explore – then define, and then communicate internally - the triggers for when you will impose the plans, leaving sufficient time to address the risks at hand. Remember, not all continency triggers will be time-bound.
Time is running out for the stiff upper lip that says there’s no reason to plan for a no-deal Brexit. Put your customers, employees and shareholders first – and be prepared for what could be a prolonged period of uncertainty. Without doubt, a no-deal Brexit will result in casualties. Don’t let one of them be you.
If you need assistance determining the impact of a no-deal Brexit and where to begin building contingency plans, let's talk.
Written in conjunction with:
