Brexit at a Crossroads
January 28, 2019
While the headlines in the U.S. had centered on the government shutdown, things have heated up in Europe as the Continent is focused on Brexit. Robert Mirsky, Head of EisnerAmper's London office and Head of the firm's Asset Management Group for the U.K., gives us his front-row perspective on how companies in the asset management sector are planning for either a “hard” or “soft” Brexit.
DP: There's quite a political crisis going on in the UK around Brexit. Rob, explain to our listeners the magnitude of what happened last week.
RM: It was a pretty significant vote last week. It was the biggest defeat of a British prime minister on their flagship policy, and it wasn't exactly a surprise rejection. The UK spent the last two years negotiating its withdrawal agreement from the UK, and Theresa May, the British Prime Minister put forward a compromise deal to try and bring all of the different factions of British politics together. It didn't really have that effect and the vote reflected that.
DP: Why do you think the vote was so lopsided?
RM:Because it was a compromise that didn't seem to satisfy anybody. Leaders didn't like it because they thought the deal didn't allow UK independence and sovereignty, the freedom to make its own trade deals. The Northern Irish MPs, who really prop up Theresa May’s majority government, didn't like it because it meant that the rest of the UK and Northern Ireland would have different customs regulations. Don’t forget, the UK really is a sort of country with several countries divided. It's a union. And so Northern Ireland, Wales, Scotland and England each equally have some autonomy here. The Northern Irish issue is what they refer to as the backstop issue. And I think we'll look at that a little bit later. The Scott's didn't like that because they voted overwhelmingly to remain in the EU. And others didn't like it because it involved leaving the EU, it involved believing at the very least, the customs union and single market. I think ultimately that the Irish backstop is going to be one of the real staying issues here.
DP: A lot of disparate, unhappy stakeholders. What now?
RM:Well, I think that the current fear is about the looming deadline, the 29th of March. Under the UK law, leaving the EU at that point, regardless of whether or not there's a deal in place. And that's what people call the no-deal Brexit, a lot of the politicians and experts think that a no deal could be an economic disaster for the UK. Its trading partners in the EU, at the very least, the current level of uncertainty is halting disruption in business here. This past Monday Theresa May presented a plan that after the historic loss last week in Parliament, she had to very quickly present a new plan. That new plan was a plan B that looked very much like plan A from the week before and has been met with a similar disappointment. Theresa May says she's now consulting all MPs and all sides of the argument to try to pull something together, something that everybody will vote for. And really the next decision point to look at plan B is on January 29th. Some of the MPs were actually declining a little bit to negotiate with Theresa May on this until she takes no deal off the table altogether, which until now is been bargaining chip of hers with both Parliament and EU.
DP:When you say no deal, that's the so called hard exit.
RM:That's right. That's the hard Brexit option. That's the UK crashing out without having any agreement. It a sort of a cross section of MPs across the two main political parties, conservative and labor are meeting right now to force Theresa May’s hand to not allow a no-deal Brexit to happen. And they may try to constrain her ability to do that through some different legislation. Next week is the renewal of plan B, and the political wrangling to prevent a no deal being allowed to actually happen.
DP:At this point, do you think we're more likely to see a soft Brexit or a hard Brexit? And what's the difference?
RM:At the moment, the opposition party and governance that’s the Labor Party are really pushing for a softer Brexit or soft Brexit, which means remaining in the customs union. In other words, we're all countries in the European Union that share a common tariff on goods. That's really one of the key red lines, and they won't vote for a deal without it, but it's a stalemate. The customs union is one of the prime minister’s red lines. A lot of disruption or a soft Brexit where the UK is no longer formally part of the U. But remains a trading block, not dissimilar to sort of how Norway interacts with the EU at the moment. My guess as to what’s most likely at this point, realistically, it is going to be a delay of the March 29th deadline, and that's going to be, probably until right before the next Parliament opens in summer, and it's even possible that we can delay until the end of the calendar year. Interestingly, today, the dollar sterling currency pair rate, if that's any indication of real expectations, sterling hit its highest level since November, most likely suggesting that a delay and potentially or a softer Brexit or maybe even a second referendum is the most likely outcome. So there are really four options that I see and there's either going to be a delay, hard Brexit or a soft Brexit or new referendum. At least for this March 29th deadline, I think the delay is what we're going to get.
DP:Obviously businesses are not operating in a vacuum. They are watching this very closely. How are they preparing for Brexit?
RM:So what we're seeing with clients in the US and Asia and Europe, certainly here in the UK, is a number of things. I'll focus my comments predominantly on the asset management industry. Let me start by saying I've had some interesting conversations over the last few days on exactly this topic. I just got back from Luxembourg yesterday where I spoke with a number of people around what they're doing and what they're seeing. And interestingly, the government position in Luxembourg is that Brexit will be bad for Luxembourg, which you know, is one of the largest centers of financial services in Europe. Fund managers and providers of service to the industry there they’ll see an opportunity for growth. It’s very much like Ireland. Luxembourg has a strong and well- established fund product and servicing base and through things like usage which are really European mutual funds and alternative investment funds and private equity structures, Luxembourg is actually seeing a pickup in activity. I think we're expecting a rush from London to Luxembourg as such, but what's likely as the additional products and additional service provisions will be required by the CSSF, the local Luxembourg regulator, and by the same token, the Central Bank of Ireland, who is the Irish regulator for this, to ensure continuation of distribution across Europe. And that's one of the things that a lot of our asset management clients, particularly US asset management clients, are asking us about. How am I going to be able to continue to distribute my product if I've got a UK base right now and there's Brexit? And the most likely answer on that as well is they're going to be delayed, as I said before. My guess is you're going to start to see some transition rules come into place. I think Ireland, very much like Luxembourg, is seeing the same thing. And just by way of example, this morning in London I spoke with a billion-dollar asset manager we're doing work for and what they said is that to ensure continuity of their operation, they've set up a parallel investment manager in Ireland. They're taking a wait-and-see approach knowing -that they can cover all eventualities, having that sort of the EU 27 or EU minus UK investment management basis. I think the basic points for asset managers to consider here are around the distribution strategies and Europe, and then trading activities. Trading I’m guessing is going to be able to continue without a lot of massive changes here. Distribution could become challenging. And really now is the time to start thinking and planning for that. In other areas, businesses are preparing in a lot of different ways for Brexit, whether it's the on quantities of product, or potentially moving headquarters. You saw that with Sony and Dyson today. They’re moving staff offices in Europe. Just too sort of help you understand how this looks on an emotional level for Europe and the UK, there was a politically motivated car bombing in Derry, in Northern Ireland this past weekend, and one of the biggest sticking points, the Brexit negotiation is the backstop. It's a border between the Republic of Ireland and Northern Ireland. It's frictionless at the moment. There's nothing set up between the two countries. If you remember the Good Friday accords were signed 20 years ago. How the Brexit negotiations end up will have a much bigger impact here than simply the free movement of goods and services.
DP: Yes. We don't want to go back to the time of “the troubles” as the locals call it. Being based in EisnerAmper London office, Robert, thanks for giving us this front-row perspective.
RM: Thanks Dave.
DP:Thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast where we get down to business.