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Let’s start planning – seriously – for Brexit

Posted November 20, 2016

By David Worsfold

It is getting increasingly difficult to look past the barrage of strident (and often ill-informed) newspaper headlines about the UK’s progress towards the European Union exit door. For businesses, including insurers, it is time for some clarity about the realities.

Going round the City, it seems increasingly clear that most major firms are planning for a hard Brexit. You hear phrases such as “we are investing in our capabilities in continental Europe”, which is code for ensuring they have a secure, functioning, properly resourced office or subsidiary set up and running within the EU by March 2019, maybe even going as far as a wholesale switch in primary domicile.

The planning for that has to start now. It can’t wait for the government to stagger through the Brexit negotiations, especially as it doesn’t appear to have much of a clue as to how it will approach those negotiations.

It isn’t just a question of looking at your own company’s operations but also every element of your supply chain. Are fund managers, consultants, advisers, processing and support functions all aligning themselves for Brexit in a way that fits your firm’s Brexit model?

All of these questions were debated in Westminster last week under Chatman House rules but with a former senior Cabinet minister, top fund manager and government and trade association adviser on an expert panel.

They warned the audience not to be distracted by the Article 50 fracas. This, they agreed, was a red herring.

Politically, it would have very little effect as Labour has said that it will not oppose the triggering of the Article 50 process so if it does come to Parliament in the New Year (depending on what happens in the Supreme Court), it will be passed anyway.

There was agreement that the government made a mistake in the High Court arguing that the Article 50 process is irrevocable – once started it cannot be stopped and exit is certain.  This may have tipped the balance among the judges towards ruling that Parliamentary scrutiny at the beginning of the process was therefore essential.

The belief on the panel was that Article 50 was a political device and could be amended by politicians at any time so it isn’t irreversible. Although many in the EU may be making aggressive noises about Brexit, most do not want the UK to leave the EU and if – once terms are clearer – the UK wants to reconsider, they will almost certainly allow it to do so.

What that reconsideration would look like in terms of UK politics was less clear, however.

Would it need a second referendum?

Could it be stopped by Parliament alone?

If there was a consensus in the room, it leant towards a second referendum with no certainty of a victory for Remain if the immigration question wasn’t addressed.

With the “more heat than light” furore over Article 50 dismissed, the panel turned to some of the more detailed issues.

There was sharp criticism of the Prime Minister for a lack of leadership. The pleas that the government doesn’t want to be forced to show its negotiating cards was attacked by the panel as an indication that the government doesn’t actually know what should be on those cards.

The clear differences between the Treasury and the so-called Brexit departments are a fault line running through the heart of government. Theresa May will have to address this before starting negotiations with the EU in earnest.

The clearest indication that there is no clear strategy is the Civil Service’s claim that it needs to recruit 30,000 people. This, they argued, was a typical Civil Service response when it is asked to do something it isn’t very good at – devise a strategy. That should be the politicians’ job.

The lack of clarity at every turn was highlighted, especially the almost interchangeable use of “access” and “membership” of the Single Market. Some ministers appeared to appreciate there would be a distinction but nobody was spelling out exactly what that might mean. This was carried through to crucial issues such as the potential contribution to the EU budget for the maintenance of the Single Market and the need for access to the European Court of Justice to ensure enforceability of the UK’s market access once it is no longer a member of the EU.

There was widespread scepticism about the promotion of the Norwegian model – essentially membership of the European Economic Area – as a serious option, although for some, it might be the best of a bad job.

In addition to having to accept a rulebook written by other countries, Norway is outside the Customs Union. This allows it to sign trade deals with third countries but it also means that all Norwegian exports to the EU have to pass through strict customs checks that include extensive paperwork to demonstrate that Norwegian predicts are either made inside the EEA or that they comply with the EU’s product-specific rules. It is by no means clear how this would apply to the UK’s huge financial services sector.

Clearly, a predominantly financial services audience was never going to find any real enthusiasm for the Brexit project but the growing nervousness at the government’s apparent lack of a strategy and coherent negotiation position, and – outside the Treasury – any appreciation of the problems facing the sector is creating a palpable sense of growing nervousness about what the next two years might hold.

For insurers, uncertainty continues to be the only visible horizon.

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