By Ted Howard
Treasurers will have to watch and wait on the specifics but they can still gather intel and ask a lot of questions as they prepare.
With the UK’s historic vote to leave the European Union there’s nary an industry, sector, company, function, city, town, neighborhood, or house that won’t been affected in some way. But how they will be affected is yet to be known; and may not be known for some time. That’s because it could be years before the split actually takes place.
This is also true for multinational corporations, which can for now only speculate on the impact in terms of regulations and other international deals. “One of the first questions [for companies] is what impact is there right here and now, and I think the answer is that there will be none,” said Luke Zubrod, director of risk and regulatory advisory at Chatham Financial.
And that could be the case for some time. According to international law firm Baker & McKenzie, the vote to leave the EU means that, “at some point in the near future, the UK Government will trigger Article 50 of the Treaty on the European Union by notifying the European Council of the UK’s intention to leave.” This notification starts the clock on a two-year countdown in which the UK and the EU will negotiate the withdrawal. The bad news for the UK is that the withdrawal likely won’t be on its terms. The EU holds the power. “The form of such a withdrawal agreement will depend on negotiations and there is no guarantee that the UK will be able to withdraw entirely on its own terms,” Baker & McKenzie wrote in a blog. The good news is that for that two-year period, the laws remain EU laws and nothing changes legally.
But that doesn’t mean it will be quiet. One of the biggest questions is what happens to London’s position as financial hub; and within that, banking structures. Some US banks have already announced they will move their European subsidiaries out of London to an EU location, possibly Dublin or Paris. Much of the reason is because the laws make banking easier to execute from within the union than from without.
Currently, US and other non-European banks are able to operate across the EU via “passporting” as long as they have a UK presence. “Passporting means that a British bank can provide services across the EU from its UK home,” according to DLA Piper. “Passporting into the EU from the UK will not be possible following a Brexit unless a special arrangement can be negotiated. Financial services businesses wanting to continue to provide services across the EU may well have to establish subsidiaries in mainland Europe (to the extent that they do not already have them).”
What this will mean for corporate banking relationships is up in the air. Will it mean switching to a new bank that is able to offer services on the continent? Will the disruption of the Brexit usher in a new round of retrenchment by global banks? Will share-of-wallet conversations begin all over again, putting into question where a company stands with its bank?
For now, in order to maintain its status as a financial center, Chatham’s Mr. Zubrod said the UK will likely continue following the dictates of the G-20 and the EU, even after the split. London is “the king of financial services in Europe,” he said. “And if it’s going to maintain that position, it will have to have a regulatory regime that meets the European standard.” And indeed, the global standard, he added.
According to law firm Orrick, Herrington & Sutcliffe, even when made, the formal notification of article 50 will not immediately trigger any changes to EU or UK law. “All UK laws which are derived from EU Directives and incorporated into UK law will remain in force unless and until the UK parliament passes legislation to revoke them and even after notification and exit negotiations, it is likely to take years to unpack these laws and put replacements in place,” Orrick wrote in a note to clients.
Brexit may have a chastening effect as well, Mr. Zubrod suggested, as UK financial regulators going forward may attempt to outdo their continental cousins and become more conservative with banking rules, or at the very least, follow them to a “T.”
questions to ask
But now that the deed is done, it will be up to treasurers to do a post-mortem to help them navigate the certain volatility going forward. Questions that need to be asked should include:
- Which pre-event hedges paid off and which didn’t?
- How should the company handle its bank relationships and deal with its counterparty concerns?
- What liquidity structure changes should the company be considering, including the location of the header accounts and treasury center managing entities?
- What about BEPS, the OECD’s program to stop alleged corporate tax avoidance?
- The BEPS-led substance requirements have been favoring UK branches and other entities; does Brexit change this?
- And finally, what are the longer-term scenarios for the UK and sterling, and the EU and euro, that have been made more real by this event?