Article 50 has been triggered by Theresa May. This sets out the start of the formalised process for the UK to leave the EU. The government now has two years to set out what that actually means in financial, social and political terms for the UK’s citizens and businesses.
This means there are going to be big changes for the 64 million people living and working in the UK and the 5.4 million SMEs. But what does it all mean and in what ways can it affect your business?
According to the Telegraph there are two major points to negotiate during the implementation of Article 50: Untying Britain from membership (which is easy); and (the real hard bit) establishing what tariffs and barriers to entry will be allowed like free movement of EU nationals and single market access.
While your business will want the easiest economic and trade terms possible, if the EU is to allow such lenient separation terms it will make it easier for other countries to follow suit, which it definitely doesn’t want. So it won’t be straightforward and it might even take a lot longer than two years.
What Are The Big Issues of Article 50?
The big issues, including the ‘stickier’ points of this UK/EU divorce are already readily apparent and include:
- The rights of EU citizens in the UK and UK citizens in Europe
- Free Trade Agreements
- Customs Union
- Taxes on financial businesses
- Extending the two year timeframe
- Defence and Security.
The real indicator, says the Independent is how the relationship pans out between the UK and EU. Will it be cooperative or antagonistic?
Expect A Rocky Ride For the Pound Says the FT
It’s a question that is going to elicit a lot of differing opinions, but the facts remain that since Theresa May has been touting a consistent, coherent message regarding Brexit, the pound has been both stable and strengthening. Suggesting that for the money markets, a clear message equates to a clear plan or strategy, which will ultimately mean a more buoyant economy.
But there are other considerations to factor in too. A Scottish independence referendum is one, although Theresa May has consistently repeated that the government will not be allowing this
The Financial Times highlights five factors that can have a big influence on the medium-term value of the pound:
1. The impact of the pound’s recent decline on business
2. The risk posed by Brexit on inward investment
3. Theresa May’s relationship with influential EU leaders
4. The forthcoming French elections
5. Likely rate rises in the US.
What this means is that during the next two years, the pound is likely to fluctuate alongside the process of negotiations. And while there might well be indications of a strong US dollar and strengthening Euro, neither will be unaffected by these Brexit negotiations. Principally due to the fact that no external or internal deals (which can raise the pound’s value) have yet been outlined or formalised.
- Trade deals outside the EU haven’t been set
- EU tariffs have not yet been renegotiated.
CNBC agrees that the biggest fluctuations between the pound and the dollar have already been seen, notably the initial decrease to a 31 year low rate of $1.31. While it now hovers considerably lower at around $1.22, they don’t see it moving further down in value.
Most analysts, including Berenberg and ETF Securities feel that the decline in the pound’s value has been ‘exaggerated‘ and that triggering Article 50 won’t cause any volatile movement because much of the fear of Brexit has already been ‘priced into’ it.
Does Your Business Employ EU Citizens?
If your business currently employs a high level of EU citizens in its workforce, or has a number of key positions filled in this way, it is likely that the next two years are going to be seen as critical to your consolidation and balance.
The nature of the kind of Brexit we are likely to experience, whether it is hard or soft will dictate many future employment decisions. Indications as to the type of exit we are likely to experience might be similar to the two alternative systems already in place; the Norwegian (EEA) and the Swiss (EFTA) models.
Norwegian model – remaining fully compliant with EU legislation and the free movement of people.
Swiss model – bilateral agreements on free trade for specific industries and free movement of people.
Theresa May has however, all but dismissed adopting the framework of these models promising instead that this would be a ‘red, white and blue Brexit’ with the government seeking a bespoke deal.
What this means for the free movement of EU citizens isn’t clear, but it certainly suggests that there will be some sort of change in the legislation allowing EU nationals to work freely in the UK, although it is unlikely it will be overly discriminative or in any way contrary to the reciprocation that the 1 million Brits living in Europe will likewise want to experience.
What Does Small Businesses Want From Brexit Negotiations?
What’s clear is that things are determinedly unclear for small businesses. This need for clarity has been echoed by currency newsgroup The Economy News in their Pound Service Live magazine and their sentiments echo the view of many small businesses around the country:
“Frustratingly, we’re still in the dark in regards to the full impact of Brexit, but early indicators are a mixture of positive and negative“.
Clearly the weaker pound has had a positive boost on exports, with order books looking a lot healthier after surges in demand from overseas for UK products. But this has to be tempered by the impacts of rising costs for materials coming the other way.
The key concerns for small business owners are:
- Being able to import and export with confidence
- Rights and responsibilities for EU and non-EU workers
- The flexibility of the Free Trade Agreement
- Access to skills.
These concerns have paved the way for the Federation of Small Businesses (FSB) to come up with their own ‘wish list‘ from Brexit:
The FSB report offers a glimpse into what is seen as the UK’s small business’ top priorities:
63% still see the EU as a priority trading partner, while 42% see the US as the key trade ally. Meanwhile 29% believe we should be concentrating on Australia, 28% on China and 22% on Canada.
What remains important is being able to hold on to the best deal possible with the EU. Which is (and probably will continue to be) Britain’s biggest trading partner.
And for SMEs this means holding on to both the right talent as well beneficial aspects of free trade agreements within the EU.
“The impact of potential tariffs and non-tariff barriers to trade with the EU is a real concern for small businesses. They [small businesses] call on the government to secure the easiest and least costly access to the EU single market in Brexit negotiations…including frictionless cross-border trade” –
Mike Cherry, FSB national Chairman
How Will Financial Services Be Affected by Article 50?
One of the bigger issues with the financial services industry is the role of ‘financial passporting‘ a kind of security pass for financial institutions based in a member EU state to be allowed to access customer’s financial records and markets across the rest of the EU. Currently London is at the heart of the international financial mechanism, but there are fears that this will have to change when we leave the EU.
It was one of the bigger concerns of the government report on Brexit: Financial Services when stating (regarding a potential removal of financial passporting)
“It is equally clear, from the evidence we have heard, that a deal to bolster the existing equivalence provisions should be a high priority.“
And this means that investors and hedge fund managers will either be crossing their fingers or wasting no time in setting up alternative financial arrangements to maintain their business and clients rather than waiting for Brexit negotiations and uncertainties. This puts into question an end to the financial passport rights for the City of London.
It is an industry that is worth over £9 billion to the UK economy.
How Business Lending Is Viewed As A Different Fish
Despite Brexit, Article 50 and the UK’s separation from the EU we haven’t seen a stemming of the flow of business funding available to British small businesses.
In January the British Business Bank agreed a further £40 million to fund British businesses through which followed the £60 million injected last year. This comes on the back of the £100 million of funding agreed by the European Investment Bank last year, despite the Brexit vote.
Although further investment from the European Investment Bank remains muted until negotiations concerning Article 50 are either agreed upon or concluded, investing in Britain is still seen as an attractive mantra for British SMEs and larger corporations.
TigerBridging, a bridging loan finance company expects Article 50 to have a lesser effect than rising interest rates on the property market. But what it does envisage is movement in financial institutions away from London due to the uncertainty over financial passport rights and this can have a big impact on the property market in the capital and by definition will have an impact further afield in the UK regions too.
Triggering Article 50 Can Be A Time For Optimism When Considered For The Right Reasons
The government white paper on Brexit, drafted up in February, clearly explains the position the UK and the EU finds themselves in.
What becomes increasingly evident is not the belief that Brexit needs to cut links and ties but that it can in effect do the opposite. Article 50 might well have a number of sticking points and has a big fish to fry – in the financial services industry – as well as EU citizen rights and movements.
But for SMEs the focus isn’t about creating trade agreements that are somehow unbalanced or unequal with each other but, as the white paper states:
“Unlike other trade negotiations, this isn’t about bringing two divergent systems together. It is about finding the best way for the benefit of the common systems and frameworks, that currently enable the UK and the eu businesses to trade with and operate in each others’ markets.“
So let’s hope this outlook prevails over the course of the next two years.