Preparing An Exit Strategy

Ashton, Eiger FX: Clients are already hedging with options and forwards to lock in current FX rates.

The June 23 Brexit voteis rapidly appraoching.UK voters will decide whether or not to leave the European Union—the world’s largest trading bloc—after 23 years of membership, potentiallytransforming their political, economic andsocial relationships with Europe and the rest of the world. Polls suggest a close result.The scope of regulatory fallout would be extensive, and companies should already be focusing on how Brexit might alter their critical business models.

Whether in the EU or elsewhere, will you be comfortable on June 24, if your own boards, risk committees and investors say: You knew the referendum was coming. Yousaw the polling.What’s your plan?

Remarkably, many companies continue to dither. In February this year, an FTSE-100 survey, conducted by The Financial Times, discovered that only four companies (airline EasyJet, housebuilder Persimmon, automotive and aerospace components company GKN and investment firm Standard Life) had made any detailed preparations for Brexit.Some of the inertia is attributable to an overall political will to keep the EU together. The UK government, which officially supports continued EU membership, accused Nissan of “scaremongering” when its CEO, Carlos Ghosn, hinted last September that his company could close its Sunderland plant if the UK left the EU. (Paul Willcox, chairman of Nissan Europe, walked back Ghosn’s remarks days later, saying the Sunderland plant would not close regardless of the outcome of June’s referendum.) But Nick Jeffrey, director of public policy at business adviser Grant Thornton asks, “Even if Nissan stays [in the UK], will they make as many cars?”

Few firms inside the UK are planning for Brexit, but non-UK firms are even less prepared. Derek Meilman, a partner at international law firm Hogan Lovells, says most firms are adopting a wait and see approach. “We mainly see hesitancy towards making major transformative decisions such as M&A transactions,” he explains. Fellow partner Sharon Lewis concurs, “We’ve been asked to prepare workshops for several clients, but people aren’t changing contracts and prospectuses cite very general risk factors.”


Matthews, Dechert: The UK government may not have time for nice, lengthy consultations with industry before forming a negotiating position on harmonized regulations.

As a starting point, all firms that do business with the UK need to answer some basic questions, according to attorneys at global specialist law firm Dechert, based in London. Have they identified key risks and opportunities? Are there any changes that would apply to their competitors? How will legal or economic uncertainty during any negotiation period affect them? Are there particular EU laws they wish the UK would retain or replace should it exit the EU? Do they rely on EU trade agreements with third-party countries?

Answers in each case depend on the nature of a company’s business. Consider export market concentrations. Would Brexit hamper market access or reduce attractiveness? For a company that exports UK-manufactured cars to the Continent: A post-Brexit tariff may make those vehicles more expensive. “If a company is thinking of expanding its factory capacity, they may delay an investment or hold back on the design of a new distribution network until they know the results of the referendum,” advises Jeffrey of Grant Thornton.

A Brexit could generate financing pressure on firms exposed to government financing. A project that relies on government borrowing could become more expensive. Firms may also need to mitigate exposure to concentrated export markets. Earlier this year, Standard Life CEO Keith Skeoch stated in a media call that 2015 fee-based revenue from Europe constituted just over 10% and represented about 17% in new flows: “We will ensure that we can structure ourselves to make sure we can continue to serve those European clients so there would be no dislocation, but for us it is in a relatively small area of actual fee income and flows,” he stated.

Despite the prospect of Brexit, few companies have announced they plan to diversify away from the UK. Whether companies will continue to manufacture as much in the UK depends on how tariff negotiations evolve, assuming Great Britain votes to leave. The time frame for negotiations could last at least two years, which is the UK’s period of notice for any intention to exit.

“Two years seems an optimistic time frame for something so complex, involving all the different industry sectors,” says Nicky Edwards, director of policy and public affairs at TheCityUK, a UK lobby group that represents financial services firms. “We’d expect uncertainty for longer.” Edwards adds that, post-Brexit, “the UK would be dealing with a new set of institutional relationships with regulators and policymakers.”

Clearly, it will take time to shape the regulatory architecture. Industries that require a lobbying strategy to influence harmonized regulations should use a window early on in negotiations during which companies can make their case. Roger Matthews, a senior lawyer in international trade and government relations in Dechert’s London office, cautions: “The government may not have time for nice, lengthy consultations with industry before forming a negotiating position.”


Jeffrey, Grant Thornton: In the event of a Brexit, it may be more difficult to transfer talent to where it is needed.

If Brexit is the outcome of June’s referendum, the change in status will have repercussions in three major areas: trade, currency and regulatory regimes. Companies should address each of these impacts accordingly.

Currently, the UK participates in the EU’s free-trade agreements with other countries or economic zones. Post-Brexit, more than 50 international trade treaties between the EU and other parts of the world may cease to apply to the UK. Continental companies with subsidiaries in the UK that serve the rest of the world should look at which of their exports may be affected by potential tariffs, advises Peter Vanden Houte, chief eurozone economist at ING.

Sectors differ, but on average, most-favored-nation import tariffs for the EU are about 3.2%. In the absence of a trade agreement, the EU may impose tariffs on goods or services from the UK, and the UK could retaliate by establishing tariffs on imports from the EU.

Next, firms should analyze the likely post-Brexit arrangements the UK has with third countries. Hypothetically speaking, consider a country like El Salvador in terms of its trading relationships with the UK and EU. When the EU negotiated trade agreements with this country, it was the party with the stronger hand. After Brexit, the issue is not so much whether El Salvador can negotiate better terms with the UK than it has with the EU, but whether it is a priority for the UK to negotiate an agreement at all, given limited time and resources. “The UK may just live with a gap period without free-trade agreements with smaller economies,” observes Matthews of Dechert.

Trade with a relatively large country such as Mexico poses a different set of problems. The UK could establish replacement agreements with Mexico either through an arrangement to piggyback on the EU agreement or by negotiating a separate deal. Mexico might be able to negotiate better trade terms with the UK than the EU. “The UK will be keen to set up a decent network of third-country free-trade agreements quickly,” Matthews says, adding that a country like India, which the UK would look to target, may anticipate slightly more favorable trade terms than what the UK may negotiate with less strategic countries.

Even if the UK can negotiate friendly trade agreements with other countries, UK growth will be impacted, Vanden Houte predicts. In the event of Brexit, he expects capital flight to pressure the pound, with sterling falling 10% to 15% against the euro. Demand shock in the UK, combined with a weaker sterling and negative sentiment, may shave up to 0.3% off growth in Europe, he adds. The euro, however, could lose 5% to 10% against the dollar, and so would lose competitiveness against UK companies—but gain against dollar transactions. “Even those companies that do little business with the UK are making a mistake to assume no exchange-rate risk,” Vanden Houte points out, “because Brexit may affect the euro/dollar exchange rate.”


Edwards, TheCityUK: If financial services firms were to relocate within the EU, what capital prudential requirements would they have to comply with in a new country of residence?

Peter Ashton, managing director at Eiger FX, concurs that Brexit will affect the euro as much as the pound. Clients of his firm, which specializes in international business payments and global foreign exchange risk, are already hedging with options and forwards to lock in current rates. These primarily include financial institutions, asset managers and hedge funds, with firms based in Hong Kong, Australia, the Balkans, Greece and New Zealand. “Eurozone-based companies, like those from Germany, tend to be more risk-averse and are taking more-affirmative actions,” says Ashton.

A third area of concern is the potential for regulatory upheaval. In particular, the current system of passporting rights enables UK financial services firms to operate inside the rest of the EU without setting up branches there, and to let other countries establish a branch in the UK as a springboard into Europe.

Financial services organizations have taken a more proactive approach to contingency planning than most other sectors. Last year HSBC, Deutsche Bank and US asset manager Vanguard announced they were seriously looking at moving some operations to Europe; in February 2016, HSBC said the bank would likely move 1,000 investment bankers to Paris if Brexit occurred.

In evidence given to the UK’s Parliamentary Commission on Banking Standards, both Goldman Sachs and J.P. Morgan emphasized that the passporting system underscored the rationale for their presence in the UK.

Moreover, if financial services firms were to relocate within the EU, asks Edwards of TheCityUK, what capital prudential requirements would they have to comply with in a new country of residence?

Vanden Houte, ING: Continental companies with subsidiaries in the UK that serve the rest of the world should look at which of their exports may be affected by potential tariffs.

Other significant regulatory exposures aside from financial services have attracted less public attention. For example, under a pan-European authorization system for trademarks, each country has its own registration scheme, as well as a community system for EU-wide protection. Imagine a German firm operating in both Germany and the UK that originally obtained UK and German trademarks, and later, EU-wide cover. If the UK trademark lapses, Brexit may mean the company no longer has UK protection. The European Medicines Agency, based in London, grants medical licenses in Europe. Brexit may mean laws need to be revised to meet changing standards. “A lot of pharmaceutical companies have been looking carefully at these issues,” says Matthews of Dechert.

Other key regulatory concerns involve data protection and tax. In the event of Brexit, would the UK be a safe recipient for data transfers under EU laws? And could UK companies still benefit from favorable tax treatment afforded by various EU directives?

Companies should also look at staffing. Jeffrey from Grant Thornton notes that “it may be more difficult to transfer talent to where it is needed, to put your people into beneficial secondments and obtain work visas [into and out of the UK].”

The scope of regulatory fallout is extensive, but companies should start focusing on how Brexit may alter their critical business models immediately. The result of the referendum is, after all, predicted to be close.