Two months after the Leave vote in the UK referendum on EU membership, the Cambre/Newington Brexit taskforce takes a look at the aftershocks – and a deeper dive into the world of financial services – in this third edition of our “tale of two cities” analysis.
The summer heat has to some extent dulled the effects of the UK Brexit referendum. In Brussels, the traditional August holiday has played well with a widespread desire to let things sit and sink in and see if time cannot offer some clarity to the post-referendum chaos and avoid the worst knee-jerk reactions before the policy-making cycle begins again in September. To some degree, the break has helped: the unexpectedly steady performance of the Eurozone economy has calmed market nerves; the lack of “copy-cat” referenda in other countries has calmed political nerves; the institutional holiday has allowed policy advisers and decision-makers time to come to grips with the technical implications of the vote, put teams in place and, in the case of the British representatives in Brussels, devise a basic plan for their own positions and roles over the coming years. The lull has however also encouraged the “wait and see” approach which already began to manifest itself a couple of weeks after the vote, when the scale of the uncertainty and lack of contingency planning from both London and Brussels became clear. Many in Brussels are inclined to think the UK will not leave the EU in the end (and consequently support a lessening of the initial pressure on the UK to trigger Article 50 asap). The (new) “Big Three” of Germany, France and Italy have made a show of unity and commitment to the continued advance of the European project, but their meeting on 22 August in the European federalist mecca of [Ventotene]. was stronger on symbolism than substance. The Poles are the exception in having clearly articulated their national position in upcoming negotiations. Poland has said it will seek to preserve its citizens’ status quo in Britain, which includes the right to work and access to welfare benefits [EurActiv]. In the meantime, Euroscepticism has already begun to regain its foothold and is expected to rattle nerves again in the upcoming Austrian Presidential election rerun and Hungarian “migration” referendum both due on 2 October.
Movers and shakers: getting their act together on Brexit
This is not however universally true. Following a whirlwind of lobbying action in July [The National], First Minister Nicola Sturgeon has kept up the pressure for a bespoke solution for Scotland, visiting Berlin on 10 August [Reuters]. German Chancellor Angela Merkel between 25-27 August met with 14 EU leaders to discuss Brexit ahead of the Bratislava EU27 “informal” summit set for 16 September. Merkel has said the summit should focus on job creation for the young and reinforcing security in Europe [Euobserver]. She is also looking to broker a compromise between member states that want deeper EU integration and those, particularly in eastern and central Europe, that support taking some powers back to the national level. The divide is also partially along political lines. The European Socialists met in Paris on 25 August to discuss how to implement their vision of a more integrated Europe post-Brexit, focusing on social democratic “sustainable growth”. European Council President Donald Tusk is also meeting with all EU leaders ahead of the summit [Council]. The Commission appointed Michel Barnier, a French former Minister and Commissioner to spearhead its Brexit negotiation taskforce. The choice of a French national (and non-English speaker), is in some quarters judged a conscious snub to the British. A dedicated Europhile with in-depth knowledge of financial services, Barnier is in Brussels however broadly considered a safe pair of hands to manage the tough negotiations ahead and balance the power of the Council team headed by comparatively unknown Belgian diplomat Didier Seeuws [Politico].
The gradual but unmistakeable fallout?
The summer has also seen a very tangible shift in perceptions of British influence in Brussels. The immediate aftermath of the referendum saw Jonathan Hill resign his post in the European Commission and a handful of Members of the European Parliament relinquish their leadership roles on key dossiers, in some cases following pressure from their continental colleagues [Politico]. Since then, the UK has rallied to nominate a new Commissioner (Julian King has been assigned a new “Security Union” portfolio in what is seen as a bid to strengthen security cooperation as economic union flails). In the European Parliament, a consensus is emerging among Labour MEPs (receiving very little in the way of direction from London) to maintain their posts and files while toeing the Group line unless British national interests are clearly at stake. Tory MEPs had already been briefed by capital to continue with “business as usual”. Concern remains in the Parliament and Council however that the Brits could block legislation and reforms in the interests of the bloc, or use their votes as a bargaining chip. Most votes in the Council demand approval by countries representing at least 65% of the EU’s population, and even a UK abstention policy could make it very difficult to get the votes needed [BBC]. For business, British influence in Brussels going forward is also a major question mark and has already markedly declined [Politico]. As full members of the club, British industry has ensured its voice through trade associations which are one of the core cogs of the Brussels lobbying machinery. The future of this access is now in doubt and alternatives need to be found. As the summer comes to an end, complacency is no longer an option.
The quieter summer period following the EU referendum result has not helped to lessen the uncertainty felt by business, and in particular the financial services sector on the potential implications of Brexit. Despite this, leading figures in the sector have taken advantage of Chancellor Philip Hammond’s reassuring comments – by stating that single market access is key in future negotiations – by instigating their own representations to Government ahead of the triggering of Article 50, which itself has been delayed until next year. The British Bankers’ Association (BBA) is looking to request a “Swiss-style plus” bilateral deal and a new taskforce led by Santander UK’s Chairman is working on presenting policy ideas to the Cabinet Committee for Brexit.
Restructuring the civil service
Prime Minister May was swift to restructure departments and the civil service in an attempt to deal with the magnitude of the task ahead in unpicking the UK’s 40 year relationship with the EU. Right-winger David Davis, the former Shadow Home Secretary under David Cameron prior to the 2010 election, was appointed as Secretary of State for Exiting the EU, and Liam Fox, the former Defence Secretary and another prominent right-winger, was appointed to a new Department for International Trade. The restructure took the civil service completely by surprise, and for some weeks both Cabinet Ministers were left hot desking in the Cabinet Office with hastily put together private offices of a dozen or so civil servants to assist them. The turf wars in the weeks since the restructure have begun to emerge. Dr Fox wrote to the Foreign Secretary, Boris Johnson, copying in the Prime Minister, suggesting that British trade with other countries would not "flourish" if responsibility for future policy remained with the Foreign Office. In the letter, leaked to the Telegraph, Dr Fox said that "In my first few weeks as Secretary of State for International Trade it has become clear to me that existing cross-Whitehall structures have meant that HM Government has not taken the holistic approach it might have on trade and investment agendas.” He called for the Foreign Office's economic diplomacy team, which helps champion trade and growth, to be transferred to his department. David Davis has also attempted to poach the Europe Directorate from the FCO, claiming that his new department needed ‘the most brilliant people’ from across the civil service to work in his department. The turf wars are interesting in themselves in showing the tensions between the different cabinet ministers, but also reveal a much broader point – Britain is simply not ready to begin negotiations, which is why the Chancellor and the Prime Minister have put off triggering Article 50 until 2017. Another key fact is that Britain currently suffers from a dearth of trade negotiators, as all of its dealings with foreign capital have been done via Brussels for the last four decades. In comparison, Canada has employed 800 negotiators to manage its new EU trade agreements, named CETA. Britain’s staff force of a few dozen simply is too few and needs to be significantly expanded.
Clouds on the horizon?
Negotiating with the EU on the terms of Brexit is not the only difficulty that the new UK Government faces. Hammond and Prime Minister May have issues closer to home to manage, namely the ‘three Brexiteers’ of Boris Johnson, David Davis and Liam Fox, all of whom are vying for position in the race to drive forward the Brexit process on terms closer to the spirit of the Leave campaign. Moreover, they – and crucially, a significant number of Conservative backbenchers – will be keen to ensure that the UK does not trade away an end to free movement of people in return for continued access to the single market. This will have a significant impact on areas such as farming, healthcare, education and services sectors, all of which significantly rely on a predominantly non-UK workforce. The National Farmers Union has stated that, “we are not just talking about access to seasonal labour - some sectors and businesses are currently reliant on non-UK workers in full-time roles, year-round.” Evidence given by companies to the Business, Innovation and Skills Select Committee report into Access to Finance, suggested that in the FinTech and financial services sectors, in some companies EU nationals account for up to 80% of their workforce, and there is significant concern over their position given the Prime Minister’s decision not to guarantee their future in the UK until a similar agreement can be made for British nationals in the EU. Conservative backbenchers have already begun to organise themselves with a view to identifying which areas of financial services legislation they wish to scrutinise and possibly amend when it is transferred into UK law. The current assumption by a number of constitutional experts is that the Government will be forced to do a block transfer of all EU legislation into UK law in one Bill, before beginning the process of amending legislation piecemeal. A number of Conservative MPs may well take a different view, and use the process in Parliament to slow down the Brexit process and consequently increase uncertainty. Until the Government sets the direction it wishes to take, both in terms of the future relationship it wants to have with the EU, and how it wants to implement the Brexit process, we are unlikely to achieve any greater clarity.
Passport to the future?
Securing the best Brexit deal for financial services – in the form of a bespoke model that will enable “passporting” and access to the European Investment Fund – won’t be easy, especially given that Lord Hill’s resignation as Britain’s European Commissioner has further removed Britain’s influence over making final adjustments to the pivotal MiFID II legislation which will aim to prevent excessively risky practices yet still affect UK businesses. The key issue for financial services in the UK is what impact the Brexit negotiations will have on “passporting” rights, where businesses based in the UK – and regulated by UK authorities – are able to provide financial services anywhere in the EU and in the EEA while only having to follow one set of regulations. With financial services accounting for about 8% of the UK economy, any impact Brexit will have on these rights is likely to have a significant impact on the UK economy as a whole. Until the Government provides direction about whether the UK intends to remain in the EEA or go down the bilateral trade route, the uncertainty will remain.
Impact on regional funding
The decision to leave the EU will also have a profound impact on regional funding. The structural policy of the EU has existed since the 1970s, aiming to reduce economic inequalities across the different regions across Europe. Whilst the UK has been a net contributor of funds towards the EU, the North of England has received significant funding since the decline of traditional heavy industries, in an attempt to create new industries, particularly focussed on SMEs and technology. Over the current 2014-20 funding cycle, the regions will gain around £2280m in European funding, before match funding, and around 70,000 jobs have been created in the North, alongside 18,000 new businesses, according to the University of Sheffield’s Political Research Institute. There was significant uncertainty in the immediate aftermath of the Brexit vote about the future of regional and infrastructure funding, particularly since several of the Government’s flagship devolution deals were responsible for administering and directing the spending of EU structural funds. Philip Hammond announced earlier this month that it would continue its funding beyond the UK’s departure from the EU for all structural and investment fund projects, as long as they are agreed before the autumn statement. If a project obtains EU funding after that, an assessment process by the Treasury will determine whether funding should be guaranteed by the UK government post-Brexit. Universities and researchers will have funds guaranteed for research bids made directly to the European Commission, including those to the EU’s Horizon 2020 programme, an €80bn (£69bn) pot for science and innovation. The Treasury said it would underwrite the funding awards even when projects continue post-Brexit, although anecdotal reports from universities are already suggesting that researchers are pulling out of applying for posts due to Brexit. These commitments do not, however, satisfy a number of critics who claim that regional funding will suffer unless full guarantees are made. The chairman of the Local Government Association, Lord Porter, said “Local areas need certainty around the future of all of the £5.3bn in EU regeneration funding promised to them by 2020. The continued uncertainty risks damaging local regeneration plans and stalling flagship infrastructure projects, employment and skills schemes and local growth”. Meanwhile the Labour Party has welcomed the move but called for clarity over whether Britain would remain a member of the European Investment Bank, which funds infrastructure investment in areas such as housing.
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