What is the Brexit Impact?
by Jean-Marc Servat, Chair, EACT
On 23 June, a majority of voters in the UK expressed their wish to leave the European Union. It is a major political event that will have repercussion for years. Political events often have more drastic impact on financial markets than economic ones. This is clearly the case.
What does it mean for treasurers and for the EACT?
Financial institutions, markets, treasurers are already and will continue to be impacted.
Two days after the Brexit vote, Lord Jonathan Hill, the British commissioner in charge of Financial Services, resigned. As much as his appointment in 2014 by Jean-Claude Juncker was a sign of confidence in the UK membership and the recognition of London as the major European financial hub, the Brexit vote could result in a possible fracture in the integration of European financial markets. The Capital Markets Union (CMU) project would be different if London were not part of it.
Markets reacted immediately to the results, with the GBP and equity markets worldwide dropping significantly and assets going to safe havens.
The exit mechanism is likely to take time as the UK will likely follow article 50 of the Treaty on the European Union, where the process can take up to two years. In addition, David Cameron has announced that he will step down in October and let his successor negotiate the separation. This leads one to believe the process will be long, contrary to what the European Commission and some Member States would like.
Brexit will have a structural impact on banking and securities markets, as financial institutions based in the UK will cease to be granted a ‘passport’ for their branches in other EU Member States. The exact impact will depend on what route the UK follows as an alternative to the EU membership, but without the passporting, banks currently regulated in the UK would have to establish regulated entities in the EU. Several banks have already announced their intention to move some personnel to continental Europe. Frankfurt, Paris and Dublin are frequently quoted as potential beneficiaries of Brexit. The UK could choose to join the European Economic Area (EEA) to benefit from most key features of the single market in financial services. However, such a route could be politically less palatable as it is often seen as an obligation to implement EU legislation without the benefit of negotiating at the table.
For treasurers, the process could result in fragmentation of their banking partners and a reversal of economies of scale, due to new counterparties, new processes to comply with specific UK regulations, and possibly additional hedging costs because of regulatory capital that would be tied at new banking counterparties in continuing EU members.
We recommend the profession to follow the legal developments of Brexit and identify precisely with which legal entities they are transacting. The EACT will follow the regulatory impacts closely. The EACT is a grouping of treasury associations across the European continent. Our scope extends beyond the European Union, and although most of our members are from EU countries, Switzerland’s ACTSR (since 2009) and Russia’s RACT (since 2013) are members. The London-based ACT is a recognised professional association and whether or not the United Kingdom is part of the EU, we share the goal to promote cooperation between treasury professionals. So the vote of 23 June has no direct implication for our work.