Post-Brexit Game Plan
Now that the official wheels are in motion for the United Kingdom to leave the European Union by 2019, companies that have operations in the UK or conduct significant business there need to develop contingency plans for however the Brexit negotiations proceed.
The UK government’s plan is for a so-called “hard” Brexit, meaning that it plans to leave the EU single market and introduce some immigration controls over people coming from the EU into the UK, said David Gent, legal director at Bird & Bird in London. The UK would also no longer be a member of the EU Customs Union, which could mean some trade tariffs between the UK and EU.
“The precise terms of trade between the UK and the EU will be uncertain until a new free trade agreement between the two is negotiated,” Gent said. “There’s also a possibility that the UK and EU will not be able to reach an agreement.”
There’s also uncertainty over what the terms of a potential trade deal may be between the UK and the U.S., and how that might impact U.S. companies doing business in the UK, he said.
“The UK is commonly used by U.S. companies as a gateway country to trading with the EU, but after Brexit companies may want to rethink this, or if entering the EU market for the first time, look at another country instead,” Gent said.
The financial services sector is expected to be particularly impacted, and many firms may move jobs to mainland Europe, he said.
Many U.S. life sciences companies have also established their European headquarters in the UK, and there’s been uncertainty about the future of the regulatory environment, including the conduct of clinical trials and approval procedures for medications and medical devices, said Sally Shorthose, a Bird & Bird partner. Currently the UK regime is “intricately incorporated” in the EU system, and the UK government has announced it would continue close relationships with EU regulators.
“… The changing strategic profile also changes the strategic risk profile. As a result, we just want to make sure the company’s insurance and risk management programs are performing at an optimal level.” — David Molony, risk finance consultant.
“My discussions with pharmaceutical companies indicate that if the UK is not part of the same regulatory environment, it would then become part of a third or fourth wave jurisdiction to get approval for new medicines,” Shorthose said. “If they have to pay once for EU approvals, they might not pay again for UK approvals in a hurry.”
The demand for goods and services from all types of U.S. businesses might be impacted by a downturn in the UK economy due to Brexit, as well as changes in UK regulations, said Eric Siegel, a partner at Dechert LLP in Philadelphia.
U.S. exporters should consider currency hedges if the UK pound falls further relative to the dollar, Siegel said. For example, a hedge that allows a U.S. business to convert pound-denominated sales into a stable dollar amount, or a hedge that pays off when the pound falls, could allow a U.S. business to keep its prices from going up for UK customers.
Building a Plan
Aon Risk Solutions is now offering clients a three-step Brexit Navigator tool to determine what could happen to their risk management, insurance and business continuity management programs after Brexit, said David Molony, a risk finance consultant for the firm in London. Initial risk assessments are based on how clients are currently using the “four freedoms of movement” that exist between the UK and EU — goods, services, capital and people — and how those freedoms could change after negotiations.
The next phase of Brexit Navigator involves the potential redesign of a client’s risk management and insurance programs if the client has to restructure its operations, he said.
“Say a German company is selling goods in the UK, but if a there’s a potential tariff that reduces its profit margin, the company could then decide to concentrate business elsewhere,” Molony said. “That means the changing strategic profile also changes the strategic risk profile. As a result, during this phase we just want to make sure the company’s insurance and risk management programs are performing at an optimal level.”
During the tool’s execution and resilience testing phase, Aon will help clients determine whether their business continuity management strategies are still appropriate, depending on the changing business environment, whether or not they have the same number of employees in every location, and whether they’re still operating in those locations or in new locations.
Revisiting Legal Structures
Brexit could significantly impact the business operating models of insurance companies based in the UK and those who transact global business through a UK entity, said Greg Galeaz, U.S. insurance industry leader at PwC in Boston.
“If they continue to operate in the UK and then set up another operation, that could create some level of inefficiency and require additional capital,” Galeaz said.
Companies will also need to review their legal entity structures to determine both their capital and tax effectiveness post-Brexit.
Mark Weil, chief executive of Marsh UK and Ireland, said that the brokerage firm is concerned about the possible loss of passporting and the ability it affords clients to access insurers across the EU from a single country license. Insurers are acting to establish local licenses inside the remaining EU, so that they can passport from there.
“That’s Plan A,” Weil said. “It does, though, have some risk — the most obvious one is being timed out by the process. So we think clients and insurers need a Plan B that doesn’t depend on governments and regulators and which puts them back in control, keeping firms’ access to the broadest set of choices.”
Marsh has offices and licenses in all EU countries, giving it the ability to wholesale from its EU office network into the UK and vice versa, he said. The firm has shaped a “bridge” structure based on fronting that it uses in other regions such as Latin America, a structure that European insurers used before the single EU market and passporting existed.
Brexit could also increase the tax burden for multinationals, said David Jaffe, principal of Jaffe Counsel plc. Multinationals currently can move dividends up and down the corporate chain throughout the EU without tax consequences, but after Brexit, there may be tax costs for companies paying dividends to their UK units.
“The thing to remember is that this is going to be a roller coaster for a couple of years, a great period of uncertainty regarding the UK’s negotiations with the EU, likely with a lot of gamesmanship and drama,” he said. “The key for companies is to keep flexibility in their contingency plans.”
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds, said that the UK-EU relationship will likely stay fairly intact.
There may be some negotiations around the UK’s contribution to the EU’s budget, but for the most part, he anticipates free movement of goods, services and financial capital. &