UK/EU: Working through uncertainty

Practical consideration for Financial Institutions

The British people have voted for the UK to Leave the European Union (EU). This is a momentous decision which will have significant implications for both the UK and Continental Europe. Whilst a second referendum in the wake of a period of intense negotiations between London and Brussels cannot be entirely ruled out, Financial Institutions should commence reassessing their strategic, business and operational models on the assumptions that the UK will leave the EU definitively within the next three years.

In this document, we discuss the implications for Financial Institutions and explore the immediate practical options facing their Boards. It is an updated version of our paper of May 2016 ‘Preparing for the EU Referendum’. Whilst this paper focuses on the implications for UK based Financial Institutions, a British departure from the EU will also have significant consequences for all Financial Institutions based in or dealing with European markets.

For the moment, the Referendum outcome technically changes nothing, in that the UK still remains a member of the EU and is bound by its legal and treaty obligations until such time as the country definitively exits. However, in practice much will potentially change and much — including the applicability of future EU Regulations and Directives — will remain uncertain during the two to three year period of negotiations between London and Brussels upon which we are now embarked.

We may well see a period of market volatility particularly in foreign exchange and equity markets although Central Bank intervention and the exhaustion of immediate profit opportunities will likely ensure this period is relatively short lived. On the political front, in the UK there will be tension within the Government in the wake of the referendum campaign and probable changes of Ministerial portfolios. A general election before the end of the year should not be ruled out. There will be renewed calls in Scotland for a second independence referendum.

Against the background of political and economic uncertainty, Financial Institutions will pay close attention to future negotiations surrounding the UK’s future access to the Single Market and in particular to Passporting and Equivalence rights for UK based institutions.

Although there is no call for precipitate action, all Boards will need to launch a comprehensive programme to assess from multiple perspectives the likely consequences of the referendum decision, its implications for strategic, business, operational and governance models, and the options available. We hope this paper will serve as a short and useful introduction to some of the principal issues involved.

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