Brexit Insights

In Brexit, Commodities, Equities, Exchange Traded Derivatives, FX, OTC Derivatives, Thinking by New Link Editor

On the 23rd June 2016, the British population voted in favour of leaving the European Union. Jack Hemmings interviewed Tom Masters, Partner at New Link Consulting, to examine the likely ramifications of Brexit for firms operating in the financial services industry and got his thoughts on how firms should organise themselves to ensure that they are best prepared for any eventuality.

“What do you see as the biggest Brexit challenge?”

The delivery of Brexit will be a legislative, logistical and indeed cultural challenge on an unprecedented scale. The volume of regulatory reform required is quite frankly not practical and transitional requirements will be essential to ensure that the necessary changes can be instigated within an achievable timeframe. However, practicality and pragmatism are not necessarily going to win out in a protracted battle, where more relevance may be given to more emotive political factors, than matters of structural reform and the minutiae of associated legislation necessary to the smooth functioning of markets. It is likely therefore that much of the preparation for the onset of Brexit will need to be completed in the dark. A ‘Brexit Hedge Strategy’ will therefore be required.

“You refer to a ‘Brexit Hedge Strategy’. Why do use the term ‘Hedge’?

Quite simply no one knows what the outcome of the Brexit process will be. It is quite conceivable that passporting rights are agreed as part of the negotiations, and UK entities can continue to service the EU market, especially if the regulations, both incumbent like EMIR, FRTB and forthcoming like MiFID II, are transposed into UK law without amendment. Unfortunately, at the opposite end of the spectrum, it is also possible that no agreement may be formulated and punitive measures implemented that restrict the ability of EU citizens to access UK regulated services. Given the short timeframe for negotiations and resolution, it is unlikely that firms will be afforded the luxury of planning on certainty – a ‘hedge strategy’ will therefore be needed.

“If the details of Brexit are not known, how can firms even begin to plan for its outcome?”

Firms should start with asking themselves 2 crucial questions:

Where are my clients?
Where are my markets?
Understanding the above criteria is not necessarily as simple as it sounds, however, it is the central foundation upon which the ultimate resultant implementation will be built. Once your market access capability and location of your client base has been determined the work of figuring out a Brexit hedge strategy can commence.

The object should be to prepare the business such that it can both access markets and service clients from both a EU domiciled entity and a UK entity. If clients can interact and use the services of either entity then market access, and corresponding revenues, should be assured if market access is restricted to one entity by a legislative impediment.

“What about people and staff. Can planning start in this area?”

While at this stage it is not yet known how EU-27 citizens residing and working in the UK will be treated post Brexit (and indeed, UK citizens residing and working in the EU-27), certain contingency measures may be considered. Staff may be encouraged to take dual citizenship where they have met the requisite residency duration. It is worth pointing out, however, that this is likely to be one of the first elements of Brexit to become clear, especially if the EU negotiators get their way. At the very least firms should be looking at their workforce and assessing their citizenship status and potential.

“Is it just UK based firms that should be concerned?”

It is certainly not the case that UK based firms are the only companies with an issue here. The UK itself is a sizable market, and certainly one of the continent’s most wealthy. EU firms wishing to continue to access the UK domestic market should also be looking at Brexit in sharp detail, especially those currently supporting UK operations from a branch as opposed to a subsidiary. In this scenario, it could be said that firms in this position will have a greater volume of work ahead of them than UK institutions with an already established EU 27 state subsidiary.

“How do you go about building a ‘Brexit hedge strategy?”

Defining a strategy is a complex task and will be bespoke to each firm based on their client base and the markets which they operate on. Broadly it will centre on the location or locations of their EU hub or hubs.

Firstly, it is important to establish the desired business outcome of the strategy from the outset: do they see Brexit as an opportunity to go after market share? Do they wish to simply preserve business? Do they wish to recentralise on certain profitable key markets? Secondly, it is necessary to build a comparative model to test the costs and benefits associated with each potential strategy. This will enable variables to be compared at the outset and will also provide the flexibility to adjust various parameters as the Brexit discussions unfold.

Considerations that should be addressed include the proximity to clients, lingua franca and legislative environment of the location. This will be of primary importance to clients so it should form the central tenet of the analysis for the firm. Topics such as the local employment law, taxation, supervisory regime and the reputation of the local regulatory bodies as well as communications and the attractiveness of the city for key staff will also need to be considered.

“How can firms define their implementation plans?”

This will vary from firm to firm. Some firms may have already well established EU-27 entities with mature operating models whereas others will need to start from scratch, apply for or acquire appropriate licenses and establish an office in a new location. Above all, firms should ensure that they have structured their delivery programme in a structure that isolates thematic work streams and tracks dependencies between each of them. As the implementation plan will be executed with the outcome of the final terms of Brexit undefined it is important that the assumptions upon which key decisions rest are isolated so that changes can be controlled to give assurance that outcomes and strategies are appropriate for the ultimate requirements.

Thematic work streams are likely to include topics as diverse as: Regulatory Approval, Client Onboarding or Transition, Market Onboarding, Staff Organisation and Relocation Planning, Administrative and Office Needs and Marketing & Awareness.

“What are likely to be the main implementation challenges for firms?”

Based on previous experience of entity and client migrations I would say that the negotiations around client agreements will probably be the biggest task. Clients may take the opportunity to renegotiate terms and press for different pricing in certain scenarios. Mobilising a motivated sales force is ordinarily critical to success. Likewise, technical challenges can abound in ensuring the appropriate supporting infrastructure is built out and tested in a meaningful manner.

It is important to remember that clients will also be considering their approach to Brexit. This could necessitate the need to execute novations to migrate and consolidate business with their chosen counterpart. This could have knock on effects in terms of netting and capital, metrics that should be tracked as Risk Indicators on the project.

All of the above will require significant investment which is unfortunately incremental to the current demands placed on firms by ongoing regulatory reform. Perhaps the biggest challenge will be to ensure that the work put into insuring that the impact of Brexit is allayed is not greater than the benefits derived. Careful outcome modelling with a frequent review cycle will be critical to mitigate this risk.

“How can New Link Consulting Help?”

New Link have been carefully considering their response to Brexit to design an offering that will help firms define their hedge strategy. Undertaking a thorough assessment of a client and markets through our client review services followed by a detailed evaluation of location strategy leveraging analysis underpinned with our scoring methodology will help us shape the strategy of our clients.

Our extensive experience in managing large scale multi-faceted programmes of work within the financial services sector mean that we are uniquely placed to leverage our practitioner led consulting service to structure, plan and execute the defined strategies within a robust, coherent and transparent governance structure.

In addition, New Link support clients in both the UK and on the continent. As part of our own Brexit strategy, we will soon be opening our EU subsidiary from which we can support our existing continental client base and help firms with any transitional tasks necessary to the execution of their strategies.


For further information on our Brexit service, or if you would like to discuss the topics discussed in this interview please contact Tom Masters or Jack Hemmings. They will be delighted to provide you with further information.