In some ways, it feels like the 12 months since the EU referendum has gone quickly. We have had the excitement of the US elections, the outcome of which enabled us to point fingers back at the Americans. There were the legal challenges to the UK government’s ability to trigger Article 50 without going to Parliament. And, most recently, Theresa May sated our desire for something else to vote on (which none of us knew we had). We have also had to contend with the news that Nestlé Original coffee is now more expensive, along with Marmite, fish fingers and Walkers crisps. If you reach for a calming glass of French wine you will note that that too will be becoming more expensive. And forget about a comforting Crème Egg: they’ll probably be smaller, too.
In other ways, very little has happened. After the court hearings and the novelty of all 12 judges of the Supreme Court of the UK sitting in judgment at once, the government went about its business and steamrollered the Article 50 vote. During the debate, numerous MPs put forward items which they wanted to be specifically referred to in the bill. These varied from promises securing the rights of EU nationals who have resided in the UK for five years to remain indefinitely, to the UK’s position as a member of the European Atomic Energy Community. In the end, the government penned what was dubbed the shortest suicide note in history (again).
The Article 50 notification to president Tusk stated that the UK recognised the four freedoms of the single market are indivisible and that the UK was not seeking membership of the single market. However, the notification also specifically referred to the importance of “economic and security cooperation”, with express mention of the financial services and network industries, and recognition that UK companies will need to comply with EU rules in the future. As encouraging as the sentiment may be, these are small crumbs of comfort and we remain very much in an environment of uncertainty.
That said, we find ourselves in a relatively buoyant market. Although Deloitte has reported that the number of deals for the first quarter of 2017 is down from 212 to 188 compared to the same period last year, this is perhaps a misleading figure. Those deals were reported pre-Brexit vote and a number of transactions would have been held over from the end of the previous year. Instead, we should consider activity post-referendum. The general sentiment is that deal flow eventually, allowing for some lag, dropped following the vote. Add in the slowdown which occurs in the run up to the US presidential elections and we have the conditions to explain the quiet transactional market. Since the turn of the year, we have seen a different story.
Transactions are underway and are finding traction to propel them to completion. Perhaps dealmakers have decided that they can either sit on their hands for two or more years, waiting to see what Brexit really looks like, or they can get on with business and take positive steps. Notwithstanding the bounce in value of the sterling following Theresa May’s announcement of a general election, UK businesses remain attractive prospects with solid fundamentals and good valuations.
There is speculation that some of these transactions are entities consolidating, perhaps defensively and perhaps in anticipation of stiffer headwinds resulting from Brexit. For example, Wood Group agreed a takeover of its rival North Sea oilfield services company Amec Foster Wheeler, with Wood Group claiming that it believes there are at least £150m pre-tax cost synergies from the transaction. Similarly, Standard Life agreed an all-stock £3.8bn acquisition of Aberdeen Asset Management. These are big deals, and they are domestic, with reduced exposure to foreign exchange risks and which have cost-savings featuring prominently. Encouragingly, there remains a healthy pipeline of inbound investment, with notable investors from the US and Asia, but it needs nurturing. Less positively, some commentators are of the opinion that this only a bump in volume and activity will slow down once the bigger transactions have completed and the defensive plays have been made.
To head off any such decline, we continue to look to our institutions for strong guidance and decisive leadership. Unfortunately, despite the rhetoric there is still little for us to hang our hat on. The Financial Conduct Authority (FCA) admitted as much in its business plan for 2017/18 when it said: “with little information available about the form and nature of these negotiations, it is currently unclear how [Brexit knock-on effects] will materialise”. The accompanying announcement that the FCA is allocating £2.5m of its £527m budget to a Brexit task force did not create the warm glow of positivity it intended; it feels very underpowered considering the size of the task before the regulator. Sadly, that was largely the extent of the coverage of Brexit in the business plan.
The FCA is to advise the government on technical matters in the run up to Brexit in a bid to avoid the cliff-edge Brexit of the regulatory framework changing the moment the UK completes the exit. There are 5476 UK firms holding at least one passport to undertake business across the EEA, and 8000 overseas firms are authorised in other EU states to do business in the UK. Clearly there is a mutuality of interests to agree on a method by which that deal flow can continue. Andrew Bailey, chief executive of the FCA, wrote to the Rt. Hon Andrew Tyrie, chairman of the House of Commons’ Treasury Select Committee, in October 2016 and clearly summarised the UK’s position when it becomes a ‘third country’ by the EU. As Mr Bailey noted, there does not presently exist a single solution to cover the financial services industry. If the UK were to leave the EU without a free trade agreement being in place, the UK would default to the position under the World Trade Organisation, taking away any passporting rights that might exist.
Therefore, the FCA needs to consider the equivalency frameworks that exist in certain EU legislation and standards, including the Prospectus Directive, Alternative Investment Fund Managers Directive, MiFIR and MiFID II, Transparency Directive, Accounting Directive and Solvency II. Proving equivalency will not be easy, particularly in the face of pressure to remove some of the perceived shackles imposed by EU regulation. At least we can take encouragement that our standards are presently EU-compliant and that 33 third countries have been granted at least one equivalence determination by the EU. Sadly there is little such comfort for third country passports, with ESMA continuing to march to an unknown beat from its own drum regarding AIFMD passporting.
The business plan replicates the five-point ‘optimal framework’ of Brexit-related focus for the FCA that was trailed in the same letter: (i) cross-border market access; (ii) consistent global standards; (iii) cooperation between regulatory authorities; (iv) influence over standards; and (v) opportunity to recruit and maintain a skilled workforce.
Again, the proof is in the pudding when it comes to the true meaning and value of these statements. For present purposes, the most significant are the first four. These all point towards an equivalency argument; we want our financial services firms to be able to advise in the EU, we will maintain global standards which we will have a voice in setting and we want other regulators to play nicely.
So on the anniversary of the referendum, we may know the direction of travel but the detail remains, understandably, sketchy.
One year after that momentous vote we will have triggered Article 50 and Theresa May will most likely have strengthened her mandate following the snap election. That should provide the platform for driving towards Brexit. There is a huge amount for the lawmakers and the regulators to do, and it could be wild ride. In the meantime, it seems to be the case of not waiting around to see what’s in the mystery box but to get on with business, not least because everyone else is and no one likes to be left behind.
Sam Pearse is a partner at Pillsbury Winthrop Shaw Pittman. He can be contacted on +44 (0)20 7847 9597 or by email: firstname.lastname@example.org.
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