Relocation – what are the risks?
December 2016 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
The vote to leave the European Union (EU) and the potential risk of losing the financial passport has ignited intense discussions about whether financial services should relocate to countries that are still part of the bloc. With companies weighing up their options to ensure preferential treatment and continued access to key markets, numerous factors should be taken into careful consideration when making a decision.
When relocating your business, cost savings are not the only thing to bear in mind. Applications, systems, hardware and people are all being moved and a seamless transition is essential to prevent any interruption or risk to your reputation or finances.
Many view international relocation as a cost-saving initiative but the reality is more complex. Issues to take into account include the country’s infrastructure, legal environment, currency risks and ability for people to successfully relocate to that location, as all these areas pose a potential risk to the organisation.
With this in mind, we have examined core factors that must be considered when relocating or establishing an operating base in a new market, as outlined below.
Redundancy vs. relocation. Seeding resources in the new location is the norm, as it strengthens the culture of the firm but given the proximity of the bloc to the UK, the question of redundancy or relocation should be considered. The major financial centres of Europe, Paris and Frankfurt are within three hours of London yet resources may not be willing to move at the risk of disturbing an established family unit. The set-up of a new office could take three years to fully establish and incurs significant costs. If the take up for relocation is not great, then there may be a requirement for redundancy which can cause reputational damage and cost on average £60,000 per resource.
Talent sourcing. Sourcing talent also needs to be considered. Are there enough relevant skilled resources in the new location to cover work currently done in London? Depending on the Brexit negotiations, relocation may not be an option as there may be a need for a UK citizen to hold a visa to travel and work in Europe. This is as much of an unknown as the financial passport.
Employment requirements. Local HR laws need to be considered. France and Germany, for example, have very strong labour laws which can be prohibitive if there was an exit from the country. Benefits packages may need to enhanced, termination rights will be different, and all have a tangible and intangible cost.
The legal and regulatory structure. Knowledge of the target markets’ legal and regulatory structure is vital, as is sourcing a dependable local adviser. It may be simpler to relocate by partnering with a local vendor. Post Brexit the UK could offer a regulatory advantage, as the country would have an opportunity to review the financial regulations which could be financially beneficial to organisations which retain the UK as their base.
Financing agreements. HQ relocation is not insignificant as there is a need to ensure there is no or minimal impact to the firm’s netting and hedging arrangements, and that capital efficiency is maintained and access to additional funding is available. If your organisation has not operated in that country before, there may approvals from financial institutions which are required – and this can be a lengthy process.
Tax implications. The UK may well have to fall back on the ability to obtain tax relief under individual tax treaties, as the EU tax benefits could be lost. Individual tax consultants would be required to manage the tax rules to ensure compliance – this would complicate business transactions and may restrict company growth.
Intellectual property and data privacy. It also should be considered where your data comes from, where it is going and remember not to overlook any data protection laws. In Switzerland, for example, it is illegal to use data outside of the country. Problems can therefore arise surrounding the relocation of technology. Legal terms and conditions must be reviewed and specifics, such as intellectual property rights and contracts, carefully considered – especially as these could be initially enticing for that location for a short period of time before changing a few years later.
Concealed costs. Travel costs, loss of knowledge and longer hand-over periods almost inevitably make international relocation more expensive than originally anticipated. Organisations plan for these but frequently underestimate the cost, particularly around the loss of knowledge as this is difficult to quantify. Team morale is also affected, which makes handovers taxing, as the current location often does not want to do the write ups as information is in people’s heads and handing over face-to-face is easier, rather than online training sessions and the like.
These are just some of the risks which must be considered, as the reputational damage which can be inflicted by ill-advisedly moving out of a location or poorly transferring some operations of a business can be hard to repair.
Naomi Crawford is a director at Brickendon Consulting.
© Financier Worldwide