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The Key Information on Brexit

22 October 2019

Barclays is preparing for Brexit in whatever shape it comes. Read more about how we are supporting clients through this period of uncertainty.

When is Brexit?

The UK is due to leave the European Union by 31 January 2020 but could leave sooner.

If a deal is approved by Parliament before January, then the UK would leave at the end of the month in which it is ratified. A transition period would then last until the end of 2020.

Draft Withdrawal Agreement

A favourite phrase of the European Union is that nothing is agreed until everything is agreed. Therefore, until a deal is ratified by both the UK and European Parliaments, no agreement is in place. Following the rejection of the original draft deal, the UK Government reached a revised agreement with the EU on 17 October 2019.

The draft agreement now comes in three parts:

Included in the agreement is everything from an agreement on citizens’ rights, the financial settlement – estimated to be in the region of £33bn, data protection agreements and the length of a proposed transition period.

Transition period

Under the terms of the draft agreement, a transition or implementation period would begin after the UK leaves the EU and would end on 31 December 2020.

The idea is that this would give the UK time to introduce a new immigration system and mean that businesses would only have to plan for one set of changes in the nature of the relationship between the UK and the EU. However, with uncertainty over whether a deal will be approved by the UK’s parliament, it is prudent to also prepare for a ‘no deal’ scenario.

The implementation period would see trade continue on “current terms” – in other words the UK would not leave the Single Market or Customs Union until the end of this period. But, the UK will be able to sign and ratify its own trade deals – including the future trade agreement with the EU.

The EU explained^ PDF that the UK will have to continue to adhere to all existing EU regulations during this period, including the “four freedoms” of movement of goods, capital, services and people, but they will not have any representation in the EU’s political institutions, including the Parliament, Council or Commission.

There is provision in the Agreement to extend this transition period, which would require the consent of both the UK and EU.

Irish border

The unique status of the UK’s only land border with the European Union has throughout Brexit been one of the defining debates. The EU and the UK have been seeking to find a solution that respects both the peace process and the integrity of the EU’s Single Market.

The draft agreement introduces the Protocol on Ireland/Northern Ireland. There are three key points to the protocol:

  1. Northern Ireland will continue to align itself to the EU’s Single Market rules for certain sectors including manufacturing and agricultural standards; 
  2. Northern Ireland will leave the EU’s Customs Union alongside the rest of the UK and will be able to participate in future trade negotiations. However, some new customs checks will be implemented between Great Britain and Northern Ireland; 
  3. The Northern Irish Assembly at Stormont will maintain the right to self-determination by voting every 4 years after the transition period has ended on whether to continue with the protocol.

This will mean that goods that are “at risk” of entering the EU Single Market will have EU tariffs applied when they enter Northern Ireland from Great Britain. The list of at risk products will be drawn up in the next phase of negotiations.

If the goods are not sent on to the Republic of Ireland, the UK government would be responsible for refunding these tariffs.

It also means that goods would have to be checked as they pass from Northern Irish to GB ports and vice versa, as Northern Ireland will remain part of the EU’s Single Market for goods. This crucially avoids the need for any checks at the border between Northern Ireland and the Republic.

It’s important to note that this protocol would only come into force after the transition period and only in the event that the UK fails to negotiate a future trading relationship by that time.

What happens on Brexit day?

If the current deal is approved, technically... not a lot. The UK will however cease to be members of the European Council and the European Commission. The UK’s 73 MEP’s will return home from Brussels and the UK will officially be allowed to negotiate new trade arrangements with both the EU and the rest of the world.

The transition period would mean that trade with the EU, freedom of movement of people and goods would remain unaffected until at least January 2021.

However, should the EU refuse an extension to the Article 50 period then the UK would leave, with the immediate next steps unclear. In the event of a no-deal exit the UK will introduce a temporary tariffs regime^ that would eliminate tariffs on many imports to the UK.

Future relationship

Any future relationship between the UK and the EU cannot be formally agreed until the UK ceases to be a member of the Union, when it will become a third country.

The two sides have published a political declaration on the future relationship which states, among other things:

  • The goal of agreeing a comprehensive Free Trade Agreement with no tariffs across all goods sectors and a liberalisation in the trade in services “well beyond the Parties’ World Trade Organization commitments”;
  • An aim to ensure fair competition after Brexit, by maintaining common standards on areas like state aid, competition and employment rights;
  • A plan to fully assess equivalence frameworks in respect to financial services by the end of June 2020, with the aim of preserving financial stability;
  • A commitment to from a broad partnership in the area of security, including physical and digital security.

Trade agreements after Brexit

The UK cannot formally agree new trade agreements while still a member of the EU, but has been taking steps to agree a series of continuity agreements with certain countries who already have agreements with the EU.

At date of publication, 17 agreements have been signed^ covering around 45 nations, these agreements will take effect when the UK leaves the EU. In addition, the Department for International Trade is in discussions with around 30 other nations, including Canada and Mexico, to put in place similar agreements. These countries are collectively referred to as TAC countries (Trade Agreement Continuity countries).

10.7% of the UK’s total trade is covered by TAC countries. In addition to this, mutual recognition agreements have been signed with Australia, New Zealand and the US. This means that the countries recognise certain product conformity assessments that each are applying, covering products such as machinery and automotive parts.

Chart showing percentage of UK trade with EU nations, TAC target countries and the rest of the world. Source: DIT.

Treasury implications for corporates

  • Payments

    On 7 March 2019 the European Payments Council approved the application from UK Finance (made on behalf of the UK financial services and payment industry) for the continued participation of UK PSPs in the SEPA Schemes in the event of a no deal Brexit. This means that should the UK exit the EU without a transition period, the UK would continue to participate in the SEPA clearing scheme.

    Assuming that the UK continues to participate in SEPA after Brexit, payment charges should remain on a SHA basis, in line with the SEPA Credit Transfer Rulebook, although some banks may choose to charge additional fees.

    Clients making large volumes of SEPA transactions may opt to de-risk the situation and open accounts with Barclays in Europe. Contact your relationship team to discuss further.

  • Trade

    Sector-specific challenges

    The way in which a corporate is impacted by Brexit will depend on whether it is primarily a manufacturing, services or trading business.

    Manufacturing businesses

    Although UK manufacturers are currently benefitting from the weak pound, they could find that their competiveness is reduced if the cost of importing raw materials from the EU increases as a result of Brexit. They could also face supply chain pressures, such as suppliers requiring faster payments or delays in receiving supplies in time for manufacturing activities to take place. In addition, customers may start to demand extended payment terms. All these challenges will affect working capital and the amount of financing that a business needs to support its working capital.

    Services businesses

    Some service sectors are likely to be more impacted by Brexit than others. For example, while the EU and the UK plan to ensure passenger and cargo air connectivity through a Comprehensive Air Transport Agreement, it is not clear how Brexit will impact on the telecoms interconnectivity regime. Business services are likely to be affected in some way, but we do not yet know how.

    Financial Services institutions having anticipated the loss of their rights to passport their services throughout Europe in the event of a no-deal Brexit and have therefore either set up new subsidiaries in continental Europe or made additional investment into existing subsidiaries. Going forwards, Barclays will serve clients in the European Economic Area through Barclays Europe, our fully owned subsidiary, based in Dublin.

    Trading businesses

    Traders could experience a rise in the cost of goods imported from the EU following Brexit. As a result, they need to consider how they could pass those costs onto their clients while fending off competitor threats from other markets. They may also need to renegotiate long term supplier agreements – for example, if they have the exclusive rights to supply a particular EU product within the UK. Brexit-related changes could result in compressed margins for traders, so they should allow for these when doing cash flow forecasts and preparing for the future.

    Due to the potential repercussions of Brexit, some businesses are choosing to postpone their capex and investment plans. It is important that businesses look to seize trade opportunities while managing their risks, however. For that reason, they should be exploring the use of automated supply arrangements and the potential to enter new markets.

  • FX

    Considerations for Corporate Treasurers

    The following considerations could help you to manage your FX volatility, potentially by using new approaches: 

    • Consider hedging sterling-related exposure to manage FX risk. Potential solutions include spot FX, forwards and swaps. For example, Barclays helped the University of Sussex to hedge the FX risk associated with euro-denominated grant payments, and the case study is available on our website.

    • Consider using natural hedges where cash flow allows. It may not be necessary to convert all foreign currency receipts into sterling if there are likely to be expenses in those currencies in the future. FX swaps can sometimes be used to move funds between currencies while managing currency risk.

    • Consider reviewing your supply chain for ways to minimise FX risk. Options include asking suppliers to take payment in the currency of your sales, or switching to sterling-denominated suppliers.

    • When hedging, ensure that your FX hedges are matched to your cash flow and invoices. If necessary, you can effectively adjust the value dates using an FX swap.

    • Review your budget FX rates frequently. Assess them on the basis of timely market information and upto- date rates. You can view Barclays’ currency forecasts by consulting your FX dealers.

    • Make use of Barclays’ FX tools and services, such as BARX Corporate, which streams real-time tradable FX rates straight to your computer. We can also provide call orders (where we notify you if we hit a particular rate in the market) and market orders (where we will trade on your behalf if the market moves at a particular rate).
  • Financing

    While the full impact of Brexit remains unknown, companies cannot easily anticipate what effects – if any – the event will have on their funding requirements. Encouragingly, however, Brexit-related uncertainty has not yet impacted on UK companies’ ability to secure funding from lenders based either locally or overseas. In fact, despite the uncertainty, the overall availability of credit to the corporate sector in both the first and second quarters of 2019 remained unchanged, according to the Bank of England’s Credit Conditions Survey.

    Refinancing

    While banks’ ability to lend is unlikely to be constrained post Brexit, many companies have still chosen to refinance or extend their loan facilities early. Some have also switched from uncommitted finance facilities, such as overdrafts, to committed facilities, such as revolving credit facilities. Others have sought greater headroom in their borrowing facilities or more flexible covenants as a safeguard against a potential deterioration in economic conditions

Barclays Europe

Following the UK’s decision to withdraw from the EU, we have been takings steps to preserve market access for our clients.

We have expanded our existing subsidiary Barclays Bank Ireland (referred to as Barclays Europe), which will become the legal entity serving clients in the European Economic Area (EEA), should Brexit result in a loss of relevant market access for the UK financial services industry.

Clients affected by these changes are predominantly European clients – excluding the UK – and will have been contacted.

Detailed information about Barclays Europe and the legal mechanisms that will be used to preserve market access for our clients after Brexit are available on our group strategy website here.

If you have any questions on how Barclays is preparing for Brexit, please speak to your Relationship Manager

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