Brexit uncertainty affecting US financial institutions

From PwC's Financial Services Institute

In June, UK citizens voted to leave the European Union. Article 50 of the Lisbon Treaty, the clause that sets out how an EU member may withdraw from the EU, allows up to two years of negotiations once a departing state officially notifies the European Council of its intentions. At this time, the UK hasn’t officially invoked the article, though the UK Prime Minister has indicated an early 2017 timeframe. What should US financial institutions do now to prepare for various possible exit scenarios?

A look back

It’s all about the timing. Since the vote, the situation in the UK has remained fluid, with developments happening almost daily. On October 1, Prime Minister Theresa May announced that the UK will trigger Article 50 no later than the end of March 2017. Almost exactly a month later, on November 3, 2016, the high court ruled that the government must get a parliamentary vote before triggering Article 50. The government appealed the ruling in the UK Supreme Court and we expect a decision in January 2017.

Dreaming of a soft Brexit. A September 2016 PwC/CBI (Confederation of British Industry) survey found that only 15% of UK financial institutions were optimistic about post-Brexit business conditions in the UK. The industry has been vocal with its desire to maintain passporting agreements, allowing UK firms to sell their services across the EU and vice versa. They are looking to make sure they maintain their established business relationships with the EU.

Turmoil, and then a pause. In the immediate aftermath of the vote, markets reacted harshly to the uncertainty. The value of the British pound plummeted, commercial real estate prices fell, and economic growth slowed. Still, there have been signs of resilience, and the initial volatility now seems to have stabilized.

The road ahead

Waiting for Brexit. If Parliament must be allowed to weigh in, timing around issuance of Article 50 will become less clear. However, given the political climate in the UK, we still expect that the official notice will be given during 2017. Meanwhile, the UK is beginning to prepare for the lengthy trade negotiations ahead.

UK recession unlikely in 2017. We expect UK GDP growth to slow to 1.2% in 2017 from approximately 2% right now. This is mainly due to the drag on investment from increased political and economic uncertainty. We also expect the Bank of England to keep monetary policy unchanged, at least over the short term.

More UK trade with the US? UK trade prospects post-Brexit depend on several key factors: securing the best possible access to the Single Market, a program of trade promotion in non-EU markets like the US, supply-side reform, and active engagement with other major international institutions such as the WTO. US financial institutions are also eagerly awaiting details of President-elect Trump’s trade policies.

What to consider

Plan and plan again. Refine your contingency planning and risk assessments given possible exit scenarios. As part of this process, you will need to consider the customer impacts of proposed operational changes. In order to main business continuity for clients, we recommend that you look for cost-effective moves that can be made now to protect customers’ interests regardless of how the larger variables play out. Update plans as new details arise.

Consider Brexit risk exposures. Financial effects are a concern for firms that sell to, buy from, or operate in the UK or EU, or are engaged in their financial markets. You will need to review contractual agreements quickly to understand Brexit exposures. You should also focus on reporting triggered by currency volatility, changes to hedging strategies, collectability of receivables, potential asset impairments, and intercompany activity.

Don’t lose key talent. Your scenario planning should include identifying affected employees, communicating clearly with them, and addressing employee concerns.
Consider long-term tax strategies. Brexit will affect how people and businesses are taxed. You’ll need to plan for changes to VAT, corporate taxes, customs duties, and more.

“Successful financial institutions will think carefully about the messages they give their customers and employees. These stakeholders are all talking about Brexit anyway. So, it makes sense to offer reassurances early and clearly; don’t make them guess what you mean.”

John Stadtler US Financial Services Leader

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PwC's US Financial Services Leader, John Stadtler, and Global FS Risk & Regulation Leader, Bill Lewis discuss customer concerns in financial services related to Brexit. Products, employees, and regulation may all have an effect on how financial institutions respond to the changes Brexit will bring. How will you prepare?

How PwC can help

Our teams in asset and wealth managementbanking and capital markets, and insurance are helping our clients tackle the biggest issues facing the financial services industry. With professionals across tax, assurance, and advisory practices, we can help you find ways to thrive even in a period of uncertainty. Whether you're preparing for regulatory changes, putting FinTech/InsurTech to work, or rethinking your human capital strategy, we work together with you to deliver value to your business.

For more information on how PwC can help navigate the challenges of Brexit, reach out to one of our leaders below or explore our US Brexit hub.

Contact us

Bill Lewis
Global FS Risk & Regulation Leader
Tel: +1 (703) 918 1433

John W. Stadtler
US Financial Services Leader
Tel: +1 (617) 530 7600

Mary Shelton Rose
Partner, US Brexit Response Office
Tel: +1 (704) 350 8170

Marie Carr
Financial Services Institute
Tel: +1 (312) 298 6823

Cathryn Marsh
Financial Services Institute Leader
Tel: +1 (720) 931 7836

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