Brexit uncertainty affecting US financial institutions

From PwC's Financial Services Institute

Brexit uncertainty affecting US financial institutions

In June, UK citizens voted to leave the European Union. The UK Prime Minister officially triggered Article 50 of the Lisbon Treaty, the clause that sets out the official notification to the European Council of its intended departure and starts a two year time period for negotiations, on March 29, 2017. Now that Brexit is in motion, what should US financial institutions do to continue preparing?

A look back

A Hard Brexit could be the path forward. 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.

Financial institutions should plan for the worst-case possibility: the World Trade Organization (WTO) scenario. A UK trade deal with the EU will be a very significant challenge and could very likely extend beyond March 2019. If the UK leaves without a trade deal—a so-called Hard Brexit—all parties will revert to a standard rules from the WTO.

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

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. It’s time for US financial institutions to sharpen their focus. Of course, you have probably completed your initial contingency plan with a full inventory of Brexit-related issues. And, it’s likely that you’re continuing to assess and adapt to changes in the UK and EU. But those plans were built and decisions were made without a lot of time pressure. Getting approval for big changes takes time, which you may no longer have. Just as you get consensus around an approach to a particular issue, the ground may shift. Given the new time constraints, you may find that you need to run your Brexit response program differently.

 

Evaluate your business exposure. Every situation is different, and how your approach evolves will be directly linked to the way your institution gains access into the EU market. The degree to which Brexit will be felt by any particular financial institution will depend on its current operating model. Designing an ideal legal structure is not easy under the best of circumstances, and Brexit has added both urgency and ambiguity. Every firm will face tradeoffs that will influence how and where they should maintain subsidiaries and whether any moves are appropriate. 

Mind the (information gaps). Financial institutions should understand how a change in immigration rules could affect business. You need to know a lot about staff. So, do you? Everything from nationalities to citizenship statuses. Who are contractors and contingent workers? Additionally, regulatory requirements might be vulnerable to change after Brexit negotiations conclude, and firms will need a detailed understanding of which regulations shape business most. What licenses do you require—by geography, by product line, by customer segment?

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“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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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
Email

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

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

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

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

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