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Planning for a vote in favour of Brexit

15 September 2015

Recent events have brought into much sharper focus a question that in truth financial services firms should have been asking for some time - what are the implications if the UK votes to leave the EU in the forthcoming referendum?

It is now both prudent and a regulatory necessity that senior management at financial services firms should be looking at how this possibility might impact upon their firms and how they should be managing this risk.

Following the general election in May some firms began to ask with varying levels of urgency what if anything they should do to prepare for the possibility that the Eurosceptic camp would triumph in the referendum. Many firms treated this as an academic exercise at most, whilst others did not begin to engage with this issue. However those complacent about the prospects for the referendum will have been perturbed by recent events. Within the past month what had previously seemed like an extremely unlikely outcome has started to seem like a real possibility (albeit the bookies still have the pro-EU camp as odds-on to win the referendum).

A recent opinion poll suggested that a majority of the electorate now favoured an exit. Whilst the recent record of the pollsters does not engender great confidence in the accuracy of this opinion poll, it does hint at a possible increase in support for those who want the UK to leave.

Furthermore, whatever your views as to the adequacy of the government's response to the refugee crisis, it does seem unarguable to conclude that our partners in the EU are unimpressed by the UK's refusal to help shoulder their burden. It was always likely to be difficult for David Cameron to negotiate fundamental changes to the UK's membership of the EU, but the strong suspicion was that other governments within the EU would at least make sympathetic noises that would allow him to trumpet his 'success'. It now seems far less likely that he will be treated as sympathetically. Indeed he may find that they give no ground at all.

One aspect of the UK's membership that the government aims to renegotiate concerns employment rights where reform would probably be well received amongst its core support, however it is likely to antagonise many on the left. It had been assumed that the Labour Party and the trade movement would be strong advocates for continued membership of the EU. However Jeremy Corbyn and others on the left who had previously expressed some ambivalence towards the EU now hold sway. As such any perceived dilution of the benefits of EU membership is likely to result in a significant erosion in support for the pro-EU camp.

These developments have come at a time when the government's slender majority has been tested on a series of votes about the referendum. Moreover the government has been forced to backtrack on the wording of the referendum question by the Electoral Commission. All of this has given the impression at least, that the campaign to stay in the EU will not be as serene as David Cameron may have hoped.

In the light of the changing mood around the referendum, firms may have now started to seek to plan for the possibility of a UK exit from the EU. However as they have come to consider this issue, they will have encountered the very real issue that a vote to leave the EU is not as unambiguous as the wording would suggest. One of the primary concerns is that the referendum question makes no reference to the European Economic Area. Without explicitly asking the question it would be inappropriate for either side, in the event of a majority voting to leave the EU, to conclude whether the electorate actually advocates the UK leaving the EEA. Of course whether or not the UK were to remain a member of the EEA has significant ramifications particularly in the sphere of financial services; for example if the UK were to leave the EU and EEA then firms based here could no longer rely on Europe wide passports to do business.

It has been suggested that if the UK left the EEA as well as the EU then the country could have a relationship with the EU that mirrored that of Switzerland. Of course whether our (by then) erstwhile partners would be prepared to enter into the bilateral treaties that the EU has with Switzerland is in no way certain. In particular why would members of the EU want to help maintain the pre-eminence of London amongst the competing European financial centres.

It is also not clear if a vote to leave the EU would be taken as a repudiation of much of the legislation that has been introduced as a result of the UK's membership. Clearly the implications of this are far wider than financial services, but because the legislative framework for financial services is now so dependent on the EU, this is one sector where a wholesale rejection and dismantling of EU legislation would be particularly keenly felt. In particular if the government wanted to ensure that the UK's regime for financial services was considered to be broadly equivalent to that within the EU (and thereby potentially allow access for UK financial services firms to EU markets) the UK would have to keep much of the legislative framework that currently applies in financial services.

One likely consequence of a vote to leave the EU is another vote for Scottish independence. An independent Scotland could seek to take over the UK's membership of the EU as the successor state. Whether or not this would actually be permitted, it does offer the prospect for some firms that one contingency would be for them to shift their business north.

Ultimately, however much firms may try and engage in some prudent crystal ball gazing, at present there is far too much uncertainty for firms to be able to plan effectively. As such firms should consider asking questions now about what would happen in the event of the Eurosceptic camp winning the referendum. Any interventions by financial services firms, when the campaign is up and running, which could be characterised as being in favour of the status quo, will probably encourage portions of the electorate to vote to leave the EU. Therefore it may also be the more astute option for firms to start asking these questions now.

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