What just happened?
The (apparent) end came quickly. Boris Johnson’s coronation as Conservative Party leader, and thus UK Prime Minister, made it more likely; his actions since December have made it a certainty.
- In October 2019, despite a doubtful commentariat, the Government achieved the seemingly impossible, securing a reformed Withdrawal Agreement.
- In December, it went on to win a ‘stonking’ majority – with every Conservative candidate pledging to back his deal in Parliament. Brexit was secured.
And so today, ‘transition’ begins, albeit significantly shortened by indecision and deadlock in Parliament.
What is transition – and how long does it last?
The UK now exists in legal limbo, retaining economic access and abiding by the rules to allow for a period of negotiations to agree a future arrangement.
- The transition period is set to end at 23.00 on the 31 December 2020, regardless of the extent to which an agreement is complete, if at all.
- This deadline has been ‘hardened’ courtesy of the UK government enshrining in law that it shall leave the EU entirely on this date. It’s a move designed to ‘provide certainty’, but perhaps also a ploy to demonstrate a dedication to a quick exit.
What happens next?
Getting here is only the beginning. Parliament has agreed upon withdrawal. Negotiations on the future have just started.
In our view, four outcomes are clearly defined options:
- ‘Soft’ Brexit – this is largely ‘off the table’, given both the policy position of the Conservative Party, and the size of majority. But if it was selected, it would include remaining inside the EEA/ EFTA via the Single Market and/ or the Customs Union. Impact: Access to European Markets, banking passports would remain, and financial services would maintain current access.
- ‘Hard’ Brexit – this is reportedly the UK Government’s preferred option but logistically difficult, given the time-frames. A Comprehensive Free Trade Agreement could cover all areas. But it’s not quick: an agreement of a similar nature took the EU and Canada seven years to negotiate and agree. Impact: The outcomes are uncertain. It is unlikely that banking passports will be included as Single Market membership would be required. Having said that, ‘enhanced equivalence’ may deliver increased passport like access for financial institutions, although only in areas where the EU envisions economic or political benefits.
- Several loose agreements – this approach would allow the government to prioritise, covering critical or strategic areas and making agreements in specific areas, without the pressure of creating a singular, comprehensive, coherent agreement. This may act as a stopgap between leaving the EU and the negotiation of a long-term solution. Impact: The impacts are uncertain and the likelihood of the EU agreeing to this approach is low. Nevertheless, having a specific agreement for financial services is not out of the question. As above, this would most likely be a system of enhanced equivalence, but only in areas where the EU envisions economic or political benefits.
- WTO rules – while this is not high on the government’s list of optimal outcomes, it remains the legal default come 31 December. This would create a number of barriers between the UK and EU economically, not to mention complicate existing relationships in other spheres such as security and aviation. It does however leave the UK completely free to pursue a new future with caveats or commitments. Impact: A definite losing of banking passports and unlikely to obtain enhanced equivalence, meaning the UK would become a third-country whose access is governed by respective EU legislation.
So where do we go from here?
Throughout the debate, the vote and the years, our advice from the start has been consistent:
Cut through the noise by delivering timely and comprehensive hard Brexit preparations. It could be a rocky 12 months.