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Looking beyond Brexit – the legal and financial implications

Portugal will feel a significant impact from Britain’s decision to leave the European Union, says Portuguese expert on United Kingdom affairs.

At a half-day seminar entitled ‘Looking Beyond Brexit – Legal and Financial Planning’ held at the British Ambassador’s Residence in Lisbon last week, Professor Bernardo Ivo Cruz said that the Brexit would lead Portugal and the United Kingdom, as Atlantic maritime nations, to forge a new bilateral relationship with focus on nations on both sides of the Atlantic and Commonwealth and PALOP countries.

Derek Stinson, senior associate of SCA Ontier, discussing the legal practical considerations of Brexit, said the decision was a “worldwide shock” and that building new relations with European partners through a new ministry would be a “monumental task”.

He pointed out that a parliamentary act passed to allow the referendum to take place stated that the result was “advisory only” to inform the government of the people’s wishes and was not an act stating Article 50 should be triggered.

“Technically, the government is not obliged to trigger Article 50; having said that, it is a fundamental principle of democracy that the government should follow the wishes of the people.”

Stinson then mentioned the legal aspect brought by the People’s Challenge which argued that parliament had the right to notify Brussels on Article 50 and a vote must be put to parliament to that effect.

“Essentially, this amounts to a second referendum and whether the challenge will ultimately succeed depends on the courts,” he said.

And according to the court’s decision, announced on Thursday, parliament must now vote on whether the UK can start the process of leaving the EU, meaning the government alone cannot trigger Article 50 without parliament’s consent.

The second point Stinson made was that economists had widely predicted the UK economy would suffer and enter a recession. “This has not been the case and all indicators, except sterling, are robust,” he said.

“Retail, manufacturing and the FTSE all did well so the take-away here is that the recession doesn’t appear to be happening.”

Domingo Cruz (SCA Ontier) asked what models could the UK follow after Brexit. The Norwegian model (a soft Brexit) would ensure that most economic trade aspects would remain the same but would not favour limitations on freedom of movement from EU citizens.

The Swiss option would take Britain to a Free Trade Association Agreement in which the UK would make a series of bilateral agreements with European partners.

The UK could become a member of the European Free Trade Association but not the European Economic Area (EEA) with access to the EU market governed by a series of bilateral agreements, covering some but not all areas of trade.

The UK might also make a financial contribution but smaller than Norway’s. It might not have a general duty to apply EU laws but may have to implement some EU regulations to enable trade, and free movement applies.

Then there is the Turkish model (also known as a “hard Brexit”) which would basically only give the UK a Customs Union.

The most likely, he argues, given Britain’s importance as a European market and trading partner, would be a hybrid “fourth option” which could contain some features of the other three, but the situation is, as yet, unclear.

Derek Stinson also mentioned the issue of passporting rights. The EU’s “passport” allows UK-based banks and other financial companies to sell their services in the bloc without needing additional local licences. The worry is that Britain could be stripped of this privilege when it leaves the single market.

Then there are “employment issues” which are emotive ones and impact state and social benefits, access to national health services and pension benefits. Stinson said that EU workers already in the UK had been given assurances by the Conservative government that their “rights would not be significantly eroded following Brexit” and that employment laws would “not significantly change”.

“Some 5,500 UK firms exercise passporting rights in Europe and 8,000 European firms do so in the UK, and bespoke arrangements will have to be negotiated to preserve these rights,” he said.

Nuno Lourenço Dimas, CEO of InvestQuest, discussed whether Brexit would mean disruption or continuity for the City. He compared London to an ecosystem, an agglomeration of firms and entities in which personal interaction was very important. “I’m for continuity in the City and believe the impact from Brexit will be residual. And European leaders trying to fragment it is not the best solution for Europe or the United Kingdom,” he said.

“We need predictability, we need a road that we can travel and European business should provide us with that road.”

Melissa Thomas, Senior Manager International Business, Blick Rothenberg said on the fiscal implications “no immediate changes” would be seen but that there would be a “push for the UK to be attractive for global investment”.

She said that the British government had pledged to cut corporate taxes from 20% to 17% with a long-term target of 15%.

The expert said that it was likely a new Customs Regime would have to be implemented although it was unlikely there would be barriers to trade and goods while restrictions on immigration would likely have implications on National Insurance contributions.

David Huggett, Corporate Dealer at Global Reach Partners, discussed risk management strategies for reacting to market volatility.

He said there were two kinds of risk: anticipated and unknown events, or “black swan events” which could not be foreseen (such as terrorist attacks, acts of God, etc).

“The consensus is that the City failed to read the strength of dissatisfaction outside the London bubble and pointed out that the Volatility Index (VIX) soared to 26.7% in the wake of the Brexit referendum and that the US Elections could also see the Index climb.

“These are difficult times to manage, as periods of high volatility are not the best times to make financial strategy decisions. The short-term worry is the US elections outcome; medium-term worry for the markets is a USD interest rate hike from the FED and the long-term concern will be the triggering of Article 50,” he concluded.


Photo: Experts looking beyond Brexit: from left, front row: Derek Stinson (SCA Ontier); Melissa Thomas (Blick Rothenberg); Nuno Lourenço (InvestQuest). From left, back row: Bernardo Ivo Cruz (academic and consultant), David Huggett (Global Reach Partners), Domingo Cruz (SCA Ontier) and João Sebastião (Department of International Trade – Trade and Investment Director/Portugal).