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- Deutsche Bank says that there’s a chance the UK won’t secure a transition deal in time to stop firms triggering their Brexit contingencies.
- A transition deal “is likely to be easier said than done,” Deutsche Bank’s Oliver Harvey and Mark Wall argue.
- Deutsche Bank’s team provides three reasons for the bank’s pessimism about securing a transition deal in enough time to stop the worst case scenarios of major companies being triggered.
LONDON – Britain will likely fail to secure a transitional trade deal with the European Union in time to stop major companies triggering their worst case scenario Brexit plans and shift big numbers of staff out of the UK, according to research circulated by Deutsche Bank last week.
Writing in a “Brexit update” to clients, Deutsche Bank’s Oliver Harvey and Mark Wall argue that securing a transition deal – whereby the UK has a period of adjustment as it leaves the EU – by the start of 2018 will be “easier said than done,” thanks to the limit amount of negotiation time available to both sides.
“The UK hopes to wrap this [a transition deal] up by early next year, thereby reduce the need for businesses to start implementing contingency plans for a ‘cliff edge’ Brexit in the first quarter. As we argue in these notes, this is likely to be easier said than done,” Harvey and Wall wrote in a note dated November 23.
Jobs, companies, and capital are all expected to flee the UK, and potentially even Europe, unless a deal is struck soon, as companies need at least a year, and possibly as long as 18 months, to establish new subsidiaries on the continent that will allow them to continue operating across the bloc after Brexit.
Without some clarity over a transitional deal, firms are likely to trigger their worst case scenario plans, most of which – especially in the case of financial services firms – are believed to include large scale staff shifts.
Deutsche Bank’s team provides three reasons for the bank’s pessimism about securing a transition deal in enough time to stop the worst case scenarios of major companies being triggered.
First, Harvey and Wall cite a “lack of legal certainty,” in any deal.
“If transitional arrangements are negotiated as part of Article 50 agreement, they will not be legally binding until the whole deal is signed off by the EU Council and Parliament after October next year,” they write.
“The EU negotiating guidelines make clear that: ‘nothing is agreed until everything is agreed.’ The deal must also pass a vote in the House of Commons, expected late next year.”
Secondly, the pair argue that the sequencing of Brexit talks could cause major issues. That’s because the UK and EU negotiating teams are on different pages when it comes to how any transition is agreed.
“The UK government is seeking a provisional agreement on transition early in the New Year. But this implies that transition can be agreed without an outline of a future relationship,” Deutsche Bank writes.
The EU side, on the other hand, is believed to want to conduct transition talks in parallel with those on the post-transition relationship. This could lead to friction, which might delay any transition arrangement being agreed.
Finally, Deutsche Bank believes that the difficulty of securing the final Brexit deal could hinder the agreement
“Under the current structure of the talks transition is only possible with agreement on a future relationship. This may prove the most troublesome part of all the Brexit negotiations,” Wall and Harvey say.
Here’s the bank once again:
“Prime Minister May is seeking an ambitious free trade agreement with the EU27 in which the UK would leave the Single Market and customs union but retain similar levels of access to EU markets in goods and services. By contrast, the EU27 have emphasized that only two options are on the table: EEA membership in which the UK would remain subject to EU lawmaking, or a limited free trade deal modeled on the recent CETA agreement.”
Issues around the transition deal are likely to have the biggest impact on financial services firms which rely heavily on international staff and carrying out business across borders.
Banks need to make final decisions about moving staff by the first quarter of next year at the latest. Banks need at least a year, if not longer, to set up fully functioning branches and subsidiaries in Europe to maintain uninterrupted EU activities.
Without some clarity over future arrangements, banks will look to their worst case contingency plans, which are generally believed to involve large scale staff moves.
Under current rules, Britain is under the jurisdiction of the so-called financial passport – a set of rules and regulations that allow UK based financial firms to access customers and carry out activities across Europe. Many non-EU lenders use the passport to operate a hub in the UK and then sell services across the 28-nation bloc.
Once Britain leaves the EU, however, it is almost certain to lose passporting rights, which are tied strongly to membership of the European Single Market, a marketplace the UK intends to leave as part of Brexit. This means that to continue providing clients with comprehensive services across the EU after Brexit, many lenders will need new branches.