Business Risk Round Up – What Threat does Brexit Pose to your Sector?
Posted by Rewan Tremethick on March 15th, 2017.
It turns out Theresa May won’t be triggering Article 50 this week. And probably not next week either, giving businesses worried about the uncertainty of the Brexit negotiation process a little more breathing space.
But the UK’s divorce from the EU is coming nonetheless. It will bring challenges, risks and opportunities.
A document leaked last month revealed the government had rated sectors of the economy in terms of how reliant they were upon the EU and how much attention they will need during and after the Brexit process.
Which parts of the UK economy does Downing Street think are most at risk and what are the main concerns for your business sector?
Finance
There has been a lot of talk about Brexit being damaging for the finance industry, but how worried should you really be? The truth – much like most of what we’ve read surrounding Brexit – is somewhere in the middle of the hype and the scaremongering.
What is true is that financial services is the single largest service sector export the UK makes to the EU, with a value of over £22 billion in 2015. What isn’t true is that the entire sector is dependent upon the passporting rights only available to members of the single market.
According to Open Europe, the banking sector relies heavily upon EU passporting rules, which allow them to operate in any European market from their headquarters in the UK without needing to secure domestic licenses in each country. Asset managers are somewhat at risk, as they often manage assets spread out across the EU from a single location in the UK. However, insurance will be largely unaffected.
Therefore, to claim the UK needs to retain its passporting rights as a whole in order for the financial sector to thrive is exaggerated, according to Open Europe’s Director of Policy and Research Stephen Booth.
‘This is not to mention the other reasons why London has become a successful hub – infrastructure, language, time zone, ability to attract the best talent, legal system, and so forth,’ he explained in a blog post back in October.
Pharmaceuticals
Of particular concern to those in the pharmaceutical industry is the potential for the UK to establish its own regulatory agency following Brexit. Currently, companies in the UK must get approval from the European Medical Agency to prove that their drugs are safe before selling them to a European market. This, many in the industry believe, is preferable to a domestic regulatory body because the latter narrows the UK down to a much smaller market.
Companies are likely to prioritise seeking approval from the EMA and from bodies in nations presenting other big opportunities, like China and Japan, before turning their attention to the much smaller UK market. This could see new medicines delayed from entering the market by as much as two years.
As Deloitte explains;
‘Brexit could also impact domestic drug access. Pharmaceutical companies think carefully about their launch sequences and an EU exit could see the UK slip down the priority list if companies have to jump through extra hoops to win approval there. The UK’s approach to market access and approach to pricing could compound the situation, making the UK a less attractive launch market and reducing patient access to innovative medicines.’
Automotive
Vehicles were the most lucrative product exported from the UK to the EU in 2015, with shipments of motor vehicles, trailers and semi-trailers exceeding £15 billion in 2015. Unsurprisingly, the leaked government document rated the sector as a ‘high priority’.
Lots has been made of the fate of the UK’s automotive sector after Brexit since the government convinced Nissan to continue manufacturing in the UK. There was much speculation from politicians and industry professionals regarding what kind of assurances the government could have given the Japanese car giant in order to sway its decision. Other car manufacturers demanded the same treatment.
Even if no concrete promises were made to Nissan, the UK government is going to want to protect the automotive sector as a priority. The entire industry supports over 800,000 jobs. The exposure to risk may be huge, but likely so is the protection the sector will receive.
The Society of Motor Manufacturers and Traders (SMMT) notes;
‘Government must provide economic stability and reduce uncertainty. Competitiveness must be safeguarded and a clear indication of likely timing, intent and ambition must be established so as not to deter potential investors.’
Chemicals & Chemical Products
Almost as big as those from the automotive sector, exports of chemicals and chemical products totalled nearly £15 billion in 2015. Tariffs aside, there is another threat to the chemical industry; Reach.
As Elizabeth Shepherd of the Independent Chemical Information Service (ICIS) explains; ‘the EU Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals [known as Reach], is amongst the one third of EU environmental law which cannot simply be copied and pasted into UK law through the “Great Repeal Bill”.’
If the UK ends up with its own regulation, this could create problems for the chemical industry when it tries to trade with the European Union;
‘Reach creates a common system making it easier for UK exporters to ensure regulatory compliance in order to trade with European countries. A divergent system would mean that UK businesses that wish to continue trading with the EU may have to comply with two sets of laws, meaning additional costs for UK exporters.’
Agriculture
It’s not just the tariffs on exports that are a threat to UK businesses. The agricultural sector is more likely to be concerned by import costs. The British Growers Association (BGA) recently supplied written evidence to a Parliamentary inquiry stating;
‘The UK has a number of grower businesses which use overseas operations to grow and supply produce out of season and these operations play an important part in continuity of supply at times when there is no or insufficient UK supply to satisfy the market … Producers in the UK are also reliant on importing raw materials and inputs as part of the UK based production process.’
Additionally, the sector could see significant change if no domestic replacement for the Common Agricultural Policy (CAP) is implemented. CAP provided UK farmers with direct payments worth £2.4 billion in 2015, with a pot of £4 billion in funding for rural development projects available from 2014 to 2020. CAP support generates 55% of the UK’s total farming income.
However, CAP is imperfect, burdened by a complex and bureaucratic payment system, poor distribution of funds, and distorted supply and demand.
So Brexit could present a chance to create a domestic alternative that offers the same support but with a better distribution.
Are you Ready for Article 50?
Theresa May is likely to invoke Article 50 at the end of this month, barring unexpected delays. From that point the countdown to Brexit will be on, with Spring 2019 set to be the moment the UK becomes independent.
By learning about the risks and rewards Brexit offers your sector now, you have plenty of time to prepare yourself. Minimise the threats and build upon the opportunities and your company has a much better chance of navigating Brexit successfully.
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