It’s three months since the UK voted to leave the EU, and we still don’t know what kind of exit deal, if any, will be agreed.
The government can’t seem to make its mind up. Earlier this month we saw the secretary of state for Brexit – David Davis – saying it was unlikely that the UK would remain in the single market, only to be contradicted by the Prime Minister hours later.
The resulting uncertainty is causing panic in the City. Brokers in particular are in paralysis. With no hint of what’s to come, they feel unable to plan for the future.
But it’s not all doom and gloom. While the government’s posturing on the issue is unhelpful, there are things that brokers in the city can do to mitigate risk, whatever the exit deal that is struck.
What kind of Brexit?
Broadly speaking, there are two possible exit deals with much in between. On one extreme, the UK could remain part of the EEA. On the other, no deal could be struck on financial services or passporting and the UK could simply become a ‘third country’.
EEA member states enjoy virtually all of the rights and privileges, including passporting, enjoyed by EU members. Therefore, if the UK becomes an EEA member, for regulated firms the result would be virtually the same as if the UK remained within the EU.
For brokers, remaining in the EEA is certainly the preferred option. But in the current political climate, this seems unlikely. Therefore, brokers must hope for the best but prepare for the worst outcome, which is being on the outside of the EEA.
Hope for the best, plan for the worst
The good news is that if the UK becomes a third country, UK brokers don’t need to drastically change their business operations.
Brokers doing purely institutional business will be the least affected. They can continue dealing with institutional clients as a third country broker in a similar way that the US or Hong Kong regulated brokers deal with EU institutional clients now.
UK brokers dealing in retail and professional services may have more obstacles. But one solution is to make use of an existing EU affiliate or set up a new one. This EU affiliate would contract with the EU client and then act as an introducer to the UK broker.
With careful planning and structuring, having a small EU office will enable UK brokers to carry on business with very few changes.
Like many others in the City, I await with anticipation further details of the government’s Brexit plans. However, the important message for UK brokers is that, wherever the Brexit negotiations end up, there will be a legal solution to help them carry on as they do now.