Businesses preparing for the big exit
25 February 2019
Ever since the referendum in June 2016 when the United Kingdom voted to leave the European Union (EU), clouds of uncertainty have circled over businesses. Harsh discourse, disputes, finger-pointing and threats, features of your typical divorce, have been every day occurrences. It is near impossible to predict all the future effects of Brexit but nonetheless 29 March is right upon us. Businesses do not have a single view about Brexit and depending on which sector your business operates in, the differences in opinions, concerns and preparations may differ considerably. What do our Members make of Brexit? How much of an adjustment is it for them? And what are they doing to prepare?
The LINK spoke to four Member companies; international bank Danske Bank, customs advisory KGH Customs Services, international law firm Reynolds Porter Chamberlain and Swedish grocer and retailer TotallySwedish, trying to assess what Brexit means to their respective businesses and what challenges, or indeed opportunities, lie ahead.
Europe’s largest independent customs broker, KGH Customs Services (KGH) expanded into the UK in May 2018, seizing a unique opportunity for their business growth. According to Des Hiscock, Managing Director, and Steve Cock, Director Customs Consultancy, a ‘no-deal Brexit’ will lead to massive logistical difficulties. They acknowledged that Brexit will mean a great deal more work for KGH, both as a customs broker and a customs consultancy. They said: “At this time, 65 million customs declarations are presented each year in the UK and Brexit will increase this by a minimum of 200 million. The same number of reciprocal declarations will be required in the countries of dispatch/receipt, so 200+ million declarations will also be required across the EU. As companies try to adapt to this change, they will look to our consultants to set up customs warehouses or assist in the classification of their goods for customs purposes.” Some of the biggest challenges that the UK faces are the insufficient number of brokers, severe delays and a potential free trade agreement (FTA), as emphasised by Hiscock and Cock.
Des Hiscock, KGH Customs Services
The limited number of brokers within the industry and within HMRC will make it impossible to process the extra 200+ million declarations. “Delays are certain and this would go on for months. A deal with Europe will allow an orderly transition towards a FTA. If successful, in addition to considering how to classify their goods, companies will have to invest time in determining the origin of their goods in order to benefit from the FTA. This would be particularly true in areas where duty rates are high, e.g. automotive, textiles, food, etc.”
Not letting it kill the fun
Annethe Nathan is the Founder and Owner of TotallySwedish. With two stores in London, Marylebone and Barns, and an online shop which offers UK wide delivery, TotallySwedish sells Swedish food products and a range of Swedish design products, books and gifts. Nathan said that it is hard to say at this stage what the biggest challenges for TotallySwedish will be as we still do not know what Brexit means in practice. Yet, as a business that relies on stocking food products from Sweden and with the majority of their customers being Swedes living in the UK, Nathan said that she can imagine that there will be many new levels of bureaucracy in importing stock, as well as potential additional taxes. In addition, she said that Brexit will almost certainly have an impact on currency exchange, which may affect TotallySwedish since a great amount of products are imported from Sweden.
Annethe Nathan, TotallySwedish, Photo: Monika Agorelius
One specific concern for TotallySwedish is the fresh goods. Nathan said: “There is a concern that fresh goods may not clear customs in time to be sold before the expiry date. We are stocking up on dry goods but obviously cannot do anything about the fresh goods.” Even though the questions are still many and the effects of Brexit are not sorted out, Nathan was in good spirits stating that: “I have run TotallySwedish for more than twelve years and I have enjoyed every day of it! Although Brexit is a concern for us, as it is for everyone, I’m determined not to let it kill the fun!”
Mikael Olai Milhøj, Senior Analyst at Danske Bank, chooses a balanced approach too. He said that while Brexit is bad in the long-term perspective, with lost benefits from free and open trade, Danske Bank does not think Brexit is an economic catastrophe, and thinks the cost is manageable. Unless we end up in a ‘no-deal Brexit’.
According to Olai Milhøj, Brexit is first and foremost a British issue, but unfortunately there are negative spillover effects on the Nordic economies due to the large trading flows between the three Scandinavian countries and the UK. Finland is an exception and is only hit indirectly through the large trade flows with Sweden. The UK market remains among the five biggest export markets for all three Scandinavian countries. Regarding the effects we can expect to see on trade, foreign exchange and business, Olai Milhøj stressed that it is highly dependent on the outcome of Brexit. He said: “In our base case with a ‘decent Brexit’, where the UK leaves the EU single market but on orderly terms, we think markets can start pricing of the ‘no-deal Brexit’ risk premium, which should lead to a stronger GBP. The economic consequences should be manageable, as the relationship between the EU and the UK will remain close. This means that long-term growth in the UK and the EU would remain relatively unchanged”. On the other side of the coin, he said that a ‘no-deal Brexit’ would not mean the end of the world, but the short-term damages may be large as companies adapt to the new relationship with more trade frictions.
Mikael Olai Milhøj, Danske Bank
He also noted that in the long-run it means that growth will not be as high as previously, in particular in the UK. When discussing how Danske Bank will prepare for Brexit, Olai Milhøj said: “Unlike e.g. American and Asian banks, we already have a bank licence in EU27 so we are still able to operate in the European single market for financial services regardless of how Brexit ends.” Olai Milhøj emphasised that Danske Bank is following the negotiations for two reasons; Danske Bank wants to prepare and update its clients as well as be able to help the clients based in the UK also after Brexit. He said: “We do our utmost to ensure Brexit hits our customers as little as possible.”
Politics and rapid changes pose challenges
Geraldine Elliot and Sukh Ahark, both Partners at Reynolds Porter Chamberlain (RPC), also highlighted the importance of providing their clients with advice as one of their key preparations leading up to Brexit. In order to do so, they have been monitoring the political and legal situation carefully to provide clients with updates as and when needed. However, they point out that as a result of the rapid changes over the last two years and the Brexit process being intrinsically political, it has been impossible to definitely state how it will affect their clients until a final deal is signed between the UK and the EU. This they say, should be the same for any international law firm. Even though the questions are still many, they strongly believe in continuing to provide their clients with carefully substantiated advice. They said that their clients have been concerned about the effect of Brexit for several reasons depending on sector. For example, clients have asked for advice on (i) how certain contractual clauses will be interpreted, especially jurisdiction and choice of law clauses, in various Brexit scenarios, (ii) applications to transfer insurance business to Europe as well as (iii) general corporate advice relating to Brexit, including explanations of which laws will continue to function and which will not.
Geraldine Elliot, RPC
The continued uncertainty around the leaving process and what the final deal will look like is the biggest concern. In addition, the uncertainty of a ‘no-deal Brexit’ is potentially a huge challenge for RPC’s clients which could be manifested in a number of ways, both legally and commercially. Elliot and Ahark raised several examples such as foreign exchange fluctuations, uncertainty for contracts previously governed by the law of an EU member state, the continued or discontinued membership in international bodies related to the EU as well as the mechanisms for enforcement of judgments from other EU member states will not necessarily remain intact.
Sukh Ahark, RPC
“As the leave date gets closer, clients might find it harder to plan effectively for the future. One of the key risks is the volatility within the foreign exchange market and the impact on supply chains (including exports) and bringing goods to market. This might expose various entities to a range of risks that they could find expensive to hedge against”, they said.
But how can clients avoid contractual breaches and keep delivering the same business experience to customers post Brexit? Elliot and Ahark highlighted two separate key considerations that should be taken into account. The first is whether the counterparty can discontinue its obligations under the contract. This could be as a result of existing contracts becoming unenforceable or because of the operation of force majeure clauses. The second concerns the commercial relationship which exists outside the contract. If that relationship is beneficial to both parties, it will be in the interests of both to ensure that it continues. If, following Brexit, the relationship is no longer beneficial, certain contracts may simply not be renewed and counterparties may look to Brexit as an excuse for early termination.
For more information on how to prepare for Brexit, visit our Brexit portal.
This article was originally published in the February 2019 issue of our Member magazine, The LINK. Read the full magazine here.