A trust and corporate services firm weighs in on the impact of Brexit.
With some of the dust settling on the Brexit vote, wealth management industry figures are starting to air their views, and the editors of this publication are keen to encourage others to do so, particularly in terms of how they think their business strategy – such as deployment of staff and location of booking centres – will be affected. The shock of the result (well, not everyone was surprised) has initially led to bewilderment, but some signs of the possible road ahead are becoming clearer.
This article is by Bart Deconinck, deputy chairman of ZEDRA, the trust and corporate services firm spun out this year from Barclays. (To see a recent interview about this firm, click here.) ZEDRA recently opened an office in Hong Kong and, as is already evident, there is enormous interest in the financial hubs of the Pacific Rim in the Brexit case.
The views of the author are not necessarily shared by this publication; we urge readers to respond and add to what is already a very sharp debate.
It was the result that the financial community did not foresee. The market’s reaction has confirmed as much. In the face of extraordinary support for the UK’s case to remain in the European Union from economists, celebrities, and even President Barack Obama, the British people voted to break away from its largest and closest partner.
Where the result originally looked like a preternatural turn against the tide, on closer look, it hints at an emerging trend across Europe. The challenge now for the EU is to stem the tide of the disaffection with the EU’s perceived tendency to be overbearing towards member states’ normal way of life.
And the risk is real. The stand-off over the timing and nature of a British exit risks becoming counter-productive for both sides. In the months ahead, it is vital that these deliberations strike the right balance between protecting a national interest and supporting a fragile market across the continent, rather than chasing excessively onerous or punitive measures that exacerbate the uncertainty in the short term.
Maintaining stability is key and that means a flexible and responsive approach to adapting to this new economic reality. The eurozone is growing, but only just. Despite sterling’s crash since the vote, we should remember that the UK is the EU’s second largest economy and also serves as a conduit to EU markets from abroad, thanks in part to its liberal and outward facing approach to trade and international relations. This means that preserving a strong and mutually conducive collaborative arrangement between the EU and the UK must be a priority for the Union’s negotiating team in order that flows of capital, goods, services and people are sustained.
The result clearly highlights a disconnect between the European project’s aspirations of tax and regulatory harmonisation across the Union. While continued integration is the aim, we must not forget that for providers of trust and corporate services, as an example, a more diversified legal landscape offers new and broader structuring opportunities, which can in some cases work better for clients, given their increasing geographic spread and open-minded approach to domiciling their assets.
It is possible that, in addition, the UK might seek to claw back proposed regulatory changes such as the beneficial ownership register and changes to non-domicile status. Furthermore, theoretically, the UK could benefit by initiating further legislation to continue to attract global corporates. This would require significant changes to its taxation model, though, reducing levels of corporate duties and rates to unprecedented levels, in order to compete with other global hub cities: principally, Singapore, Hong Kong and Dubai.
Therein lies the problem. The unintended consequence is that such a move serves to illustrate the potential competitive advantages that have been held back through a lack of flexibility and a single-minded focus on regulatory and fiscal alignment.
But this is not a zero sum game. And while it is unlikely that the UK would seek such a fundamental break with the European model – not to mention the questionable wisdom of doing so – those perceived freedoms come at a cost. Reduced access to its biggest market impedes low cost collaboration, expansion and opportunity. Reclaiming full control of the legal and tax system requires significant investment and a potentially overbearing administrative burden, at a time when the economy is fragile and growth is expected to be materially reduced.
At a stroke, the single largest obstacle to the EU’s dream of a European superstate has been removed, but the Union must learn the lesson from the British people. The EU represents huge opportunities to stimulate increased trade, build collaborative partnerships, bring consistency to the regulatory, legal and fiscal landscape and support businesses within member states as they seek to enhance their market share globally. The challenge for the Commission now is to reinforce to member states the value of membership and demonstrate that it has the capacity for change.
Overstepping the mark, as the British people demonstrated last week and as can be seen elsewhere in the continent, can undermine the central plank of the Union’s mission. The consequences of forgetting that mission can be unintended and far-reaching.