Brexit presents a myriad of challenges to the UK financial services industry. Despite many institutions already announcing their plans for relocation, few have considered the full extent to which they may end up forced to move larger parts of their business. With political verbatim still following the ‘hard Brexit’ line and no apparent signs of a tangible transitional agreement, some firms must start moving people by the end of 2017 if they want to be prepared for “Day 1”.
Solidifying this is the push from EU regulators to assert control over EU-related financial services business conducted outside of their supervisory remit. For many firms, in order to maintain access to their EU clients and lines of business, a significant shift of resources from the UK to the EU will be required.
It is critical given the numbers of jobs to inevitably be relocated, that firms consider the wide range of ‘people’ impacts entailed. Firms should ensure they have thought through the following vital criteria:
- That the necessary capabilities required to effectively manage structural, cultural and operational people changes are in place
- Look past “Day 1” challenges and consider, amongst others, where EU-facing roles and associated support functions will be located
- How to recruit people with the right skills, capabilities and knowledge locally
- How to attract and retain the best talent considering the increased and fierce competition in these hubs
- How to engage and motivate existing employees throughout this tumultuous process.
Key relocation influencing factors:
Most businesses have been contingency planning, identifying key functions and structures needed to maintain operations “as is”. However, current operating models will quickly become untenable for firms to execute their long-term strategy due to a number of contributing factors:
- Outcome of negotiations: While firms have announced initial moves, according to the FCA many firms will start implementing their Brexit contingency plans at the end of 2017 unless there is an agreement about the UK’s transition terms for EU exit
- Potential regulatory changes: While firms are currently shifting ‘hundreds’ of employees, further changes will be required if European regulators demand it. Current indicators:
- Euroclearing: the European Commission has drafted a law for firms deemed systemically important to the EU financial system to accept direct oversight by the bloc’s authorities, or be forced to move their euro-clearing operations to a location inside the EU
- Asset Management Delegation: ESMA’s recent guidance on delegation appears to limit the ability of UK-based Asset Managers to access EEA clients from London. As such, the size and significance of any Brexit-induced EEA entities may need to be reconsidered in order to ensure compliance by 2019. Firms should expect tougher authorisation processes, and a renewed emphasis on the “substance” of any delegated functions, and therefore, prepare for potentially more role moves and employee disruption
- Cost: Lastly, financial institutions have spent many years implementing efficiency programmes. Already costly, Brexit will ultimately undo some of this work by splitting teams and forcing firms to maintain duplicative governance structures in both the UK and EU. Accordingly, once changes are embedded, commercial incentives for relocation of activity to Europe may include:
- Cost cutting
- Front and back office team collaboration
- Proximity to clients.
Firms must focus on ensuring contingency plans have sufficient flexibility to respond to political, regulatory and budget challenges throughout this period of uncertainty. The challenge of ensuring the effects on talent, workforce and organisational structure are effectively managed will be what sets the winners from the losers in the new Brexit world.