Negotiators from the United Kingdom (U.K.) have a gargantuan task of concluding numerous agreements with the European Union (EU) and third countries before the Brexit completes in April 2019. The outcomes of these negotiations are fraught with consequences for businesses.
The WNS DecisionPoint™ Brexit series analyze the ramifications for key sectors as the task force led by Michel Barnier navigates Article 50 invoked in March 2017. This is juxtaposed with political events as they may unfold, including the scenario of Theresa May being forced to step down, and a ruling party change in the second general elections.
Two sectors that will be particularly impacted are Aviation and Financial Services.
Aviation is a difficult business to run. Which is why the nine ‘freedoms of air’ and the three ‘packages’ of the EU’s internal aviation is business-critical. It allows airlines of the member states freedom to introduce new fares, share seating capacity, freely move cargo and passengers across the EU states, and access to intra-EU routes among other things. But a lot of that might change for the U.K. aviation sector with Brexit.
To begin with, it may lose five of the nine freedoms of air, implying significant logistical and operational costs for carriers. Even with bilateral agreements, there could be restrictions on domestic routes. EasyJet has already announced that it will start a Vienna-based airline for its European operations.
Airlines will also grapple with new legal and regulatory issues. For example, in 1993, the EU created a concept of ‘community carriers,’ allowing airlines to access any intra-EU route and offer services without the need for approval from the regulatory authority of a member state. One of the requirements for a community carrier is that the effective ownership and control has to be with EU member states. Airlines such as Ryanair and EasyJet are already struggling with a scenario where they may not be able to meet this criterion. If U.K. shareholders are not included in the EU count, their EU shareholding will drop to less than 50 percent.
Aviation has the largest share in the U.K.’s global trade in transportation services, and the numbers matter. Passenger count has already witnessed a slowdown since 2016. It can be said with reasonable amount of certainty that the growth will continue to be slow during Brexit negotiations, and then increase in 2020-21. However, the quantum will depend on whether we have a hard-Brexit or soft-Brexit situation, and other permutations.
Key scenarios have been analyzed in the Aviation Segment of the WNS Brexit series.
This is the stronghold of the U.K. In 2015, Britain’s trade surplus of GBP 63 Billion in financial services was more than the combined surplus of the next three countries — the U.S., Switzerland and Luxembourg. This strength has allowed Europe to attract foreign investment and reduce the cost of financing businesses. The inter-dependency between the U.K. and the EU is significant. The EU has the largest share in the U.K.’s banking sector in assets and claims.
The biggest impact of Brexit in the financial sector will be on passporting rights. The passporting framework authorizes a bank to provide a wide range of services across the EU. A passported bank can set up a branch in any EU country and offer cross-border services to other EU member states.
A loss of passporting rights means duplication and costs for banks. Banks are already indicating that they will move jobs and assets to the EU. In January 2017, HSBC and UBS have outlined plans to transition 1000 jobs each from the U.K. to the EU. Citigroup, Deutsche Bank and JPMorgan Chase have given similar indications. Nomura, Daiwa and Sumitomo Mitsui are moving their European headquarters to Frankfurt.
There is a framework of equivalence wherein a non-EU member can be allowed to carry out specific services within the EU. However, the framework is narrower in scope. Hence, equivalence is not nearly the equivalent of passporting. Also, fulfilling the requirements of equivalence may mean violating the very tenets of regulatory and judicial independence that the U.K. is seeking through Brexit.
Key scenarios have been analyzed in the Financial Sector Segment of the WNS Brexit series.
Brexit is nothing short of the U.K. intending to rewrite its future. The next two years will be critical in shaping that future, both for the people of the U.K. and businesses which have a stake in the country’s growth.
The WNS Brexit series is available here.