Listening to the Brexit Mood Music

The UK has a rich tradition of musical innovation. From the Beatles, Rolling Stones, and Led Zeppelin to the more contemporary Adele and Ed Sheeran, the country has always taken a major role in the global music scene. However, it is UK asset managers that are rocking and rolling with the din of Brexit music currently reverberating across their industry.

What Do I Do Now? – Sleeper, 1996 – “What did I do wrong? I thought we had it sorted.”

The dial recently turned up on Brexit drama, replacing upbeat mood music with bleak dissonant overtones. The resignation of David Davis as Brexit Secretary shortly followed by Boris Johnson as Foreign Secretary in direct protest of Prime Minister Theresa May’s Chequers blueprint threw UK politics into turmoil. Asset managers’ hearts skipped a beat too as many are well into rolling out their Brexit contingency plans. The latest maneuvers crystalized for many that the one remote possibility of a hard Brexit feels more and more like it will become a reality, and the required contingencies should be deployed in full.

Davis suggested his departure was caused by the “progressive dilution” of the Brexit red lines, leaving him as a “reluctant conscript” no longer able to lead the army forward. Johnson rather less eloquently stated his departure was also linked to the Chequers Brexit plan. The departure of Johnson, the flamboyant poster boy of the “Vote Leave” campaign, deepened the sense of crisis at Downing Street, however much of that has since subsided. It’s easy to get hung up on political intrigue, however for cross border asset managers in the UK and beyond, not much has changed.

Despite the recent fallout, the UK now has a concrete proposal the EU will use to get back to the negotiating table. This is progress. Regardless of cabinet reshuffles, news cycles with alarmist headlines, a leadership challenge to Prime Minister May, a hung parliament, or any other political shift, asset managers can’t let up on their Brexit contingency plans.

So, here is a playlist of our favorite Brexit mood music to help managers get the job done:

Vinal-Records_220x220bTwo Tribes – Frankie Goes to Hollywood, 1984 – “When two tribes go to war, A point is all you can score.”

There is irony to the fact that the biggest Brexit battle since “the vote” hasn’t been between the EU and UK, but between divergent factions who fundamentally disagree on what leaving the EU means. However, with little progress made and a fast approaching March 2019 deadline, both sides appear to be changing tone. Leading British politicians are becoming more acutely aware that history books will not be kind to them if their Brexit legacy is a “no deal” exit. The promised goals of a richer, stronger, more independent nation outside the EU fails to recognize the globally interconnected nature of the modern economy. The best-case outcome will strike a balance between satisfying the extremists in Theresa May’s party and recognizing the practicalities of the overall situation with a view to ultimately broker some form of deal with the EU

Vinal-Records_220x220dAnarchy in the UK – Sex Pistols, 1977 – “Don’t know what I want, But I know how to get it.”

Since the resignations of highly visible Brexiteers Johnson and Davis, many have used the word “chaos” to describe British politics. And while the Chequers blueprint is far from perfect, it is a basis of negotiation that has until now been absent.

The Chequers plan does not eliminate a “no deal” Brexit scenario, however it does lessen its probability. The UK proposal contains several elements which hard Brexiteers will find difficult to swallow – such as the concept of the UK as rule taker, being subject to European Court of Justice (ECJ) jurisdiction, qualified free movement of people, and a customs partnership that would leave the UK as a de facto tax collector for the EU. Similarly, the EU has repeatedly stated that it will not accept splitting the four freedoms (free movement of goods, capital, services, and labour) as the UK proposal currently suggests. A key factor of the Chequers agreement for example is handling the treatment of goods and services separately. The parties may remain split on the details, but at least now they have a concrete plan to red line.

Vinal-Records_220x220cNew Rules – Dua Lipa, 2017 – “I’ve got new rules I count ‘em, I’ve gotta tell them to myself.”

A crucial element of the EU single market is that all member states follow identical standards regarding goods and services. The UK’s desire is to allow for “ongoing harmonisation on goods” and then “strike different arrangements for services.” No other countries have such a deal currently.

The biggest fear amongst Brexiteers is that the proposal makes the UK a rule taker and no longer a rule maker. There’s also a question of how to resolve disputes. Brexiteers want to be free of the ECJ as ultimate judge of its laws, but the rulebook proposes a continuing role for the EU’s highest court since the UK wants to set up a joint committee and independent arbitration in the event of any future disputes. This committee would include some combination of both the UK and EU’s highest courts.

Vinal-Records_220x220fThe Time is Now – Moloko, 2000 – “And we gave it time, all eyes are on the clock, Time takes too much time, please make the waiting stop.”

While stating the obvious, the time pressure for a Brexit agreement is building with each passing day. As such, asset managers should take decisive action now (if they have not already) to protect and ensure business continuity regardless of the Brexit denouement. The market now finds itself in an instrumental bridge between the opening verses and the build up to the final epic chorus. Both Dublin and Luxembourg in particular are seeing a lot of activity from those firms making moves now to prepare for whatever may come. Whilst a lot has been done, there’s also a lot left to do in advance of the March 2019 deadline date.

Vinal-Records_220x220eThe Long Goodbye – Paul Brady, 2000 – “No matter how hard I try, you’re gonna make me cry, Come on baby, it’s over, let’s face it, All that’s happening here is the long goodbye.”

With the scale, complexity, and diversity of topics left to discuss, negotiate, agree upon, and implement, it’s unlikely all will actually conclude by March 2019. In fact, when leading Brexit figures such as British Politician Jacob Rees-Mogg speak about a 50-year horizon to truly know what Brexit will mean for the UK, it puts into stark focus how seismic the changes are for both sides. It will take significant time and effort before the UK and EU are fully disentangled.

We expect both sides to use the previously agreed two-year transition period (or even work to agree on a longer period) to iron out the details. The flip side of any extension is that a lot can change in a week, never mind two years. Can the current UK government bring Brexit home before the next election? Additionally, with EU parliamentary elections due in 2019, it’s possible there will be a different perspective sitting on the EU negotiating side. For example, should hard line pro-EU thinkers be elected as members of the European Parliament, might the EU take a less conciliatory EU negotiating stance? As the time horizon extends on Brexit, so too does the uncertainty, however it is not a matter that is capable of being swiftly concluded.

Vinal-Records_220x220gTime Is Running Out – Muse, 2003 – “And our time is running out, We can’t push it underground.”

With a viable negotiating position from the UK now on the table, the real game can begin. The next set of formal talks are penciled for October, however in the interim, diplomatic dialogue will continue. To date, the UK has felt that the EU was not listening to their stance with the right sense of urgency. The EU perspective is that there was very little to discuss given the respective non-negotiable “red lines” on both sides. The EU has not changed their tune however, constantly and consistently reiterating the importance of the four freedoms. The political turmoil within the Conservative party in the UK remains an unwelcome distraction. In the best interest of the nation, Prime Minister May will continue negotiations and is even expected to request a further deadline extension. The industry hopes the adage “nothing like a deadline to focus the mind” holds true here and that both sides remain open to listening to one another and are capable of advancing towards a deal in a condensed time period.

Vinal-Records_220x220hWe Can Work It Out – The Beatles, 1965 – “Think of what I’m saying, We can work it out and get it straight.”

The Chequers blueprint offers a ray of light within the Brexit bleakness. As European Chief Negotiator for the UK Michel Barnier recently stated, the talks can be “de-dramatized” and there is still time and willingness to get closer to a workable agreement. Both sides have drawn red lines to an overall Brexit plan, but this is the first time the UK has laid serious detail on the table to negotiate. The bigger question is whether Theresa May can prevail long enough to get the UK back to the negotiating table?

Vinal-Records_220x220aThis Charming Man – The Smiths, 1983 – “He knows so much about these things.”

Barnier is no stranger to the asset management industry. The 67-year-old French career politician has held an unprecedented two terms as European Commissioner responsible for the EU internal market brief, which exposed him directly to managers. Barnier chooses his words very carefully, representing the European style of politics, defined by quiet diplomacy and tactful concessions. He is well versed in navigating complexity, since his role is to coordinate with 27 governments, 27 national parliaments, the European parliament, and the EU Commission. He sees his role as “a technical job” and not overtly political. Whatever a post-Brexit world looks like, Barnier’s stock will have risen with his deft handling of the first phase. If there is a pragmatic solution available within the legislative construct, Barnier will broker the compromise. Barnier’s most recent statement before taking a well-deserved vacation in advance of the next round of talks is indicative that the EU and UK are getting closer at least to singing in tune together.

Vinal-Records_220x2201jHeroes – David Bowie, 1977 – “Though nothing, nothing, will keep us together, We can beat them, forever and ever, We can be heroes just for one day.”

Throughout the Brexit process, the prevailing narrative has been that Brexit is so irretractable and the two divorcing parties so far apart philosophically that disaster is inevitable. Many have said talk of deals is naïve and that there was and remains little to no chance of avoiding a no deal Brexit.

It is no secret that the EU negotiating team has been surprised at times, by the lack of British preparation in the initial stages of dialogue. However recent signs are that a more cordial and productive engagement has emerged in the talks. Of course, like in life, the divorce negotiation is made up of both well-rehearsed public utterances and private impromptu arguments but either way, diplomatic dialogue continues. That can be deemed progress. Many of the naysayers have either quieted or walked away from the process. However, with champions of a Hard Brexit losing public support and credibility, it is now increasingly likely that softer tones will emerge along with new heroes from the UK camp.

In terms of asset management, the UK has recently made it clear that without certain concessions on the EU side it is difficult to see how the UK can allow unfettered access to EU entities and funds, such as UCITS to the lucrative UK fund distribution market. It’s not that the UK has no leverage in making deals on financial services. There are many reciprocal areas where both sides know a little give and take is needed to ensure neither party is disproportionately damaged.

Vinal-Records_220x220iYou Can’t Always Get What You Want – The Rolling Stones, 1969 – “But if you try sometimes,  you might just find, you get what you need.”