If we go back to Christmas Eve 2020, from a business point of view the timing of the Brexit trade agreement was not ideal. Leaving aside a disrupted Christmas or New Year period for a lot of businesses, getting a deal was a big achievement, which is something everybody should be very relieved and happy with.
Achieving the overall goal of tariff-free, quota-free trade is very significant. But there's a but. Unfortunately, for many areas, even within a zero-tariff deal, people are starting to realise the practical implications, such as rules-of-origin restrictions, in particular. These implications were known, and people either ignored, overlooked, or maybe tried to wish them away.
These nontariff barriers are, for certain sectors, significant. The deal did reduce the nontariff barriers in sectors such as automotive, medical products, wine, and chemical products, but did very little for other sectors.
Frictionless trade was always a fiction, and it could never be fully achieved once the UK was outside the Single Market. The fact that hauliers can continue to operate throughout the UK and the EU, and UK hauliers do not need the permits they would have needed under a no-deal scenario, is very positive. However, the other frictions that have been introduced have brought issues for the haulage industry that we saw in January, where hauliers refused to go to the UK because they didn't have certainty of when their trucks would come back because of delays. And secondly, if they came back, would they be able to backhaul, that is, bring a load on the return journey? If they can't backhaul, then the cost of that trip is increased.
From an Irish perspective, much of our trade either transits the UK or has centralised warehousing in the UK that services the Irish market, in many cases, overnight on a classic just-in-time model. Goods can be ordered before 5pm, shipped overnight, and be in store at 9 the next morning. This phenomenal level of just-in-time calibration has been disrupted.
Businesses will inevitably get to grips with these challenges. For many businesses, they may not be material, but they're high profile. Some of them stem from people not realising either what the rules are or how to apply them. So they will be ironed out. That's the positive.
However, in early January, Dover, Calais, and the Eurotunnel were dealing with an absolute fraction of the normal trade — 15% of their 2019 volumes. Once you get up to normal volumes, that's when minor issues could accumulate quite quickly. Suddenly it's a kind of Swiss cheese effect of once the holes align, you get a massive issue.
There have also been various IT system challenges, and it's not clear the capacity in place in January was sufficient to manage the volumes. Individually these issues may not be catastrophic, but if you get a cumulative impact across them, you could see more and more issues.
It was notable that the deal addressed services to some degree — many trade deals do not at all. However, there were a lot of areas where effectively UK services businesses' freedom to operate across the EU has been significantly restricted. Services trade is complex — it's about mobility of people, qualifications, data, and other issues. It covers a lot. The impact is yet to be felt as businesses work out how and where they will be impacted in the services sphere.
Steps for finance
React to the immediate
The first step for businesses is a "triage" one — reacting to the immediate. If there's a truck being held up, then the supply chain team may need help to work out the solution. For management accountants it's about being the enabler for the different parts of the business that are reacting to issues with paperwork, or systems issues, or whatever it might be. Finance should be part of an overall Brexit response team — there needs to be a coordinated response.
Examine cost impacts
Second, as it has the visibility across the business, finance needs to take a lead role in helping monitor costs. This includes one-off impacts that people just need to be aware of, as well as structural, sustained effects that the business will need to react to over the short and medium term. There could also be a need to revisit commercial models or pricing models.
Understand the opportunities
The strategic medium-term role is working with the business, not as a finance solo run, but with commercial and strategy teams to see where the opportunities lie. If someone else has a challenge, you may have an opportunity.
For goods businesses, that's primarily about substitution opportunities. So if it is now more difficult to get a certain product from the EU into the UK or vice versa, the consumer demand will have to be met from somewhere.
The challenge to centralised distribution may mean that over the medium term much more warehousing gets built in Ireland and products get shipped here directly from EU suppliers and then go in store. That will be great for service levels, but it will add cost, so consumers will have to be willing to pay for that. Irish suppliers may be able to replace some of those products, but not produce like fruit that can't be grown locally.
Businesses need to ensure they're aware of how those markets are evolving and where the gaps are that they may be able to step into. Finance then has a role in making sure that it can help coordinate all that — forecasting the impact of it, working out what the cost implications will be, and helping with working capital funding for it or longer-term financing, if it's a bigger investment, such as new production lines or new warehousing.
Finance needs to be the glue or the enabler within the firm's overall response — to bring the insights, the visibility, and a level of coordination to different teams that will have a required perspective on addressing these issues.
Equivalence decisions on both data and financial services were expected over the course of 2020 but were effectively delayed. Those decisions weren't part of the trade negotiation, and the delay meant the discussions ended up being run in parallel, and that gave the EU a lot of leverage.
People sometimes misunderstand the importance of financial services to both sides. The London financial services sector is very important to the EU. It isn't possible for the EU market to just immediately switch off London and say, "We'll take it all back to Amsterdam, and Dublin, and Frankfurt," because it's just too big, some of it, and there's accumulated expertise and infrastructure around it that will take a long time to replace.
So there is a mutual interest in maintaining financial services in London to some level. That has been shown by the fact that the EU has granted effectively a split process: It has given slightly longer temporary equivalence to certain clearing operations, and it has granted shorter temporary equivalence to the rest of the sector. Medium term, however, it's probably reasonable to assume that there will just be a continued slow but ongoing erosion of the position London has in financial services.
The EU has been quite clear already that things like euro-denominated trades in many instruments have to happen on EU exchanges. There was a big shift in capital flows in the first week of January away from London and back to EU-based exchanges. It's difficult to predict exactly how individual financial services sectors will behave, because some of them genuinely can and should arguably operate from London. Others will be areas that the EU will probably want to pull back, so it's an unhelpful level of uncertainty for the sector.
For much of the financial services sector, Brexit had largely happened two years ago, as far as it was concerned — companies had already put in place their contingency plans. Regulators had been very proactive in making sure that financial institutions, particularly systemic ones, did not just have contingency plans, but had actually implemented them. So it wasn't the same type of deadline for financial services as it was for other industries.
'The end of the beginning'
Finally, this really isn't the end of the story. The deal should be seen as the foundation for the subsequent discussions on the relationship between the EU and the UK. Data and financial services are yet to be resolved, and genuine teething problems for goods will need to be addressed. The deal sets out timeframes for talking for several years to come.
So, for example, fisheries have a defined transition arrangement. Northern Ireland has its own unique arrangements that have time-limited elements, including political votes to renew the arrangements. The process by which professional qualifications are reviewed is set out in it. So, this is just the end of a chapter, the end of the beginning.
As a framework, it provides the basis on which all of the future debates and arguments will be grounded.
If you're a business and if you sit back, depending on where you sit, it may feel like you are a winner or a loser. The issue of fisheries has had a lot of airtime disproportionate to its employment or economic impact, although important to the people involved in the sector. Ultimately, the UK is a net exporter of services to the EU, and the UK's position on services has been weakened. The EU is a net exporter of goods to the UK, and the inevitable frictions notwithstanding, it has achieved a degree of protection to that, which it will probably be happy with overall.
Ignore the winner or loser tags: They don't advance a business's position. Now is the time to focus on taking action to protect, optimise, and expand your business based on the reality of the trading relationship, rather than what people wanted it to be.
Simon MacAllister, FCMA, CGMA, is a Strategy and Transactions partner and Brexit lead for Ireland at EY. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.