UK companies take steps to mitigate Brexit risks

The one certain thing around Brexit has been uncertainty — for EU nationals working in the UK, for businesses’ strategic decision-making, and around the political process itself.

A vote of MPs in the UK Parliament on Prime Minister Theresa May’s Brexit deal has been postponed until the week beginning 14 January 2019. The next steps beyond that date — including the timetable for the UK to leave the EU on 29 March 2019 — remain unclear. The UK government is meanwhile preparing for the eventuality of a no-deal Brexit with an additional £2 billion available for its planning announced in mid-December.

Since the UK’s June 2016 Brexit referendum, surveys have articulated risks that rolling back UK-Europe integration on trade and movement of labour could create.

One of these surveys — of chief audit executives across UK industries — revealed that more than four-fifths (82%) anticipated that their organisations will be affected by risks related to Brexit. Just over half of those surveyed were working in the financial services sector.

The top three risks identified by this research published in October 2018 by the Chartered Institute of Internal Auditors (CIIA) were regulatory change (69%), recruitment of labour (61%), and supply chain management (57%). A similar survey by the CIIA in 2016, one month after the June referendum, showed different concerns — of currency market volatility (69%) and falling consumer and business confidence (47%). Regulatory change (55%) was also then identified in the top three risks.

The Association of International Certified Professional Accountants carried out its own Brexit survey of CIMA members largely based in the UK. It revealed that Brexit was negatively affecting members’ 2019 forecasts, with 58% anticipating increased costs, 27% expecting profits to be flat in 2019 as a result of Brexit, and only 5% forecasting an increase.

In a move to mitigate the Brexit risks, many companies — 53%, according to the CIIA survey — have carried out scenario planning.

In planning for the different outcomes — no deal or a negotiated deal — companies identified several difficulties. The top three issues were a lack of clarity from the UK government on the preferred Brexit deal, the number of possible scenarios, and the lack of information from the government through technical notices.

Remmert Keijzer, the CIIA’s policy and external relations executive who authored the research, said that internal audit functions were focusing their planning on a possible hard Brexit — viewed as the most disruptive type of Brexit.

“Most companies that we have spoken to established an internal Brexit working group straight after the referendum,” he said. “It’s really to get everybody in the organisation, or some of the key departments like legal, regulatory, HR, senior management, internal audit, in the same room to discuss regularly Brexit and the impact it has on the organisation and how the organisation could prepare for Brexit.”

Keijzer pointed out that smaller organisations have less resources to establish a Brexit working group and communications with government. Some larger companies have been actively lobbying the UK government for information, but for smaller businesses, it is “very difficult for their voices to be heard”, he said.

Multinational chemicals company Johnson Matthey, the CIIA’s report identified, is focusing on the implications of custom barriers and non-tariff barriers, as well as supply chain disruption “in case of a hard Brexit”. It is also considering “the possible effects on the organisation’s contractual obligations and access to EU research and innovation funding”, the report said.

In the banking and financial services sector, Standard Chartered reported that planning is challenging and requires regular review as a result of new or revised assumptions being required.

All potential scenarios were being considered by energy services company Centrica, the report said, to ensure that it can meet customer needs if importing energy from the EU becomes more difficult and expensive.

Centrica’s group head of audit, risk, and control, Carolyn Clarke, told FM magazine the company was looking in detail at each of its business areas and being “as specific as possible about where we think the significant issues will be”.

She added: “It’s very easy to focus in on the things that are getting a lot of public attention and the commentary in the media. And, actually, it is not necessarily those things that are going to have the most significant effect for your organisation.”

Centrica, she said, had built up its understanding of what might happen, including how it can mitigate the risk of the “severe but plausible outcome” as well as more likely outcomes and scenarios in the short term.

Clarke offered three tips for scenario planning for those leading internal audit:

• Get close to other parts of the business and listen to them.
• Be flexible and have the ability to be agile. A fixed plan won’t enable an organisation to respond to the risks as they emerge.
• Be as specific as you can regarding the potential issues and scenarios that could arise.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is external affairs content manager for FM magazine.