What’s next after Brexit vote fails?

The UK Parliament forcefully rejected Prime Minister Theresa May’s Brexit plan Tuesday, deepening the turmoil surrounding the country’s pending withdrawal from the EU. The results increase the risk of a “no deal” Brexit, which would disrupt supply chains, raise costs for businesses in the short term, and force the pound further down.

“Every business will tonight feel no-deal is hurtling closer,” Carolyn Fairbairn, director-general of the Confederation of British Industry, tweeted shortly after the vote. “A new plan is needed immediately.”

Tuesday’s vote could lead to a number of alternatives, such as a strategic rethink by the government and a move towards a closer relationship with the EU. In the short term, thanks to a parliamentary decision last week, May is expected to present an alternative plan by 21 January. Her government survived a no-confidence vote Wednesday.

As far as businesses are concerned, a no-deal Brexit would be seen as the least-favourable outcome. It would be expected to lead to rising costs for companies trading across the UK border due to customs delays, potential new tariff barriers, and uncertainty over standards as the UK abruptly departs the EU’s single market and Customs Union.

“The basic message for the moment is that firms need to carry on their planning for a no-deal Brexit as most have been for a long time,” said Jonathan Herbst, global head of financial services at international law firm Norton Rose Fulbright. “It is really about calm analysis on the one hand and keeping a close eye on developments on the other.”

Organisations such as the UK’s Chartered Institute of Procurement & Supply and professional services firms KPMG and PwC have urged businesses to reassess their value chains in detail in the run-up to Brexit and consider the impact that even a “soft” exit from the EU could have on working capital in the short and long term. Legal and regulatory divergence from the EU, for example, may lengthen payment terms and raise bureaucratic costs.

Some companies have already rearranged supply chains to lower their exposure to cross-UK border trade. For example, companies based in the EU27 are finding new suppliers in the remaining member states, and UK-based companies are turning to UK suppliers. Others are seeking new partnerships in lower-cost countries in central and eastern Europe to mitigate other potential cost increases.

Currency fluctuation

Businesses will also be assessing the impact on sterling of Brexit developments. Citigroup’s private-banking arm advised its clients on 15 January to refrain from trading the pound for at least 24 hours, due to the increased risk of serious volatility surrounding the vote.

“While markets usually trade in advance of the news, based on expectations, the range of outcomes means that there is much continued potential for currency volatility,” said David Newton, FCMA, CGMA, finance director of currency brokerage Halo Financial. “As uncertainty drifts on, so too will the volatile pound.”

With this in mind, companies with considerable sterling exposure are already hedging, a trend that may accelerate, depending on outcomes.

“It’s a time for considering automated orders (by setting defined trigger points) that can target the top of ranges or can protect against collapse. Have a chat with a trusted foreign exchange broker to see how you can protect payments against market shocks,” said Newton. “Planning ahead is always advisable; doing nothing is often the biggest risk of all.”

For more on Brexit, visit cimaglobal.com.

— Andrew MacDowall is a freelance writer based in France. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.