12 Jul 2018

Hokey cokey Brexit: A White Paper blueprint for the UK and the EU that is "in, out, in, out, shake it all about."

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On the front page of the FT today, an individual with early sight of the White Paper on the future UK-EU relationship describes the section referring to financial services as resulting in “cohabitation but without the same commitment as marriage.” That may be true up to a point (cohabitation is rather too strong a comparison on closer inspection) but if the whole document is to be assessed deploying similar terms then a better description would be a shift from marriage to moving next door. Even more forcefully than the Chequers Statement issued last Friday, this White Paper confirms that the UK aspires to an hokey cokey stance in its economic and political relationship with the EU-27 in future.

When it comes to goods, London is prepared to become a de-facto rule taker in order to ensure it has the widest possible access to the single market moving forwards. Parliament will have the right to diverge but it is hard to imagine how any deviation from the ‘common rulebook’ would be any more than incremental or a response of last resort if the EU introduced new rules or regulations which would be manifestly hostile to UK interests.

By contrast, when it comes to services, which are almost four-fifths of the UK economy overall and where just three-eighths of all the UK’s exports are sent to the EU-27, not only will the UK be nominally free to diverge from the EU, there is also an implicit acknowledgement that it is highly likely to do so. Any remaining pretence that ‘passporting’ might be retained by a different name is abandoned. Furthermore, even the ‘Plan B’ of a variation on the same theme based on mutual market access has effectively been sidelined. The starting point for the negotiations in this realm will be the existing EU concept of equivalence. In a similar spirit, ministers have set out which EU agencies and arrangements they wish to be associated with after the UK quits the EU, with the logical inference that any and all others will then be of little or no interest to them.

The closest model to this, explicitly referenced on page 85 of the tome, is the EU-Ukraine Association Agreement. That accord has virtually the same arrangements when it comes to goods, a patchwork quilt with regard to services, no obligation to allow free movement and no financial payment from Kiev to Brussels. The eventual outcome in the case of the UK, which is a much larger and much more interconnected economic partner to the EU, will be different in that there will be a more permissive regime (but not absolute freedom of movement) when it comes to people and there is likely to be a financial contribution from the UK, albeit not one which involves the ‘vast sums’ witnessed today.

So what does all of this mean for private equity and venture capital and the portfolio companies in which the sector holds investments? It is too early to opine with absolute certainty what the ‘end state’ is destined to resemble but it is possible to make an educated analysis of what in the White Paper is and is not likely to be translated into the ‘Future Framework’ declaration of principles that will accompany the legal Withdrawal Agreement that looks ever more likely to be settled this year.

Goods

Uncertainty over what the nature of tariff and non-tariff barriers between the UK and the EU will be has rendered the prospects (and hence valuations) of companies which move components and final products between the UK and the EU-27 less stable. The comprehensive free trade agreement that is set out in the White Paper would involve zero tariffs across goods (including manufactured goods, agricultural, food and fisheries products) with no quotas and no routine requirements for rules of origins between the UK and the EU. It is highly likely to be the basis for a deal albeit with several additional safeguards to ensure the integrity of the single market, a benign stance towards EU nationals in the ‘mobility framework’ that emerges and, by some means or another, a relatively modest (but useful) continuing UK contribution to the EU budget. It may be an accord that some in the European Commission consider close to cherry-picking but most member states will deem control over the ‘common rulebook’ to be sufficient to agree to continue with the status quo which does, after all, deliver a very considerable surplus on goods to the EU-27 in its trade with the UK.

Services

The UK, as outlined above, has thrown in the towel on anything stronger than enhanced equivalence on services. In this regard, it will seek (a) common principles for the governance of the relationship, (b) extensive supervisory and regulatory dialogue, and finally (c) predictable, transparent and robust processes. What that in turn means is a dispute resolution (or dispute management) procedure, an institutional mechanism for regulators from the UK and the EU-27 to talk to one another regularly and a timetable for notification of any ending of equivalence that is much longer than just a month.

What might that mean for private equity and venture capital funds that want to raise money in the EU-27? In the short-term, national private placement regimes will remain the centre of attention. In the longer-term, the notion of a passport may well evolve into something akin to an ESTA-style visa.

A passport and a visa differ in three crucial regards. First, it is one’s own government that issues a passport, whereas it is a foreign government that controls the assignment or not of a visa. Second, in the UK a passport once permitted lasts for a decade or so but visas have to be renewed more often. Finally, if one behaves badly in one’s own country it is unusual to have a passport taken away but if an individual acts inappropriately abroad, that nation is entirely at liberty to cancel a visa forever. Exactly how this post-passport era might operate will now be at the heart of the end state dialogue.

One final point relating to EU agencies is worthy of industry attention. The White Paper does not contain a single word about the UK maintaining any form of relationship with either the European Investment Bank or the European Investment Fund. That would appear to make the repatriation of the resources previously sent to UK-focused private equity and venture capital funds to the British Business Bank as close to a racing certainty as one can find in this immensely complicated process.

People

The White Paper explicitly repeats the assertion that free movement ends on December 31 2020. What it is deliberately more ambiguous about is the ‘mobility framework’ which will then replace it.

The document states that ministers want to “support businesses to provide services and to move their talented people” and to “allow citizens to travel freely, without a visa, for tourism and for temporary business activity” and to “facilitate mobility for students and young people, enabling them to continue to benefit from world leading universities and the cultural experiences the UK and the EU have to offer.” So, it is reasonable to assume this means highly talented EU nationals, would-be entrepreneurs, students, tourists and even seasonal agricultural workers will all be ‘in’ under the new scheme but simply turning up on these shores hoping to find a position in a pub or shop and live in the UK for an undefined period will be a far more challenging proposition compared to recently.

Yet even that might not be impossible. What the White Paper alludes to, but for domestic political reasons does not chose to elaborate upon, is that the more far-reaching a free trade agreement that is struck with any country, the more liberal the stance on matters of migration will be (this is an area known as ‘Mode 4’ commitments). Therefore, if an absolutely comprehensive bargain on free trade in goods is secured (as is probable) then one would expect the ‘mobility framework’ as it applied to EU-27 citizens to be at the most accommodating end of the international range. It would not be ‘free movement’, but it would also not mean a return to the pre-1973 UK-EEC stipulations.

To an extent, to conclude, Boris Johnson was right to describe these proposals in his resignation letter as a “semi-Brexit”. This does not mean, though, they are the worst of all possible worlds.

Tim Hames
Director General, BVCA


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