The UK’s decision to leave the European Union is one of the biggest political shocks witnessed by this generation.
At a recent roundtable Money Marketing brought together high-profile representatives from across the financial services sector to discuss the outcome of the Brexit vote and its short- and medium-term implications.
Did the morning of June 24 hear the industry’s phones ringing off their hooks? Were clients immediately hauling their money out of UK equities?
Million Plus Financial Planning financial planner Graeme McColgan said: “In the first few days we had a lot of clients contacting us wondering if they should act but since the initial shock has passed, we haven’t seen anyone walk away. No one has really adjusted their risk profile.”
What the vote has done is bring to the fore the importance of open and continual dialogue.
Morningstar Investment management chief investment officer for EMEA Dan Kemp said: “Our communications strategy is ‘lots and often’, regardless of how much there is to say. The lack of answers doesn’t stop the questions and we believe it’s far better to be honest and describe the uncertainty, look at the options available, how we are handling them and where we see the challenges. Don’t underestimate the demand from clients, and it poses one of the biggest dangers to a business in times like these when clients don’t feel communicated to.”
That human voice is never more powerful than in times of crisis, when empathy and sensitivity is required.
McColgan said the communications exercise post-Brexit has served to detract from the prominence of robo-advice, as clients seek reassurance and understanding in times of uncertainty.
He said: “It has been a great opportunity to speak to clients. It’s attractive for us as advisers to be able say, ‘When something like this happens you need to go and speak to someone, sit down, ask those questions face-to-face and talk about it.’”
Amid such uncertainty, appetite for any kind of information from all facets has been “insatiable”, according to JPMorgan Asset Management global market strategist David Stubbs.
He described his scepticism over the UK’s gravitas when entering forthcoming negotiations and warned of the “gap” between the status quo and the eventual outcome.
“What this comes down to is how special this country is going to be viewed by the EU and will European politicians really go against their procedures and rules to give us a special deal?
The idea of the “Norway model”, or European Economic Area membership – where countries have full access to the single European market yet no say in the politics, is gaining traction. But Cicero Group head of UK public affairs Tom Frackowiak is quick to point out its shortcomings.
“People have jumped on the idea of us moving to the Norway model, but Norway pays into the EU pot, it accepts freedom of movement, but it doesn’t influence any of the rules.”
The idea the UK can cherry-pick the aspects of the EU it wants and sidestep those it doesn’t seem to be a source of frustration – especially with such a long time horizon.
Frackowiak added: “We’ve been hearing from the Commission there is actually provision in Article 50 to do the withdrawal and agree heads of terms on a new relationship with the UK, which you could negotiate after the two years. There may be flexibility but we all have to recognise that, immediately, we have lost influence.”
Stubbs said: “Even if we manage to negotiate all the access, equivalence and passporting, if it takes place after the exit, there could be a gap where we go from being a full member of the EU to just being a member of the World Trade Organisation and having none of that access at all. That gap is too big a risk to take – we will act well beforehand.”
Some circles have suggested the UK might retain the Mifid II regime even after it eventually withdraws from the EU, which would make it easier for UK firms to access the EU market through the ‘third country’ rules within Mifid.
Kemp added: “Whether the UK opts for an EEA outcome or otherwise is important as we work across the region. The issue of equivalence could be a great boon as we look to implement Mifid II.
“The drawback is as an EU member, the UK has opted out of some directives and so it’s debatable whether we would even get equivalent status, and if we do, how long that might take.”
Highlighting the political game of dominoes that transpired in the following days after the referendum, Frackowiak flagged one name in particular and its significance in the UK versus EU power struggle.
“One of the little-reported resignations London appears to have barely noticed is Lord Hill, the UK’s European Commissioner in Brussels. That clearly shows the direct power we’ve lost overnight, in losing somebody who was leading on things like capital markets and could have been of great benefit to the UK.”
He described some of the key challenges that lay ahead, suggesting the Government’s plan for retaining the UK’s role as a leading financial services player would, understandably, come under scrutiny by the industry.
The manifesto of the Leave campaign, particularly around the UK’s international trading ability, would now be tested, he said, with much of former chancellor George Osborne’s legacy left hanging.
“What does our domestic agenda look like now? Are we going to get a decision on an airport any time soon? We’re meant to be this great global trading nation, yet we can’t even make a decision about an airport. We’ve got cheap money – are we going to build infrastructure? What are we going to do about places outside London where people feel are not feeling the economic growth of the country?”
City Financial investment director Peter Toogood suggested the negotiations were poorly handled, with the UK showing its hand prematurely in terms of regulatory influence, but also that the Leave campaigners jumped on data points that were irrelevant to much of their cause.
He said: “The UK economy was slow anyway.
“It was slowing more than two years ago in this country, so we’re getting very excited about a set of statistics that were already there. It’s certainly not getting any better, but it was already the case.”
He explained the problem he saw with the debate was that it was all in the context of the UK.
“If you are France or Germany, you’ve got nothing to lose by saying, ‘get lost’. We’re still going to buy the Mercedes-Benz. One in five of the Mercedes sold in Europe are sold here in the UK. Are we suddenly going to stop buying them? No. What are we going to buy instead? So if you’re Europe, you just sit there tell us to get lost. And there’s no reason for them not to do that.”
He said gaps will be inevitable as we transition from EU membership.
“[On Mifid’s third country rule], if we move to that status before we negotiate, that is the really big problem, and will open up that gap between the two,” he added.
The key messages seem pretty consistent whichever side of the spectrum you sit on: keep calm, keep informed, do not do anything rash, bring your investment philosophy back to basics.
Stubbs summed up the situation as “when you bring it down to it, it’s all fascinating discussion about politics, but the answer to almost every question is, ‘I don’t know’.”
Hargreaves Lansdown senior analyst Laith Khalaf said: “We are bringing people back to basics: diversification; focus on your savings goals; make sure you’re getting value in the products you’re choosing; ensure you’re being tax-efficient.
“We were all blindsided by the result, and the aftermath is this big shock, but then you think, ‘Yes, there’s uncertainty, but what am I going to do for the next two years? Sit in a bunker with a baseball bat?’ No.”
Stubbs concludes: “It’s far too early to talk about the economic hit at the moment. We haven’t triggered Article 50 yet. We will realise the scale of that decision and I would argue it’s the biggest decision a Prime Minister will take in peacetime. A lot of companies are waiting for this to be real and it’s only real when we trigger Article 50 and we can’t do that until October 20 [the next meeting of the European Council] even if we wanted to. Maybe in a couple of months this will settle down as people realise that right now there is no such thing as Brexit.”
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