Having seen Legal & General’s shares initially tumble on the Friday morning immediately after the UK’s vote to leave the EU – like so many financial services businesses – general counsel Geoffrey Timms is concerned that the business impact of Brexit could become a self-fulfilling prophecy. ‘Markets are emotional rather than factual. We can talk ourselves into trouble. There’s this end-of-the-world view online. Britain is still in a good place. Yes, the government has to fight uncertainty, but so does Europe. One hopes common sense will prevail.’
His point is echoed by a senior in-houser at BT: ‘There’s a real danger we’ll talk ourselves into a worse situation. Lots of law firms are making genuine attempts to come up with advice and things are now clearer with the new prime minister.’
At a round table hosted by The In-House Lawyer ahead of the referendum (see ‘The big uneasy’, IHL summer 2016, page 48), senior in-house counsel spoke about managing the unprecedented challenges ahead. The hope among those at the debate was that legal teams could build a dialogue with executive teams and prioritise areas of focus to prepare a company for a post-Brexit world. And while many in-house counsel we have spoken to note the futility of detailed Brexit contingency planning, Bjarne Tellmann, group GC at Pearson, feels that boards now need their legal teams to step up and take responsibility.
‘For general counsel and legal teams in general, the greater disruption expected in certain areas of regulation and law means that there will be increased calls for innovation and imaginative thinking to help businesses be out in front of developments, and pursuing new opportunities as they arise.’
With this in mind, we canvassed the views of senior in-house lawyers in the media, energy and financial services sectors on what Brexit plans are being implemented, as well as the risks and opportunities that could emerge.
For many in-house teams, the immediate considerations in the aftermath of the Leave vote have focused on market volatility, foreign exchange, liquidity and borrowing, as well as effects on pension scheme funding. Legal departments are also monitoring developments in areas such as tax, employment and immigration.
Tellmann says Pearson publicly declared itself a Remain supporter early in the campaign, with chief executive John Fallon one of 36 FTSE 100 executive signatories to a letter written to The Times in February supporting the Remain campaign. A Brexit vote was considered ‘undesirable’ for one of its key UK stakeholders – the higher education sector – particularly if the EU grants and movement of students and researchers are restricted.
Fortunately for London-listed Pearson, education-specific regulation is largely national rather than EU-based and not subject to many of the existential regulatory concerns that affect industries such as financial services. However, Tellmann is particularly concerned about the impact on data protection, intellectual property and competition law. ‘Our plan is to monitor the potential consequences for those areas. We are also looking into our commercial arrangements with EU counterparties to assess potential exposure on questions of jurisdiction or pricing (if tariffs became applicable), but so much of this remains subject to conjecture and will unlikely become clear for some time.’
Within the energy and utilities industry, there is a wide range of possible outcomes from post-Brexit negotiations. Sellafield, which is wholly owned and funded by the UK government through the Nuclear Decommissioning Authority, is monitoring issues relating to procurement, regulatory and employment law that are likely to be affected. GC Andrew Carr says the company undertook a considerable amount of research into the potential implications of Brexit ahead of the vote, and decided not to implement a Brexit contingency plan, and now, ‘as the government begins to negotiate an alternative arrangement to EU membership, we will need to review and assess the potential impacts in greater detail’.
He adds: ‘We are already consulting with our colleagues in other public bodies to understand what types of legal arrangements and requirements may change, and then assess what we may need to do differently in the future. We’re keen not only to support the requirements of the business but also to support assessment of the implications on a wider industry level, given the specialist nature of nuclear law and regulation.’
Carr concludes it is too early to comment in detail on what opportunities may arise from Brexit. ‘We have no real idea of what alternative regulation may be in place, assuming there are significant changes, whether it is beneficial or detrimental to the way this company operates. It is something of a balance.’
A lot of what I have been doing is communication. It’s been me fielding calls and calming things down. The legal function in-house is key in that.
James McRobbie, CF Partners
As for financial services, much talk has centred on the threat Brexit poses to London’s unique position within the EU, with a large number of non-EU financial institutions also using the UK as a gateway to access clients and markets across the region.
James McRobbie, GC of risk management and asset management firm CF Partners, says: ‘For our industry, it is incumbent on the British government to sort out the MiFID [Markets in Financial Instruments Directive] passport and market financial services in Europe. It needs to clarify how it will do that. It tells you the level of risk to the business. It’s an isolated issue, but I understand there are millions of those. If they sort that out, there will be a large piece sorted in the financial services industry.’
MiFID was the cornerstone of the European Commission’s action plan to bring about significant change to how EU financial services markets operated. Updated elements to the directive – the so-called MiFID II – are set to take effect in 2018 and are based, in part, on G20 commitments and the reform agenda stemming from the financial crisis to which the UK is committed. The UK financial services industry, to continue doing business in the EU after Brexit, will need to adopt equivalent rules.
Since the vote, McRobbie observes that he and his peers in-house have been kept busy calming nerves. ‘A lot of what I have been doing is more communication. There’s no legal work yet. It’s been me fielding calls and calming things down. The legal function in-house is key in that communication. The legal industry going forward should help start the process and get greater commitment from the government, and protect what we hold dear in the financial industry. We should be pulling together.’
Separately, the insurance industry is facing headaches of its own. Shares across the sector plunged after the vote, with many fearing the impact of the result on Lloyd’s of London. Again, a major attraction to insurers operating through Lloyd’s is that it has passport rights into the EU. Many global insurers operating in London have warned of shifting some of their business to subsidiaries within the EU, bypassing the Lloyd’s market in the process.
A senior GC at a FTSE 100 insurance company comments: ‘For now, people in insurance should be looking at their cross-border arrangements. You’re in a good place if you have subsidiaries in the right places and passporting isn’t an issue – others don’t have that luxury. Does your business need to establish subsidiaries elsewhere? Who are your suppliers? People should get a feel for where they think problems will arise.’
However, they add that contingency planning for what lies ahead is premature. ‘You don’t know what you’re planning for. Until the government works out what the future looks like, getting into detail about contingencies feels like a waste of time.’
Timms agrees and says: ‘We recognised that it was always going to be a close vote. We did contingency planning, but you can only do that to an extent. We had to look at the potential aftermath and clearly the board expected us to look. There are certain safeguards you can use to protect yourself – perhaps positioning yourself in a certain way in the market and predicting which way currency fluctuations will go.’
In the telecoms sector, opinion has been divided on how negatively Brexit will affect the industry. A recent report by The Economist, ‘Out and down’, noted regulatory reforms and roaming charges will be the dominant issues for the sector, while treaties, agreements and pan-European regulations will need resolving in the event of Brexit. But telecoms might be spared the worst fate.
One senior BT in-houser tells IHL: ‘Luckily it didn’t affect our dealmaking prior to the vote, but we do need to evaluate our law firm relationships to prepare for where we might do business in the future and what specialist or local advice will be needed. We’ll relook at things that might cause us grief, that don’t work for the business and give us less of a competitive advantage. But we’ll move forward and take the opportunity to put our case to the government.’
We can talk ourselves into trouble. Britain is still a good place.
Geoffrey Timms, Legal & General
BT delayed its external law firm panel review for five months as the company was awaiting the outcome of the vote. Led by group GC Dan Fitz, the review began in July and is expected to be wrapped up by October, following which the company will kick start a review to create its first (non-UK) international legal panel.
The consensus is that with so many variables, GCs are finding it difficult to forecast much of use post-Brexit, a predicament driven by new prime minister Theresa May delaying triggering article 50, the process by which Britain will have two years to prepare itself for departure from the EU.
According to EY, 66 UK-listed companies issued profit warnings in the second quarter of 2016, the highest number in any second quarter since the financial crisis. Plans to allow the UK an exemption from EU rules on freedom of movement for up to seven years while retaining access to the single market are being considered in European capitals as part of a potential deal on Brexit. Such a deal would likely allow the UK broad trade access to the European market and abate many business concerns, though it would be politically fraught to reach.
The key point is whether the government will ultimately opt for a ‘hard’ Brexit route, leaving no, or highly restricted, access to the EU single market, or a ‘soft’ option, in which much of the trade and regulatory framework remains in place. The former option would obviously involve far more complex legal and operational challenges for general counsel than the latter, but the key issue in contingency planning remains in the political arena. Signals have been so far mixed on which path the Conservative government will pursue and it looks to be months until there is more definitive information on which legal teams can base their planning.
Such ‘will we, won’t we?’ deliberations potentially create years of guesswork, but legal teams, where possible, must lay the groundwork to ensure successful outcomes. It also gifts law firms the opportunity to lend a guiding hand through the uncertainty. All interviewees agreed that preferred law firm advisers had proved proactive.
Says Carr: ‘Law firms have been quick to provide helpful advice and guidance notes on the areas that business in general ought to be concerned about. These have proven very helpful in guiding some of our early thinking, and assisting me in advising at a board and executive level on some of the immediate potential legal risks and opportunities.’
He concludes: ‘From the in-house perspective the greatest opportunity is for the legal team to hone its skills and develop alongside the changes that will inevitably arise from the Brexit decision, however they materialise.’