Brexit Update: All Change Aboard the Brexit Bus, But No-one Knows Where to Get Off

As Theresa May (still technically UK Prime Minister) is now blissfully Brexit-free, the next cast of characters has arrived.

This update contains three different sections which can be treated as a pick ‘n’ mix depending on your interests:

  1. Westminster: An update on what is going on in Parliament and the decisions being made on how the Brexit process will progress;
  2. Asset Management: Any updates in the period from regulators, government bodies, etc, that have a direct impact on the asset-management industry – including GBP/USD movements;
  3. Beyond Westminster: Any updates in the period from wider business groups and the like on the impact of Brexit, including companies that have announced movement of operations and/or job losses in the UK.

Brexit Countdown: 111 days to go (or 26 Parliamentary Sessions)


The quote of the moment comes from Jon Henley of The Guardian:


"The EU27 will not reopen the withdrawal agreement. The baseline scenario remains: new PM goes to Brussels, Brussels refuses to renegotiate, new PM asks parliament to approve no-deal, and parliament refuses. Then what?"

– Jon Henley, The Guardian


As Theresa May (still technically UK Prime Minister) is now blissfully Brexit-free and spending her last few weeks in office attempting to add something to her legacy that doesn’t contain the B-word, the next cast of characters has arrived. Following a selection process amongst Conservative members of Parliament (‘MPs’), the candidates for leader of the Conservative Party – and the UK’s next Prime Minister (‘PM’) – have been whittled down to two. Boris Johnson (former Foreign Secretary) and Jeremy Hunt (current Foreign Secretary) are now battling it out for the hearts and minds of the members of the Conservative Party (which most estimates put at a total of 160,000 people). Recent polls have revealed that these members would be willing to sacrifice almost anything in the country to see Brexit done (Scotland, Northern Ireland, The Conservative Party and the UK economy) – the only thing that they would abandon Brexit for is if it meant Jeremy Corbyn (Labour Leader) would be PM. With this information, it is not hard to see why both candidates are campaigning on getting Brexit ‘done’ by the end of October deadline. Both claim that they will be able to re-negotiate May’s Withdrawal Agreement – Jean-Claude Juncker (European Commission President) has once again repeated that this is not an option. Whilst there still does not seem to be a Parliamentary majority for a no-deal Brexit, the pro-European MPs seem to be struggling to get amendments passed that would help to keep this under Parliamentary Control. Attempts to do this have increased since Johnson refused to rule out shutting down Parliament if that was the only way to force a no-deal Brexit through – he apparently doesn’t see the irony in excluding a democratically elected Parliament in order to protect democracy by respecting the referendum result.

It’s not just in the UK that changes are occurring. EU leaders have agreed on choices to replace Juncker and Donald Tusk (European Council President) later this year. As discussed below, these are two different characters with somewhat opposing views on Brexit. As always with Brexit discussions, it is the EU leaders that are making the decisions. Given these have not changed, it is hard to see the EU’s Brexit stance changing. By the end of July, the UK will have a new PM and we will watch to see whether rhetoric aimed at Conservative Party members is toned down as the deadline approaches, or we will finally find out exactly what the implications of a no-deal Brexit are (see Westminster section).

Switzerland versus the EU has been the match to watch – particularly in London. The EU is attempting to replace 120 bilateral agreements that govern the special Switzerland/EU relationship with one framework; however, the Swiss have taken objection to having to automatically adopt certain EU laws. Meanwhile, the equivalence granted to Switzerland that allows ease of trading shares on exchanges in the EU and Switzerland (and that financial services in London hope to emulate) was due to expire at the end of June. This would typically be renewed; however, in this case, the EU let it expire. The Swiss then retaliated by not allowing Swiss shares to be traded on EU exchanges, only through Zurich. Commentators seem to agree that the EU has a no-deal Brexit firmly in its mind while this is going on and doesn’t want to set the wrong precedent. The implications of this change may not be known for a while and London will watch with interest to see the conclusion (see Asset Management section). There continue to be falls in investment and manufacturing (see Beyond Westminster section).


Latest Implied Odds From Betting Markets

Figure 1. Implied Odds of Brexit Outcomes

Implied Probabilities of Brexit Outcomes

Source: Man FRM; As of 10 July. Man FRM calculates the implied probabilities of Brexit outcomes using prevailing odds as priced by UK bookmakers, which are collated on a daily basis. The graph presents the implied probabilities of Brexit outcomes averaged across all UK bookmakers for which data is available, over time. This data analysis is based upon information obtained from third-party sources not affiliated with Man FRM. Man FRM cannot guarantee the accuracy of this data and it should not be relied upon by investors.


What Happened Recently?

  • Following on from May’s resignation as Conservative party leader, the race for the new leader of the Conservative party and new PM began. The candidates had to secure the support of Conservative MPs via voting until two candidates remained – Johnson and Hunt. The final decision is now in the hands of 160,000 Conservative Party members who will vote by postal ballot. The winner is expected to be announced on 23 July.
  • A YouGov poll conducted between 11-14 June of Conservative party members indicated that the membership would be fine with: Scotland leaving the UK, significant damage to the UK economy, Northern Ireland leaving the UK and the Conservative Party being destroyed to ensure that Brexit happens. In fact, the only thing that would convince them to abandon Brexit would be Corbyn becoming PM. With this in mind, the two candidates have essentially been trying to out-Brexit each other in order to win the race.
    • Johnson continues to promise the UK will leave the EU on 31 October, whether or not there is a deal in place. He has however referred to the chances of there being a no-deal Brexit as a “million to one”. His plan is to negotiate a new deal, replacing the current Irish backstop provisions. He has stated that unless the UK gets a new deal, he will withhold the GBP39 billion ‘divorce settlement’. (As a reminder, this figure is to settle outstanding obligations the UK has to the EU.) Johnson is proposing to use a provision under the General Agreement on Tariffs and Trade (‘GATT 24’), which would give a standstill period and therefore allow the UK to avoid tariffs for the next 10 years. The catch is this: it cannot be entered into unilaterally and the EU would have to agree to sign up to this. There is also widespread doubt reported by the media that GATT 24 can be used in the way described by Johnson.
    • Hunt wants to leave with a deal, but would back a no-deal Brexit with a “heavy heart” if necessary. He also intends to negotiate a new deal to replace May’s Withdrawal Agreement. Hunt plans to present a provisional no-deal budget in September. If he determines there is no realistic chance of a deal by the end of September, he has said he will abandon talks with the EU and focus on preparations for a no-deal Brexit. During the leadership race, Hunt claimed that German chancellor Angela Merkel had told him she was willing to renegotiate the Brexit deal and that he would be able to solve the Irish border issue by “going to Ireland and talking to them”. On June 11, Juncker told a Politico event that it will not be renegotiated, saying it “is not a treaty between Theresa May and Juncker, it is a treaty between the UK and the EU”.1
  • Pro-remain and anti-no deal MPs in the UK Parliament have become concerned following talk started by Dominic Raab (one of the candidates that was knocked out of the Conservative leadership race) about proroguing Parliament in order to facilitate a no-deal Brexit – essentially shutting down parliament so that they would not be able to prevent this. Hunt has ruled this out; however, Johnson has not. There have been several amendments proposed by anti-no deal MPs to try and prevent this from happening. While most have failed, one passed by a single vote (294-293), which requires ministers to give fortnightly updates on the situation in Northern Ireland. This will make it harder for a PM to suspend Parliament. An additional amendment which would have required MPs to come back and debate these reports, even if Parliament was closed, was not passed. Whilst this will make proroguing parliament more difficult, it is not as iron clad as the other amendment, should it have been passed. Labour had also previously attempted to wrest back control for Parliament with regards to a no-deal Brexit: It put up, for a vote, an amendment that would make Parliamentary debate new legislation which would bar a PM from proroguing parliament in order to force through a no-deal Brexit without consent of the chamber. The amendment did not pass. Unless another amendment is successful, the only option that would remain to stop a PM forcing through a no-deal Brexit would be to bring down the government in a no-confidence vote.
  • It’s not just the officials in the UK that will be changing seats at the Brexit table. EU leaders are agreeing who will hold the top EU jobs from 1 November. The two potential new appointees for the key EU roles with regards to Brexit have historically had different rhetoric on Brexit:
    • Ursula von der Leyen looks likely to become the new European Commission President, replacing Juncker. In terms of Brexit, she has advocated patience due to unknowable consequences of a hard break. She has, however, been critical of the whole idea of Brexit. She also said on 10 July that she would be open to extending the Brexit deadline if the UK needed more time.
    • Charles Michel is set to become the next European Council President, replacing Tusk. He has previously warned that no-deal would be better than a bad deal for the EU and would prefer this in some ways as it would give clarity and responsibility.
  • On 9 July, Corbyn finally made the announcement members of his party had been pushing him to make (although they may not have been happy with limitations around it). Corbyn declared Labour’s policy to be that the new PM should be willing to put any deal to a second referendum and that Labour would campaign for Remain in such a referendum. The limitation on this; however, is that it only covers the next PM – it importantly does not commit them to putting this in any manifesto should there be a general election.

What Happens Next?

  • On 23 July, the UK’s next PM will be announced – media and pundit consensus is that this is likely to be Johnson.
  • The new PM will then have limited time to achieve the stated aims of renegotiation – taking into account the summer recess and party conference season.
  • As we get into October, time will tell whether the new PM will stick to the promises made to the Conservative Party members to leave with no deal if necessary. This will not be as straightforward as they would like, though, with significant opposition in Parliament for this course of action. Assuming that Parliament has the numbers to block the new PM doing this in the normal course of events, (and assuming as promised that the EU has not re-negotiated the Withdrawal Agreement), there seem to be four ways this could play out:
    • Prorogue parliament: This would be a very risky move. Even if successful, it would likely lead to a motion of no-confidence in the government and a general election. It’s hard to see a PM that chooses to do this remaining a PM for very long;
    • A second referendum is announced: The PM would be trying to get a mandate from the public in order to override parliament’s objections. There would need to be an extension granted by the EU (again) for this to occur;
    • Vote of no confidence: If a PM seems to be charging ahead with no-deal, then the nuclear option would be to bring down the government and force a general election. This is an option the new PM will be likely to want to avoid. With Leave voters split between Conservatives, Nigel Farage’s Brexit Party and Labour, and Remain voters split between Labour, Lib Dems and other smaller parties, the composition of the next Parliament isby no means certain. This would also require an extension.
    • Ask for an extension: It’s likely – if we get to this point – that the new PM would not want to risk any of the above three options. An extension may yet be asked for despite the vows to leave on 31 October. However, this just delays the issue; sooner or later, a choice has to be made. If it ends up at a general election, the failure to keep this vow could leak committed Leave voters over to Nigel Farage.

Preparations for a No-Deal Brexit:

  • On 12 June, a leaked confidential cabinet note warned that the UK will not be ready for a no-deal Brexit on 31 October. The note stated that six to eight months would be required to ensure medicines are stockpiled and four-to-five months would be needed to ensure traders are ready for new border checks. At the time of the note being leaked, there were just over four months left until the latest Brexit deadline; there is now just over three.
  • Around the same time, the EU gave an update on its no-deal plans. It is broadly satisfied with the work that’s been done, but warned that insurance companies needed to do more. It has no plans to implement further no-deal steps and states it is ready for what is calls a “possible, although undesirable, outcome”.2

Asset Management and Financial Markets

  • The FT reports that dozens of global asset managers have gained permissions in Dublin and Luxembourg to set up investment operations outside of the UK. It also reports a “surge” in applications for MiFID licences to continue to offer services to European institutional investors using segregated mandates. Companies that have gained these permissions in the past six months include: Affiliated Managers Group, Baillie Gifford, BNY Mellon, Macquarie Capital, Man Group, Legg Mason, Principal Global Investors, Standard Life Aberdeen, AllianceBerstein, Aviva Investors, Columbia Threadneedle, Fidelity International, JPMAM, Jupiter, Invesco and MFS. These firms join those who made similar moves following the referendum result – Morgan Stanley Investment Management, LGIM, WisdomTree, Capital Group, Franklin Templeton, Janus Henderson, Investec, M&G, Schroders, T Rowe Price and Wells Fargo.3
  • Robert Ophèle, chairman of the French regulator Autoritéè des Marchéès Financiers, stated that Europe’s financial landscape will be “profoundly transformed” by the UK’s exit from the EU. France is pushing for tighter regulations once the UK no longer has a say and, in the past, has been critical of the European rules covering delegation believing they should be stricter.
  • A row between Switzerland and the EU may be a prelude to issues that could be faced by the UK post Brexit. Switzerland is not part of the EU4, but has a special arrangement with it. The arrangement is currently governed by 120 bilateral treaties, which the EU wants to switch into an institutional framework. The sticking point has been that the framework would require Switzerland to automatically adopt some EU laws – Switzerland rejects this proposal. The EU had granted equivalence to Swiss exchanges, meaning that Swiss shares could easily be traded within the EU. This equivalence is issued via a temporary permit that gets renewed; however, due to the ongoing dispute, the EU did not renew this when the current permit expired on 30 June. In retaliation, the Swiss finance ministry banned Swiss shares from being traded in the EU. This means investors now have to trade Swiss shares in Zurich through local brokers. The full impact of this is yet to be seen. However, London should be watching this closely as at least part of this will be a show of force from the EU in case of a no-deal Brexit.
  • EY’s Brexit Tracker states that since the EU referendum, UK financial services firms have disclosed almost GBP4 billion of Brexit-related costs, including relocation costs, legal advice, contingency provisions and capital injections to scale up new non-UK headquarters.5
  • Mitsubishi UFJ Financial Group confirmed that it will cut around 50 managerial positions in London as part of a voluntary redundancy program focused on London.
  • The FT reports on investment executive contributions to Johnson’s and Hunt’s campaigns. Johnson received the most donations, including from David Lilley (RK Capital), Jon Wood (SRM Global), Johan Christofferson (Christofferson, Robb and Co), Jamie Reuben (Melbury Capital), Alex Wilmot-Sitwell (Perella Weinberg), and Charles Montanaro (Montanaro Investment Partners). Hunt received donations from Andrew Law (Caxton Associates), David Forbes-Nixon (Alcentra) and office space from Peter Wilson (Moulsford Capital).6

Interest and Exchange Rates:

The British pound has continued to slide, hitting a closing low of 1.2465 on 9 July.7 This is its lowest point since April 2017, excluding a ‘flash fall’ in January. Bloomberg also reported at the end of June that the use of British pounds in global transactions fell to its lowest levels since August 2011 – at 6.7% compared with US dollars at 40% and euros at 34%.

Figure 2: GBB/USD FX Rates

Implied Probabilities of Brexit Outcomes

Source: Bloomberg; between 15 May to 11 July.


Beyond Westminster:

  • 3 June – Stephen Phipson8, CEO of Make UK (the group that represents a sector employing more than 2.7 million industrial workers across the UK), says that “orders are drying up – directly linked to talk of a no-deal Brexit. EU customers are in the period when they start to look at the next 12 month contracts, and they are starting to ask why they should take the risk in the UK.”
  • 4 June 2019 – EY UK Attractiveness Survey finds that the UK remains the number one destination for foreign direct investment (‘FDI’), ahead of Germany and France9.
  • 10 June – The UK signed a continuity agreement with South Korea. The agreement does not guarantee permanent tariff-free trade in all circumstances – including for goods with content from both mainland Europe and the UK.
  • 10 June – The Office for National Statistics published figures that showed UK manufacturing output fell by 3.9%, the most since June 2002 – 17 years ago10. This has been attributed to the slowdown in stock piling and planned factory shut downs.

2. Source: Bloomberg.
7. Source: Bloomberg. 8.
10. Source: Bloomberg.