Brexit Update: The Brexit Blame Battle – Shots Fired

With 23 days to go, there is no overlap between what the EU wants in a deal and what the ERG and DUP want in a deal. The Brexit blame battle has begun.

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: 23 days to go


The quote of the moment comes from UK Prime Minister Boris Johnson speaking in the House of Commons on 23 September:


"I think the court was wrong to pronounce on what is essentially a political question at a time of great national controversy… This Parliament must either stand aside and let this government get Brexit done, or bring a vote of confidence and finally face a day of reckoning with the voters.”

– Boris Johnson, UK Prime Minister


As so often seems to be the case in these updates, whilst the pieces keep moving around the board and there are political machinations aplenty, very little has changed from a high-level view.

The UK and the EU are no closer to agreeing a deal that can be ratified by its respective parliaments; the UK parliament can only find a majority for one thing – it does not want Brexit without a deal. The prospects of a deal that the EU will agree to are – as is currently composed – slim to none. A general election looms on the horizon, but hangs on when the Labour Party agrees to hold one. Indeed, polls are inconclusive as to who would actually end up in charge. In the meantime, the UK government has no majority (even with the support of the Democratic Unionist Party). As such, parliament is effectively at a standstill in all matters – including non-Brexit related ones.

Events have occurred and there are subtle changes to the positions and the paths forward. The UK Supreme Court ruled against the UK government and determined that the suspension of parliament was unlawful and, as such, it never happened. Parliament duly resumed with some of the most acrimonious scenes that have been seen in the House of Commons. Johnson came out swinging, refusing either to resign or to apologise. As language became heated, Members of Parliament (‘MPs’) from all sides called for moderation of language amidst a backdrop of violent threats being sent to MPs – the PM dismissed this as “humbug” and the UK government continues to refer to the Anti No-Deal Bill as a “Surrender Act” and refer to opposition MPs as “betrayers”. Heated tempers aside, the return to parliament was not particularly eventful. Opposition MPs had already mobilised (before the suspension) with the Bill that was passed. So, the timeline ticked on toward the deadline set within that Bill, to either agree a deal or ask for an extension.

Johnson used his Conservative Party conference speech (the timing of this meant he missed the Prime Minister’s Questions) to announce his proposals to replace the backstop in former PM Theresa May’s Withdrawal Act. This proposal put Northern Ireland in the EU single market, but out of the EU customs union, giving the Northern Irish Executive a right to decide every four years whether to remain in the EU single market or not. It has been dubbed the ‘two borders for four years’ plan as it effectively creates two borders, a customs one on the island of Ireland and a trade one in the Irish Sea. While Johnson assures the EU that no hard border will be required in Ireland, he has not – as yet – revealed how this would be achieved. Johnson hailed this plan as a “reasonable compromise” and put the onus on the EU to compromise in kind. After a weekend of Johnson publically stating the EU had not responded to his proposals, a document was leaked to the media laying out the EU’s rebuttals that had already been sent to the government. The full concerns are laid out in below. In essence, it does not achieve what the backstop does – it does not prevent a hard border in Ireland or protect the single market.

The other issue is the consent of Northern Ireland – if Northern Ireland decides to come out of the single market, there is no plan as to what would happen with the border. This sets aside the other concern – the fact that the Northern Irish Executive hasn’t sat since January 2017, when power sharing agreements collapsed. Johnson cannot get a deal passed with this parliament – moving Northern Ireland into the single market gets the EU onside, but loses the European Research Group (‘ERG’) and DUP support needed in Parliament; moving it out loses the EU.

The Anti No-Deal Bill should now force Johnson to ask for an extension. This in itself poses a dilemma: to be seen to do this willingly risks losing the support the Conservatives have gained from the Brexit Party (which they will need for a majority in the inevitable election); however, to not ask for an extension, will break the law.

This is where the Brexit blame battle begins. The Conservatives need to convince their voters that the blame for any extension does not sit with Johnson – he was forced to do it by the EU or parliament or the courts. Shots have already been fired on this point, with Downing Street releasing details a conversation between German Chancellor Angela Merkel and Johnson, with Merkel saying a deal was unlikely – this was released for Johnson to be able to say the EU are not playing ball. The EU has retaliated, reminding the media they presented a solution that works – the backstop; the buck sits with the UK if it cannot find an alternative.

For further details on how this might all play out, see the Westminster section. Withdrawals continue from UK equity and property funds. Ex-Chancellor Phillip Hammond accused hedge funds of backing a no-deal Brexit for profit
(see Asset Management section). Industry bodies continue to warn that businesses are not ready for a No-Deal Brexit
(see Beyond Westminster section).



Latest Implied Odds From Betting Markets

Figure 1. Implied Odds of Brexit Outcomes

Source: Man FRM; As of 8 October 2019. 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?


  • 24 September 2019: The decision of the UK Supreme Court on whether the suspension of parliament was lawful was announced. The court found two ways against the government: first, that the issue was justiciable (i.e. it was within the remit of the court to rule on); and secondly, that the suspension of parliament was unlawful “because it had the effect of frustrating or prevention the ability of Parliament to carry out its constitutional functions without reasonable justification”. Lady Brenda Hale (President of the UK Supreme Court) also ruled that it was for parliament and the speakers of both houses of the UK parliament to determine the next actions and that there was no requirement for any action from the PM. Johnson’s official statement was that while he disagreed with the verdict, he would respect it. Leader of the House of Commons and pro-Brexit MP Jacob Rees-Mogg was less diplomatic, calling the ruling a “constitutional coup”.
  • 25 September 2019: The UK parliament resumed at 11.30 a.m. GMT. Johnson came out fighting, refusing to resign or apologise, whilst still maintaining that the Supreme Court decision was wrong. He also challenged opposition parties to call a vote of no-confidence in him and face the public in an election. Johnson also angered all parties (including his own) over his use of language, including dubbing the No-Deal Act a “Surrender Act” and accusing MPs of “betrayal”. MPs challenged his use of language and asked him to moderate it due to threats that MPs have been receiving, the divisive nature of the debate in general and reminding the PM of the death of pro-Remain MP Jo Cox during the referendum from a right-wing terrorist. Johnson dismissed these concerns as “humbug” and stated that the best way to honour her memory was to leave the EU. This has sparked criticism from all sides, including Conservative-supporting newspapers and pro-Brexit Jacob Rees-Mogg, who also urged moderation of language. (Note that it has been reported that he and his family have regularly been receiving death threats.)
  • 26 September 2019: Johnson loses vote number 7 in the commons – a motion to allow a short recess of parliament for the annual Conservative party conference was defeated. In a twist of fate, both the Liberal Democrats and Labour had already had their conferences prior to the resumption of parliament. So, while the Conservative conference will continue, parliament will also continue to sit during this period.
  • 2 October 2019 – Johnson announces his plans for a new EU deal (discussed in the Proposed Deal section below).
  • 2 October 2019 – Johnson will suspend parliament again from 8 October to allow for the Queen’s Speech (traditional opening of parliament speech to announce the government’s legislative agenda) on 14 October. This suspension is in line with standard conventions in that it will only last for three working days. It does have an added bonus for Johnson though as it means that the Prime Minister’s Questions (where Parliament can question the PM directly) on both 9 October and 16 October will probably not take place. (It would not take place on 16 October as it usually takes a few days for business to return to usual following the Queen’s Speech). What would be only Johnson’s second Prime Minister’s Questions since he took office in July would then be held after the EU Summit, and importantly, after the deadline has passed for Johnson to seek an extension if a deal has not been agreed.
  • 7 October 2019 – The Spectator reports on text messages from an unnamed government source, which predicts the negotiations with the EU on a Brexit deal will be dead by the end of the week. It talks about several items: plans to get around the Benn Act (which requires the PM to ask for an extension), as well as public and private statements to the EU that anyone who opposes a delay to Brexit will go to the front of the queue for co-operation and any that support it to the back. It also states that “supporting the delay will be seen by this government as hostile interference in domestic politics”. The government also intends to give the message that it will not negotiate any further, so a delay would be pointless.


  • 23 September 2019: During the Labour Party Conference, Corbyn confirmed that Labour’s Brexit policy going into the election would be to negotiate a softer Brexit deal and then hold a second referendum pitting this option against Remain. What he refused to be drawn on was whether Labour would campaign for ‘Leave’ or ‘Remain’ in this referendum, stating that this would be determined after the election. There is large-scale dissent within the Labour party over this stance – the criticism being that Labour will go into the election without a declared Brexit policy. The aim of this is to appeal to both Labour Leave and Labour Remain voters; however, the worry for some MPs is that it will alienate both. Corbyn won a party vote on adopting this neutral strategy going into the election.
  • As a side point to this, Brexit is not the only point where disagreements are public. In the Labour conference, almost all policy announcements have been over-shadowed by in-fighting, including an attempt to oust the deputy leader and the resignation of Labour’s Head of Policy.
  • Opposition MPs continue to discuss potential options for calling a vote of confidence in the current document. These talks remain stalled. Labour insists that as it is the official opposition party, Corbyn should be the PM of any caretaker government. Whilst the Scottish National Party and other smaller parties are now on-board with this, the Liberal Democrats and rebel conservative MPs are not.

The Proposed Deal

  • UK’s Proposals: Johnson announced his new plan for a deal with the EU on 2 October, which alters the controversial Irish Backstop. The new plan is becoming known as the ‘two borders for four years’ plan. Johnson billed the plan as a “reasonable compromise”. The plan now leaves Northern Ireland within the rules of the EU single market for agriculture, food and industrial goods, but removes it (along with the rest of the UK), from the EU customs union. Essentially, this will result in some customs checks between Northern Ireland and the Republic of Ireland, as well as checks on goods on a border within the Irish Sea. Northern Ireland remaining in the EU Single Market will be time-limited for four years, at which point the Northern Irish Assembly will have the power to vote on whether to remain in it or not every four years. One important point that hasn’t been addressed is that is due to the tensions between the various political parties in Northern Ireland and the collapse of the power sharing agreement, the last time the Assembly actually sat was in January 2017. Johnson continues to insist that there will be no need for a physical border, with checks carried out in a non-intrusive way and no requirement for any new infrastructure. So how is this plan different from May’s (which was rejected by parliament three times)? First, it means there would be a customs ‘border’ on the Island of Ireland. May’s deal kept the whole of the UK in the customs union until a long-term trade treaty was agreed; Johnson’s plan takes the whole of the UK out of it. Secondly, Johnson’s plan relies on the consent of the executive of Northern Ireland. (In May’s agreement, both the UK and EU had to agree, which effectively gave the EU a veto on the UK leaving the customs union.)
  • EU Reactions – Following public criticism from the UK government attempting to deflect blame (with regards to the impasse and potential need for an extension or no-deal), the EU leaked a point-by-point rebuttal that had been provided to the government. This was also in response to Johnson’s claim that he had not yet heard the EU’s thoughts on the UK government’s proposals. The government has been releasing rhetoric, saying that they expect a counter offer from the EU over the coming days. The EU does not seem to be playing ball, reminding the UK that the backstop is the EU’s solution to this and if the UK wants to replace it with something else, then it is up to the UK to work out what that something else is. Merkel has historically been the EU’s biggest proponent of avoiding a no-deal Brexit. However, even she has now come out and said that a deal is “overwhelming unlikely”. Johnson has been given until the end of this week to make changes, which would allow a deal to be discussed in advance of the EU summit. Details of the EU objections are below:
    • Warnings that the proposed Northern Ireland veto provides the DUP with an opportunity to block the all-Ireland regulatory zone from ever materialising;
    • The proposals for a customs border risk a major disruption of the all-Ireland economy; these proposals have also been rejected by groups representing Northern Irish businesses;
    • The UK is seeking a fallback of no controls, checks or border infrastructure in the event Northern Ireland’s alignment with the single market is vetoed; this would leave the EU internal market open for abuse;
    • The proposal seeks for a joint EU-UK committee to work out how to avoid customs checks once the UK (including Northern Ireland) leaves the EU customs union, with no plan B if a solution cannot be found;
    • The UK wants the EU common transit convention overhauled to avoid the need for new infrastructure at the border. The EU has rejected this due to concerns that other EU countries may want this exemption, which would endanger the internal market;
    • The EU finds the wholesale exemption of small and medium sized businesses from customs checks unacceptable; it also fails to provide any details on how to combat smuggling;
    • The proposals do not provide any solutions for VAT if it is not to be paid or checked at the border;
    • All of May’s previously agreed conditions about state-aid and level playing fields have been removed;
    • It also does not accept that the UK would keep access to an unlisted number of EU databases, even if Northern Ireland vetoes the agreement with the single market.

What Happens Next?

  • In the words of Merkel, a deal in advance of the EU summit is now “overwhelming unlikely”. The crux of the issue remains the same – there is no overlap between what the EU wants in a deal and what the ERG and DUP want in a deal. This means either parliament will support it or the EU will, but not both.
  • In this scenario, the No-Deal Act that was passed by opposition MPs requires Johnson to ask the EU for an extension to the Brexit deadline. Johnson and his government, however, have continued to maintain the official line that the UK will leave the EU on 31 October – deal or no deal. With parliament suspended from close of business on 8 October and normal business not due to resume until close to or after the EU Summit, and the deadline from the No-Deal Act has passed, there is limited opportunity now for MPs to pass any additional legislation to safeguard against a no-deal Brexit (or other measures such as those aimed at a second referendum). Time has also run out on calling an election in advance of 31 October. There are still, however, a few ways that this could play out:
    • Once parliament resumes, Corbyn could call a vote of no-confidence in the government, which the government would probably lose. There would then be a 14-day period for a new government to gain the confidence of the house. The initial suggestion for this was that a caretaker government would take power, request the extension from the EU and then call an election. In recent days, however, there has been talk from within the Labour party about trying to hold a second referendum (as opposed to an election) after an extension has been granted. The idea of this is to keep the general election from becoming a defacto referendum. There is one giant Corbyn-shaped obstacle in the way of this path. As the official opposition party, Labour is insisting that the caretaker government be led by Corbyn. This is the conventional option in the event of a no-confidence vote, but also has the added benefit of Corbyn being nominally in power at the time of the election. Initially, all other opposition parties were opposed to this. However, more recently, the SNP and other smaller opposition parties have come round to the idea. Even with these, Corbyn doesn’t have the numbers as the Liberal Democrats and Tory rebels will not support this. In our opinion, unless the Liberal Democrats and Tory rebels change their stance, there is little chance of a vote of no-confidence being called in advance of the Brexit deadline.
    • The government could call for an early election under the Fixed Term Parliament Act. This requires two-thirds of MPs to agree (as opposed to a simple majority under a vote of no-confidence). The government doesn’t have a majority to push this through, and for most of the reasons above, it is highly unlikely two-thirds of MPs would agree to this in advance of the Brexit deadline.
    • Johnson refuses to ask for an extension and the UK leaves the EU with no deal by default on 31 October. The way things stand, this would mean Johnson breaking the law to do this.
    • Johnson asks for the extension as required by law. In our opinion, this is the most likely outcome; however, it will not be straightforward and the government may look for ways to get the EU to refuse the extension even if it is asked. Johnson needs to keep the voters that the Conservatives have won over from the Brexit Party in order to stand any chance of winning a majority in an upcoming election. What is likely to happen is loud public statements from unnamed sources (as has been seen already in the Spectator) promising to cause issues for the EU if the UK remains past an extension. There may be appeals to individual member states to veto the extension. However, it seems unlikely that this will work as EU budget negotiations are underway and member states stand to lose more in terms of budgetary discussions than they would gain from this option given the UK cannot negotiate trade with individual member states. The government may challenge the No Deal Act in the UK Supreme Court. In the end, we believe the most likely option is that the extension will be requested (and probably granted), but Johnson will make a big show that he did not want to do this and was forced to by parliament, the courts and the EU. This would then be his message going into the election – i.e. give me a majority and they can’t stop me. That said, it’s virtually impossible to predict the outcome for certain.
  • It still seems likely that there will be an election and strategies to win this are already evident. Conservatives would prefer to have left the EU before the election in order to neutralise the Brexit Party or they will be forced to step up rhetoric about leaving whatever the cost. In the event of an extension, they need to be able to blame anyone else but Johnson. Labour would also prefer Brexit to be done as that would save it from making a call on which way it would campaign in its proposed referendum (polls already show it losing remain voters to the Liberal Democrats and Leave voters to either the Conservatives or Brexit Party). The latest polling intentions are shown in Figure 2:

Figure 2 is an average of polls taken during each week indicating who respondents would vote for as a percentage of the total number of respondents intending to vote.

Figure 2. Averages of Voters Intentions

Source:; as of 29 September.

Preparations for a No-Deal Brexit:

  • 26 September 2019: The National Audit Office published a report that revealed the Department for Health had sufficient stockpiles for 72% of medicine product lines. This compared with 91% before the March 2019 deadline.

Asset Management and Financial Markets

  • 19 September 2019 – The 26th edition of the Global Financial Centres Index was published by the Z/Yen Group. The results from the index showed that New York has extended its lead over London to 17 points and that London’s second place in the index is at risk due to strong performances from other centres – Paris in particular.1 If the trends for these two continue, London would be reduced to a 2-point lead over Paris and lie behind Shanghai.
  • 22 September 2019: Mark Wiedman, a BlackRock executive who is amongst the contenders to replace Larry Fink as CEO, warned in the Financial Times that Brexit is causing big challenges for asset managers that operate on a global scale. BlackRock has made preparations by setting up a hub in Paris and applying for additional regulatory licences in Amsterdam. Wiedman made the following remarks at the Financial Times Asset Management conference2 in New York: “It’s not the exit of the UK that we are prepared for… It’s the fragmentation within the European Union with no dominant financial centre ready to check the efforts of each national actor to try to move jobs into its sector. That’s going to make it much harder for there to be a European common market in financial services”. At the same event, Pimco CEO Manny Roman stated: “I find it incredible that London, which clearly was giving New York a run for its money as the most important financial hub in the world, could be jeopardised by what I think is pure politics.”
  • 25 September 2019 – Santander took a EUR1.5 billion writedown on the value of its UK business, blaming both new regulations and the expected economic fallout from Brexit.
  • 25 September 2019 – Bloomberg reported an increase in the use of deep in-the-money options as a hedge against a falling pound. It also reported that one investor had bet a notional GBP190 million that sterling will fall more than 10% to USD1.108 by the end of October. On the same day, it also reported companies were issuing more sterling bond sales than usual in front of the upcoming earnings blackout and EU exit deadline date.
  • 26 September 2019 – Industry groups re-raised concerns about European firms being blocked from using clearing houses in London within six months. At the initial Brexit deadline, a temporary measure to prevent this was put in place that lasts until March 2020 (which will be less than six months after the current Brexit deadline). Industry groups are concerned that no further measures have been put in place in the event of either an extension to the deadline or a no-deal exit.
  • 26 September 2019 – The Eurozone’s bailout fund announced that it will stop issuing bonds governed by English law. From 1 October 2019, the European Stability Mechanism will stich to Luxembourg law.3 The CFO stated that “this shift was triggered by Brexit, which started a discussion about the future legal basis we want to issue under… As one of the largest euro-denominated issuers, we would like to be part of the EU legal framework.”
  • 28 September 2019 – Philip Hammond (former Chancellor) criticised hedge funds that have supported Johnson and the Conservative party for wanting to facilitate a no-deal Brexit in order to profit from a falling pound. This followed a Channel 4 documentary that featured hedge fund manager Crispin Odey, who appeared to confirm that he had encouraged Johnson to suspend parliament. (He has since confirmed that he does not talk to Johnson.)
  • 3 October 2019 – Calastone data showed redemptions from UK active equity funds totaled GBP3.5 billion in the third quarter – an increase from GBP2.2 billion the previous quarter.4 UK property funds had withdrawals of GBP667 million, an increase from GBP250 million the prior quarter. The Financial Conduct Authority (‘FCA’) has increased the number of property funds on daily monitoring fearing another liquidity crisis in the event of a no-deal Brexit.
  • 7 October 2019 – The Institute for Fiscal studies has said that even a “relatively benign” no-deal Brexit would push UK debt to its highest since the 1960s.5 It said that borrowing was likely to rise to GBP100 billion and total debt would increase to 90% of national income. The director of the institute commented that “the government is now adrift without any effective fiscal anchor”.

Interest and Exchange Rates:

Figure 3. The Movements of GBPUSD Since Initial Brexit Deadline

Source: Bloomberg
A: May announces her resignation
B: Johnson becomes PM
C: Plan to suspend parliament announced
D: Anti No-Deal Bill passed
E: Parliament is suspended
F: Suspension declared unlawful
G: Johnson presents new deal proposals


Beyond Westminster

  • 22 September 2019: The head of one major business group in the Financial Times (who declined to be named) indicated that the government had given them a clear message that it would not be helpful to criticise Brexit preparations. He states: “A number of member companies have gone in… and been given a similar message: Don’t expect to be given good access [to the government] and influence if you’re not prepared to play the game in public.” The department for business declined to comment.
  • 23 September 2019: The Law Society of Ireland said its solicitors’ roll had received applications of more than 31 times the average annual rate pre the 2016 referendum. The numbers include UK lawyers concerned about potentially losing rights of audience in European courts and seeing their abilities to advise on European legal matters curtailed.
  • 25 September 2019: Tesco and Sainsbury (the two biggest grocers in the UK) have warned about possible threats to the British food supply in the event of a no-deal Brexit. Fresh items like vegetables and citrus fruits from Spain are most at risk from delays at the borders.
  • 27 September 2019: A UK-wide survey of small businesses by the Federation of Small Businesses has found that only one-fifth of small British businesses exposed to Brexit have prepared for a no deal. More than a third of respondents also said that Brexit has already caused either temporarily or permanently reduced profitability.
  • 1 October 2019: Car manufacturer Nissan has announced that it would review its decision to build its Qashqai SUV at its Sunderland plant in the UK if Britain leaves the EU without a deal. This could prompt the eventual closure of the site, putting thousands of jobs in the area at risk.
  • 7 October 2019: A government paper estimates that businesses will be hit with an annual GBP15 billion bill for filling in customs forms between the UK and EU in the event of a no-deal Brexit.