Brexit Update: Six Defeats, Suspended Parliament and the Supreme Court

Brexit Countdown: 43 days to go (maybe)

Summary

The quote of the moment comes from the Financial Times’s Robert Shrimsley:

 

"From the Westminster perspective, things look truly awful. Cabinet members, including [Boris Johnson’s] brother, are resigning. Some of the biggest names in his party have been expelled. [Members of Parliament] have combined both to block him leaving the EU on 31 October and to deny him an election on his terms. In the words of one opponent, we are back to the Olympic Games image of Mr. Johnson stuck on a zip line, waving Union flags and waiting for Labour to cut the wire."

At the time of the last update, UK Prime Minister Boris Johnson was riding high after being appointed and Parliament had just gone on its summer holidays. It was widely expected that Leader of the Opposition, Jeremy Corbyn, would call a vote of no-confidence in the UK government once parliament returned. What was less clear was how successful this would be given the UK government was presenting a united front and the opposition could not seem to agree on anything. What a difference a summer makes.

Let’s take a brief look at how Johnson’s first 56 calendar days in power have gone. In summary, it’s been unusual, eventful and one could argue that it has not gone very well – Parliament is suspended, but managed to inflict six consecutive defeats on Johnson before this occurred; and Johnson’s majority in the House of Commons started September as plus one but currently sits at minus 46. Things could have gone better.

A few days prior to Parliament returning after the summer recess, the UK government announced that it would prorogue (suspend) parliament for 33 calendar days. This was an unexpected and unusual move. The current parliamentary session has been the longest in 400 years (810 days) and the UK government continues to argue that this is standard procedure to end one session and begin a new one in order to present its legislative agenda. In some sense, this is true: parliament is regularly prorogued between sessions. However, to put this into context, the average length of suspension since 1930 has been five calendar days – compared with the current suspension of 33 calendar days. This decision is currently being challenged in the UK Supreme Court, the ramifications of which are discussed below.

So, Parliament had just over a week between summer recess and prorogation, and this seems to have had the unintended consequence of uniting the opposition. When parliament returned, it seized control of the agenda and passed legislation that will force the PM to ask for an extension if no deal is agreed at the time of the EU Summit in mid-October (defeats one and two). Johnson then responded by calling for an election on 15 October on two separate occasions and lost the vote on both (defeats three and four). Parliament then passed a motion requiring the government to release documents on the decision to suspend parliament and preparations for a no-deal Brexit (defeats five and six).

After the first defeat, Johnson’s majority quite literally walked away – a Conservative MP defected to the Liberal Democrats by walking across the floor while Johnson was still speaking – bringing his majority to zero. The next day, 21 MPs that voted against the government in the first defeat from the party were expelled. This has outraged the more moderate Conservative MPs – the expelled MPs include the grandson of Winston Churchill and former chancellors, cabinet ministers and ministers, many of whom were well-regarded in the party. The government’s majority fell further when Johnson’s own brother resigned both as a minister and an MP and one further cabinet minister resigned.

Johnson is now declaring his intention to secure a deal, whilst simultaneously saying he is still prepared to leave without one (despite the fact this is now essentially illegal). The opposition is concerned he is looking for ways to sidestep the new legislation.

In any event, it seems almost certain, in our view, that the UK will be heading to the polls again probably this side of Christmas. What is far from certain is who will end up as PM after this election. The Conservatives look to have been denied their ideal moments for an election (unless the UK leaves the EU on 31 October). As shown below, the Conservative Party has been pulling support away from the Brexit Party since Johnson became PM – this could disappear if Johnson is forced to ask for an extension. It’s unclear whether Labour could get enough support for a majority; its middle-of-the-road Brexit stance seems to be alienating both sides. The Liberal Democrats will campaign to remain in the EU, a strategy which may gain them more seats, but probably unlikely enough for a majority. The outcome will more likely be a hung parliament, with the composition of the government determined in back-room deals (see Westminster section). Tensions are beginning to show between UK and EU financial regulators over possible future divergence in regulations and capital continues to flow out of UK equity funds. Sterling continues its volatile ride and has been trading lower than Black Wednesday in 1992 and the Global Financial Crisis (see Asset Management section). A recent Brexit survey suggests only 22% of UK companies have completed the required steps to be able to export to the EU in the event of a no-deal Brexit (see Beyond Westminster section).

Westminster

Latest Implied Odds From Betting Markets

Figure 1. Implied Odds of Brexit Outcomes

Source: Man FRM; as of 17 September 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?

• 28 August 2019 – The government formally asked the Queen to prorogue Parliament. The Queen authorised this and parliament will be prorogued from mid-September to 14 October.
• 2 September 2019 – Johnson gave a brief statement outside Downing Street, declaring that he would never consider asking the EU for an extension. This was in response to talk from anti no-deal MPs that they were preparing legislation that would require him to do this in the event a deal was not agreed with the EU and passed by the UK parliament.
• 3 September 2019 – Opposition MPs tabled a motion that would allow them to have control of the agenda of the House of Commons the following day. The motion was designed to allow them to put forward the legislation aimed to prevent a no-deal Brexit. Johnson’s government opposed the motion. The motion is passed 328 votes to 301 votes, aided by 21 Conservative MPs that voted against the government’s orders. Johnson had lost his first government vote as prime minister.
• 3 September 2019 – In a theatrical moment, whilst Johnson was still speaking following this vote, Phillip Lee (a conservative MP) defected to the Liberal Democrats by literally walking across the floor of the House of Commons. This reduced Johnson’s majority from one to zero.
• 4 September 2019 – To the consternation of more moderate members of the Conservative party, the 21 Conservative MPs who voted against the government all had the whip removed. This essentially expels them from the Conservative party, meaning they cannot stand for re-election for the party and could effectively end their political careers. It also had the effect of reducing the Conservative majority to minus 42. Those expelled from the party included: the grandson of Winston Churchill, two former Chancellors of the Exchequer (one of whom has been a conservative MP since 1970), six other former cabinet ministers and 11 former ministers. Recall that former PM Theresa May had a majority when she lost her votes – amongst those voting against government orders were Johnson and prominent pro-Brexit MP Jacob Rees-Mogg (who is now, incidentally, Leader of the House of Commons).
• 4 September 2019 – The “Anti No-Deal Bill” is passed by the House of Commons by 327 votes to 299 votes. The legislation legally requires Johnson to ask for a 3-month extension to the current Brexit deadline if a deal has not been agreed by the end of the EU summit on 19 October. Unusually (and perhaps a sign of the lack of trust in this government from other MPs), the legislation lays out the exact wording that Johnson must use to request this extension. Johnson, who has been adamant that he will not request an extension, responded by calling a snap election for 15 October to let the public decide who should ask for an extension. The other interesting point about this date is that if Johnson were elected with a majority, he would have time to overturn the legislation just put in place. The flaw in this plan is that under the Fixed-Term Parliament Act, the support of two-thirds of MPs (434) is required to call a snap election. Johnson lost the vote as only 298 MPs supported it. Johnson had just lost his second and third government vote as prime minister.
• 5 September 2019 – After comments from Corbyn stating that Labour would not agree to an election until the Anti No-Deal Bill was passed into law (following debate in the House of Lords and Royal Assent), Johnson’s government stopped opposing the Bill and plans for pro-Brexit Lords to filibuster the Bill were dropped. The House of Lords confirmed it would pass all stages of the Bill by close of business on Friday 6 September.
• 5 September 2019 – Jo Johnson (the brother of Boris Johnson) resigned both as a minister and as an MP, citing an “unresolvable tension” between his family loyalty and the national interest. This was widely viewed as a criticism of Boris Johnson’s approach and appeared to rattle him at a press conference later that day. As a side note, the press conference wasn’t well-received in general as Johnson pledged he would rather “die in a ditch” than bow to the demands of the no-deal Bill, which require him to ask for an extension. The fact he made this speech posed in front of a group of police officers attracted criticism, including from the police force (which had understood the speech would be regarding new police recruits and not Brexit).
• 6 September 2019 – At a case hearing in Edinburgh, calling the prorogation of parliament unlawful brought by a cross party group of MPs, the court determined that this was a political decision and therefore not in the court’s remit. This decision was then overturned by Scotland’s highest court on 11 September, which declared it unlawful; however, it said that it would not seek to recall parliament before the UK’s Supreme Court makes a final decision. This decision on this case (which will hear an appeal from an English Court that agreed with the initial Scottish case) is expected by Friday 20 September. If the government loses this case, then parliament will have to be recalled straight away.
• 9 September 2019 – After the Bill received Royal Asset, Johnson once more attempted to call a snap election. Once more, he was defeated, with just 293 MPs supporting it. There is now no option for an election before 31 October, 2019. Two further motions were brought by opposition members: one to require the government to release confidential memos on the decision to prorogue parliament; and one to require the government to release documents on the likely disruption to be caused by a no-deal-Brexit (a version of this had already been leaked to the press and is discussed in more detail below). The government lost both of these votes and will now “consider the implications of the vote and respond in due course” after branding the demands disproportionate and unprecedented. Johnson had just lost his fourth, fifth and sixth government votea as prime minster.
• 9 September 2019 – In another unexpected turn of events, John Bercow (Speaker of the House of Commons) announced his intention to retire – either immediately if MPs had voted for a general election, or on 31 October 2019. Given the MPs did not vote for the election, this means that Bercow will step down before the next election, which will allow the current anti no-deal leaning parliament to select his replacement. Bercow has been a controversial figure in the Brexit saga, often bending precedent to give backbench and opposition MPs their say. Some see him as a hero who has defended democracy, others as someone who has broken with precedent and not acted in the impartial way that a speaker traditionally should. The truth (as is often the case with these things) is probably somewhere in the middle.
• 10 September 2019 – Parliament was formally prorogued and will not sit again until 14 October (17 days before the Brexit deadline). This was greeted by remarkable scenes in the House of Parliament – MPs held up placards to protest at being silenced, some tried to prevent the speaker leaving his chair to attend the closing ceremony, opposition MPs refused to attend the closing ceremony in the House of Lords and remained in the House of Commons singing anthems in protest. The speaker did manage to leave his chair, but not before saying on the record “this is not a normal prorogation”. This ended the current parliamentary session, which has run for 810 days – the longest parliamentary session in 400 years. The prorogation will last 33 calendar days, which, for a sitting government (i.e. one that has not just won a general election) is the largest number of calendar days between the end of one parliament and the start of the next since 1930/31. In comparison¹:
  • 1900–1930: The mean average prorogation was 72 calendar days (median 53 calendar days);
  • 1930–2017: Mean average was five calendar days (median four calendar days);
  • 1999–2017: Mean average was eight calendar days (median five calendar days).
• 13 September 2019 – Johnson announced a plan to pass a Brexit deal within 10 days once parliament is sitting again. He also repeated that he will not ask for an extension, but refused to answer the question of how he would do that in the event no deal has been agreed, especially when the law requires him to do so.
• 16 September 2019 – Following a meeting between Johnson and the PM of Luxembourg, there was due to be a joint press conference. This was to be staged outside. However, Johnson requested it to be held inside due to noisy protestors. After the request was denied, Johnson did not take part in the press conference. Unusually, the PM of Luxembourg continued with the press conference solo beside an empty podium – gesturing to it at points while talking. There has been mixed reaction to this from the UK tabloids, ranging from glee at Johnson’s humiliation to outrage and claims that this is the reason the UK should leave the EU. Most notably, however, it has attracted criticism from the EU, who believes this plays into Johnson’s narrative of ‘them against us’ and could make it harder to secure a deal.
• 17 September 2019 – A UK Supreme Court hearing began to determine whether Johnson’s prorogation of parliament was lawful or not, following a Scottish court deciding it was not and the English High Court deciding that it was. The hearing is expected to last for three days and the decision not known until the end of this week at the earliest. This is only the second time in its history that all 11 judges are sitting at the same time, showing the importance of the issue. The key question that must first be answered is whether the judiciary should be opining on this at all.

What Happens Next?

• There are a range of options over what the next move might be for all parties involved. Whilst some may seem more likely than others given the events since the beginning of September, it is hard to rule any of them out entirely.
• A key decider in what happens next is the decision from the UK Supreme Court as to whether the prorogation is lawful or not. The court first has to determine whether this is actually a matter for the courts (the English High Court did not think so, but the Scottish Court did). The most conservative option would be to agree with the English High Court that it is not for the courts to decide – things would then carry on as they are with Parliament being suspended. Should the Court decide against the government, then Johnson would be obligated to recall Parliament immediately. There would be further ramifications from ruling this way. Depending on your viewpoint, either it is positive as it installs the courts as an active check on the government; or it is a negative in that the courts are becoming involved in politics, which should be separate from the judiciary. Perhaps it is both.
• Assuming that parliament remains suspended until 14 October, there still remain a wide range of possible next steps:
  • Leave with a deal: Johnson manages to get a deal with the EU that is approved by Parliament and the UK leaves the EU with a deal on 31 October 2019. This remains a tall order. Indeed, as Jean-Claude Juncker (President of European Commission) has warned, time is running out. The UK government has yet to put forward any detailed alternative arrangements to the contentious Irish backstop. It is rumoured to be considering a “border in the Irish Sea” i.e. Northern Ireland remaining in line with the EU but the rest of the UK diverging. Ironically, this was the very first backstop proposed by the EU and the UK rejected this proposal. At the time, May was reliant on the Northern Irish DUP for her majority, who are opposed to this solution. Johnson no longer has a majority with the DUP, which reduces their leverage in this respect. The UK government is unlikely to present any concrete proposals until after the Conservative Party Conference finishes on 3 October, 2019. This leaves a 2-week period for a deal to be agreed before the EU council on 17 October. Assuming that a compromise on this can be reached with the EU, the deal still has to be agreed by Parliament. This in itself will not be easy: recall that May had a majority when the deal was originally rejected three times. Should Parliament approve the deal, it still needs an Act of Parliament to pass it into law before 31 October 2019. This will be a much more complex piece of legislation with a short time period to be passed.
  • Article 50 Extension Request: Johnson doesn’t get a deal and asks the EU to grant an extension. This would not be an easy option for Johnson as it would renege on the pledge he continues to make that the UK will leave the EU on 31 October and that he would not ask for an extension. This would have big implications for the next election (undoubtedly to be held very soon, but more on that below) as it would draw support away from the Conservatives to the Brexit Party. There are several ways that Johnson can try and avoid an extension or being the one to ask for the extension. The first – which he has tried and failed at – was to call an election on 15 October. If the Conservatives had a majority, then they could have repealed the legislation forcing the extension request; if they lost, then it would not be Johnson asking for an extension. A last-resort effort to not be the one to ask would be to resign. Johnson could ask for an extension, but also ask for one member of the EU Council to veto it (for example Hungary, which has had its own issues with the EU). He could write the letter requesting the extension, along with a separate letter – warning that the UK will make life difficult for the EU while they remain in to encourage the EU to refuse the extension request. The latter would likely be ineffective as the only upcoming major decision of the EU that requires a unanimous vote is on Russian sanctions, and that would require the UK to side with Russia. The EU will also not want to be the one to be blamed for a no-deal Brexit. Other ways he could avoid this seem to be far-fetched; however, he could try and pass legislation to circumvent the fixed-term parliament act and call an election or a vote of no-confidence in himself and try to lose it. Even if he chose these options, with no majority in parliament, it is not certain they would work.
  • Leave with No Deal: Johnson manages to side-step the anti no-deal legislation and the UK leaves without a deal. On the face of it, the idea of the UK PM breaking the law in this way seems incredulous. However, Johnson continues to talk about leaving the EU with or without a deal on 31 October. Ignoring this legislation would most certainly mean the PM ends up in court and could result in Johnson being imprisoned – it seems a steep price to pay to be able to say he kept his promise and would be a supreme case of party interest over self-interest. There is currently a case in the Scottish courts to allow the courts to apply for an extension if Johnson refuses to. There are loopholes that the opposition are concerned about (and are rumoured to try and amend once parliament reconvenes) that could achieve a no-deal Brexit without breaking the law. The legislation only requires that if the Withdrawal Agreement is not approved, then Johnson must ask for an extension. Once the agreement is approved, Johnson could either prorogue parliament again (unlikely but that’s what the common consensus was before this prorogation too) or otherwise delay the passage of the legislation required to implement it by 31 October, meaning the UK would leave without a deal anyway.
• Whichever way this plays out, it seems almost certain that an election will be called; the current government does not have a functioning majority to pass any legislation. The manner of calling this election is still up for debate: Johnson could resign; the government could call a vote of no-confidence in itself; the government could request an election under the Fixed Term Parliament Act and MPs agree; the government could legislate to circumvent the Fixed Term Parliament Act; the opposition could call a vote of no-confidence and probably a few more variations of this. Johnson would ideally have wanted an election before the EU Council; he would be able to run on a mandate that he was trying to implement the “people’s will” but parliament was stopping him. This would likely mean he could retain support that has drifted to the Conservatives from the Brexit Party since he was appointed and started talking about a no deal (see Figure 2). Second to that, an election after the UK has left the EU would be best as it would nullify the Brexit Party, who would no longer have a manifesto. Worst-case scenario is an election after an extension has been requested, which would likely see support drift back to the Brexit Party. The resignation of Ruth Davidson (Leader of the Scottish Conservative Party) – who was widely credited with winning the 13 seats there for the party – will also be a blow, and Scottish voters are likely to return to the SNP. So, if the Conservatives can’t win a majority, can anyone else? If the UK is still in the EU, then undoubtedly, the election will be decided by Brexit positions. Labour – as the main opposition party – has been repeatedly criticised for not taking a view on this (to be fair to them, the main voter base is quite split between Leave and Remain). Its position going into the next election will be more of the same – it will seek a softer Brexit deal and then put it to another referendum against remaining in the EU. The Liberal Democrats have opted to campaign to cancel Brexit altogether. Chances are that no one party will get an overall majority and a hung parliament may result. The Liberal Democrats may enter a coalition with Labour but would likely require that Corbyn step down as leader. The Brexit Party could enter a coalition with the Conservatives, but would likely alienate more moderate voters with this move. It would be a tough one to call; however, without one clear mandate the certainty is that the paralysis around Brexit could continue for some time yet.

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: http://britainelects.com/polling/westminster/; as of 9 September.

Preparations for a No-Deal Brexit:

• 2 September 2019 – The UK government launched its “Get Ready” campaign to increase public awareness of the implications of a no-deal Brexit. This includes things such as renewing passports earlier than planned, getting a GB sticker for your car and that your current pet passport may no longer be valid.
• “Operation Yellowhammer” documents relating to preparations for a no-deal Brexit were leaked to the press in mid-August and then made available by the government following a motion passed in the House of Commons. There have been allegations in the media that the official document was sanitised prior to its release – mainly stemming from the fact the leaked document was entitled “base-case scenario” and the official document was entitled “worst-case scenario”. Some highlights from the document are below:
  • Cross Channel Trade: France is expected to impose controls on goods from day one. Between 50% and 85% of vehicles are not expected to be ready for this and queues of up to two days are to be expected. This disruption could last for months;
  • Medicine and Health Care: Three-quarters of medicines are delivered via Dover to Calais, which means they will be especially vulnerable to delays. Some stock-piling can be done, but not enough to cover the months the disruption may last for;
  • Food and Water: Supplies of some fresh food will decrease. There will be no overall shortage, but availability of choice will be reduced and prices will rise;
  • Border Checks: Passenger delays due to increased immigration checks are likely;
  • Data: The flow of personal data will be disrupted. Some cross-border financial services will be disrupted, including a small minority of insurance payments;
  • Civil Order: Protests and counter protests are expected to occur;
  • Fuel: Border delays may cause disruption to fuel distribution;
  • Fishing: Disputes over UK waters may lead to clashes between UK and EU fishing vessels;
  • Northern Ireland: Plans for no border are unsustainable. Expect protests and direct action;
  • Readiness: Business and public readiness at low levels;
  • Citizen rights: UK citizens in EU countries are likely to lose their rights over time;
  • Gibraltar: Likely to suffer the same goods disruptions plus additional worker supply issues.

Asset Management and Financial Markets

• 31 August 2019 – The Financial Times reported that more than USD4 billion has been redeemed from UK equity funds since May announced her decision to resign. Total outflows since the 2016 referendum are USD29.7 billion.
• 6 September 2019 – In more positive news, for the week ending 4 September, there were net inflows into UK equities for the first time in almost three months – USD197.5 million over the seven days.
• 16 September 2019 – UK regulator The Financial Conduct Authority (‘FCA’) expressed concern that as things stand, the EU will prohibit some trading on London exchanges in the event of a no-deal Brexit. The FCA chief is calling for additional talks with the EU to try and resolve this long running debate.
• 16 September 2019 – In further regulatory exchanges in the wake of the Neil Woodford fund suspensions, there are divergences between the UK and EU views on UCITs rules and how to prevent this occurring again. This is causing tensions to surface on whether UK and EU regulations will diverge post Brexit. Any divergence will have implications on the EU granting the UK equivalence as a third country.

Interest and Exchange Rates:

On 3 September 2019, the British pound dropped to its lowest point against the dollar since 2016 – USD1.1959. It rebounded following the loss of Johnson’s majority in parliament that day. Putting all of this into perspective, the Financial Times² completed a comparison of the USD/GBP rates to historical levels and concluded the following:

• GBP is currently trading weaker than when sterling was forced out of the European Exchange Rate Mechanism following steep declines on Black Wednesday in 1992;
• GBP is currently trading weaker than it did at the time of the fall out of the dot.com crisis;
• GBP is currently trading weaker than during the financial crisis in 2008/9.

In fact, the article noted that GBP has rarely traded below USD1.20 since the Plaza Accord in 1985, when governments agreed to intervene to lower the value of the US dollar.

Figure 3. GBP/USD FX Rates

Source: Bloomberg; as of 17 September.

Beyond Westminster

• 16 September 2019 – The UK government is accused of misleading the public over potential disruption to ports. The official government preparation documents stated there was a low risk of sustained queues outside Kent. However, leaked documents from the Department for Transport from August 2019 revealed this was only because it expects that tens of thousands of vehicles will be turned away from these ports for not having the correct documentation.
• 17 September 2019 – Results from a survey conducted by the Chartered Institute of Procurement and Supply showed that only 22% of UK companies have completed the four basic steps required to export goods to the EU post Brexit.³ Still, this is slightly up from the 14% at the end of March 2019.
• 17 September 2019 – Pendragon, Britain’s largest car dealership, reported a loss for the first six months of the year. It also warned that it expects a full-year loss at the bottom end of its predictions, as “heightened political and Brexit uncertainty” weighs on consumer confidence.⁴

1. https://researchbriefings.parliament.uk/ResearchBriefing/Summary/LLN-2019-0111

2. https://www.ft.com/content/d4d75de2-ce7c-11e9-b018-ca4456540ea6?segmentId=e290fb57-33d0-1ede-79c6-9ee84234f3e2

3. https://www.ft.com/content/a064869a-d960-11e9-8f9b-77216ebe1f17

4. https://www.ft.com/content/d762bc0a-d9da-11e9-8f9b-77216ebe1f17