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What CFOs Need To Expect From A Brexit

Although the fate of the UK is undecided, CFOs need to prepare

CFO
1March

There has, and will be, an interminable amount written about what will happen if the UK votes to leave the EU over the next few months. How much it will change anything is hard to say, but preparation is vital, and companies are currently sleepwalking into it.

Those in the finance function have already largely come out in favor of staying, with 62% of 137 FTSE 350 CFOs surveyed by Deloitte saying they supported continued membership. Research last April also found that over half of accountancy and finance professionals across the UK believed that leaving the EU would be detrimental to the UK economy, while analysts at Société Générale have warned of ‘significant economic damage’ on the UK over the next decade should the nation decide to leave, wiping 0.5pc-1pc off annual GDP until 2026.

While finance professionals may well be against it, they don’t decide the outcome - the general public do. The benefits for business will have some impact on peoples’ decisions, but the issue is extremely emotive and the chances of it happening are very real. CFOs need to be prepared to mitigate against the risks and put plans in place for doing business in what will be a largely unknown world for them.

The most immediate concern is the Sterling, which has already dropped significantly at the mere scent of the referendum. Both UBS and Bank of America has warned that a Brexit would trigger a Sterling crisis and jeopardize the financing of the the UK's record current account deficit. For companies in the EU with UK contracts, their price may well be fixed in Sterling as opposed to the euro, so their customers will be paying in pounds. An EU company that reports in euros will therefore have to exchange, which will need to be managed by CFOs in order not to negatively impact profit margins built into the sale price of the product.

Another, more long term, consideration is the nature of the relationship between the EU and Britain post-Brexit. Eurosceptics want the kind of status that Norway has, with access to the single market yet bound by EU legislation in a number of policy areas through its membership of the European Economic Area (EEA) - though with no formal votes. It’s not certain that the EU would grant the UK such access, indeed it’s probably unlikely given the precedent it would set to other countries looking to leave.

This is really the main thing it comes down to. Will the EU want to make an example of the UK and do as little as possible to smooth its transition? The lack of willingness to appease Syriza in Greece suggests that they will not be willing, but the UK is a far bigger economy and imports roughly as much as it exports to the EU, which should likely see a bit more leeway given.

One of the most commonly cited advantages of leaving the EU for businesses is the removal of regulations. Even pro-Europe think tanks have said that EU regulations cost the UK economy £33bn. However, it is likely that much of this red tape will remain. If British law does not mirror EU directives, it would likely have difficulty in establishing trade relationships with the EU. Switzerland, which is also not in the EU, implement the majority of the MiFID II directive and around 90% of the European Market Infrastructure Regulation in order to keep open the benefits of trading, and it is probable that the UK would have to do the same.

Whatever the merits of remaining or leaving the EU, there is little argument that the mere fact of the referendum will negatively impact business confidence. Things like advertising revenue are especially sensitive to business confidence, and a Brexit could see it fall off a cliff. Ultimately, there is no precedent for a country leaving the EU, so it is impossible to predict the effect a Brexit would have. However, CFOs need to be aware of every eventuality, and plan for the worst.

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