Talking Brexit

How will the UK’s exit from the European Union affect global mobility and multinational companies needing to move talent across borders?

Brexit question mark

See more features about Brexit in the Autumn 2016 issue of Relocate magazine on our Digital Issues page.

The Brexit vote in June’s referendum on the UK’s membership of the European Union (EU) produced only one absolute certainty: that there could be absolutely no certainty about the future shape of the relationship between Britain and the remaining 27 members of the bloc.Of course, the seemingly insoluble conundrum in the Brexit negotiations will be how the UK can continue to enjoy (relatively) unfettered trade access to the EU’s single market, particularly for its all-important services sector, while imposing restrictions on the free movement of people. These curbs are regarded by Prime Minister Theresa May as a ‘line in the sand’ and by most of her European counterparts as totally beyond the pale.Even if a compromise can be reached on this impasse in negotiations, which are due to start early in 2017 when the UK triggers the two-year negotiation process for its exit from the EU, the task facing both sides is mammoth.

Forging new partnerships

For the British, quite apart from trying to hammer out a new relationship with Europe, it will require repealing or amending swathes of EU regulation to reduce the burden of red tape so loathed by many businesses, while trying simultaneously to establish new trading partnerships with the likes of the US, Canada, Australia, Japan, India and China.For the rest of Europe, their own task of trying to hammer out a new relationship with Britain is complicated by the fact that, on one side, the UK is a crucial market for goods from so many of them – not least, Germany – while, on the other, the fear persists that reaching too generous an agreement could bolster growing ‘leave’ movements in several western European nations.And there is the problem of what happens to the right to remain of the estimated 3.3 million EU citizens, including 2.1 million actively engaged in work, currently in the UK, and about 1.3 million Britons estimated by the United Nations to be living in other EU countries, around 800,000 of whom are deemed to be workers or their dependants.Mrs May’s discussions with other European leaders have so far produced little in the way of concrete proposals, although a possible compromise has been floated that would enable the UK to ban the free movement of people while allowing the free movement of labour; that is, allowing EU citizens, but not necessarily their dependants, virtually free access to the UK as long as they have a firm job offer.Continued access to the pool of European skills – including those required by industries such as agriculture and hospitality – is a priority for many UK companies. Josh Hardie, deputy director-general of the Confederation of British Industry (CBI), says, “British businesses recognise public concern over immigration. But to thrive and grow, they also need to be able to access talent from across the world.“We have one of the highest employment rates ever, but companies still struggle to fill those jobs that are the least attractive to British workers, particularly in agriculture and hospitality. Skills shortages are severe in key industries, such as manufacturing and construction. And although it is vital the UK upskill its domestic workforce, free movement from the EU has helped companies overcome skills and labour shortages, and brought valuable talent into our workforces.“Business and government need to work closely to build an immigration system that boosts the economy and society. We need to seek reassurances for EU migrants already in the country – and UK citizens resident in the EU – with clarification about how they can remain once the UK has left the EU. “The same applies to European students looking to study in the UK: a valuable source of income for our world-leading universities.”

The business perspective

Over the summer, the CBI conducted a survey of hundreds of companies across the country in a bid to discover what they wanted from Brexit negotiations. Ensuring the UK’s immigration system would continue to allow British firms access to the people and skills they needed was one of five priorities that emerged.The other four were: retaining the ease of UK–EU trade that businesses gain from the single market; balancing regulatory equivalence with the EU with flexibility and influence over the domestic environment; developing a clear strategy for international trade and economic agreements; and protecting the economic and social benefits of EU-funded projects. The government has partially addressed the last point by guaranteeing funding for agricultural subsidies and for scientific research projects until at least the 2020 general election.Analysts agree that businesses need certainty at a time when, by the very definition of the limbo both the UK and the EU find themselves in, there is none. Immediately after the Brexit vote, economists' predictions were on the dark side of gloomy, with credit ratings agency Moody's forecasting that business investment would “weaken considerably” and consumer spending would fall.Since then, however, there has been a raft of economic data and surveys that have defied the pessimists.Employment, consumer and business confidence, and even the property market, have bounced back since the initial hand-wringing that followed the announcement of the result of the 23 June referendum. City economists now believe the UK economy will grow by an average of 1.6 per cent this year and 0.7 per cent in 2017, according to HM Treasury’s latest study of forecasts.Barclays increased its 2016 forecast sharply from 1.1 per cent to 1.5 per cent, partly because of the strong second-quarter GDP figures, which showed an acceleration of growth since the referendum, while Citigroup increased its prediction from 1.3 per cent to 1.7 per cent and Commerzbank from 1.2 per cent to 1.6 per cent. “Most firms in the UK are domestically focused, so if the consumer sector is looking good, then the feared hit to investment might not be as great as was expected,” commented Martin Beck, economist at the EY Item Club.Even so, the UK will remain a member of the EU at least until the start of 2019 and, until its post-Brexit future becomes clear, long-term investment by multinationals operating in the UK remains in doubt. This is particularly true of the UK’s booming car industry, which is enjoying its most productive era in more than a decade, producing more than a million cars in the first seven months of this year, almost 80 per cent of them going to export – and the majority of those bound for the EU.

Automotive sector: inward investment on hold

Foreign owners predominate in the auto sector – including Honda, with a major plant in Swindon, Wiltshire; BMW, which produces Minis and Rolls Royces in the Midlands; Tata Motors, owner of Jaguar Land Rover (JLR); GM’s Vauxhall plant in Luton; Nissan, with the UK’s largest and still-expanding factory in Sunderland; and Toyota’s major manufacturing facility in Derbyshire. Yet Carlos Ghosn, Nissan’s chairman and CEO, has made it clear that future investment decisions are now on hold pending the outcome of the Brexit negotiations. “OK, the UK is out of Europe,” he told the BBC in August. “Fine. But what’s going to be the new status? So you're going to see a period where most companies are going to be waiting to see what’s going to be the new status. We’re reasonably optimistic that, at the end of the day, common sense is going to prevail from both sides – that, as many people said, the UK will still continue to be a big partner of the European community.“The question: what's going to happen in terms of customs, what’s going to happen in terms of trade, what's going to happen in terms of circulation particularly of the products? All of these are very sensitive elements that are going to determine how, and how much, we are going to invest in the UK, particularly for the European market.”
In a report over the summer, PA Consulting suggested Honda and Toyota were “most at risk” of closing their plants because of Brexit. They are highly reliant on exports to Europe and have relatively low margins and profitability.“The question marks – Mini, Nissan and Vauxhall – are unknowns,” said the report. But an analysis by LMC Automotive said GM’s Vauxhall plant was most vulnerable because of the relative ease of switching production to its German or Polish factories. LMC rated an exit by Honda, JLR, Nissan and Toyota as a low to medium risk.

Banking and financial services on the move?

Yet the doubts surrounding the auto industry pale in comparison with those in the services sector, which accounts for more than three-quarters of the UK’s gross domestic product. In particular, the financial sector – which the City of London Corporation estimates contributed £66.5 billion to government coffers last year – has become immersed in speculation that major banks will be forced to relocate thousands of staff from London to the likes of Frankfurt, Dublin and Paris should Britain lose the ‘passporting rights’ that allow financial institutions in Britain to facilitate transactions across Europe.HSBC has already said it will move 1,000 staff from its London HQ to Paris if the UK loses these rights in the Brexit negotiations, and Deutsche Bank is drawing up plans to shift staff to Germany. The Financial Times has reported that several other banks have begun to take action to shift operations out of Britain, with some of London’s largest institutions approaching regulators to secure licences and lining up executives to relocate.“The big US banks – JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley – have large operations employing tens of thousands of people in the UK. They have historically set up their regulated businesses in Britain and then used its right to ‘passport’ into the rest of the 28-member bloc,” the newspaper reported. “But lawyers are warning that after Brexit, they would likely need a new legal home base, so they are preparing to shift at least some work to cities such as Dublin, Paris and Frankfurt.”JPMorgan CEO Jamie Dimon has warned that the bank could be forced to move up to 4,000 workers out of Britain, while Richard Gnodde, who jointly heads Goldman Sachs International, has not ruled out moving some, or even all, of the bank’s 6,500 UK staff members to Europe.But this is a double-edged sword, and analysts say that, with the UK out of the EU, European banks will have to set up subsidiaries, forcing them to pump extra capital into the UK because much of European banks’ derivatives and wholesale-markets operations are based in London. Boston Consulting Group has warned that European banks will need to inject as much as €40 billion of capital into their UK operations to keep doing business in the country after BrexitAnd many economists believe that, whatever arrangement the UK reaches with the EU, London will remain – along with Wall Street – one of the two principal global financial hubs, simply because of the skills, knowledge and technical innovation available there. And, as one analyst put it, “Foreign bankers want to send their children to English schools.”

Implications for employee moves

The notion of moving staff from one country to another, however, runs straight into the freedom-of-movement maelstrom. Indeed, banks and many other industries are worried about whether or not they will be able to keep existing EU citizens in the UK, just as many Britons in Europe are wondering what the future holds.Ian Robinson, an immigration law expert at Fragomen Worldwide and an adviser to the manufacturers’ organisation EEF, says that Brexit is likely to end free movement and will “have any number of implications for human resource teams across the country”. He adds, “Immigration is only one consideration but it is a reasonably big one, particularly with EU employees worrying about whether they will be told to leave the country.
“It is unlikely that the government will tell EU nationals to go home, but there can be no guarantees just yet. We do know that Mark Sedwill, the Permanent Secretary in charge of the Home Office, has said that those with permanent residence rights should be allowed to stay. “EU nationals can normally apply for a Permanent Residence Card (PRC) after they’ve lived in the UK for five years, so long as they meet certain criteria, for instance a clean criminal record. There is no legal obligation to apply for the PRC, and the vast majority of EU nationals don’t bother. I am finding, though, that many are finding a lot of comfort in holding one since the referendum.“They can also apply for British citizenship if they have a PRC, although they normally need to have lived here for six years. They also need to be of good character and meet a number of other relatively straightforward requirements. Again, this is not mandatory, but it could help people feel more secure.”

Brexit beyond Europe

Outside Europe, however, some see Brexit as an opportunity to enhance the opportunities of non-EU nationals to work in the UK. Under the existing Tier 2 visa system, not only are the numbers limited and the costs for both employers and overseas employees recently increased, but – since April – anyone failing to earn more than £35,000 a year after six years in the UK must return to his or her country of origin.The Indian government made a formal protest to the Foreign Office in London in the summer over the changes. Now, Malcolm Turnbull, the Australian Prime Minister, and John Key, his New Zealand counterpart, are working on a “co-operative framework in which Australia and New Zealand can work together to ensure that they maximise any opportunities that arise as a result of Brexit”. Mr Turnbull said, “Australia and New Zealand could work together on joint free trade and visa agreements to steer the region through the shockwaves of Britain's exit.”Alexander Downer, the Australian high commissioner in London and a long-time critic of the Tier 2 system, explained in a radio interview with the Australian Broadcasting Corporation, “As a representative of the Australian government in the UK, my job is to seek opportunities amid the Brexit fallout. While the implications of the break-up for Australia remain to be seen, I pledge to seize on the transition as an opportunity to address restrictions on working visas.“Right now, numerous restrictions exist preventing many Australians from living and working in the UK. Whether there'll be opportunities to change that when the Brexit arrangements come into place, we simply don't know. But we should try in any case, and that's what we'll do. Behind such sentiments is a widely-held belief that an end to free movement of people from the EU into Britain will lead to the UK adopting a less restrictive visa system for workers, regardless of their country of origin. There remains a severe skills shortage in all sorts of sectors in the UK, from engineering to construction, health services and finance, and, without a steady stream of talent from abroad, few can see how healthy economic growth can be maintained.

Boosting economic performance

Prime Minister May has put infrastructure at the heart of her post-Brexit plans to rebuild the economy, but the value of contracts over the summer dropped substantially, according to Barbour ABI, the construction consultancy that supplies figures to the Office for National Statistics, mainly because the public and private sectors put projects on hold amid the uncertainty following the referendum result.
Mrs May herself did little to boost confidence by delaying plans for a French–Chinese consortium to build Hinkley Point nuclear power station and by further delaying a decision on whether additional and much-needed runway capacity in south-east England should be located at Heathrow or Gatwick airport.Michael Dall, chief economist at Barbour ABI, has urged the government to take advantage of historically low interest rates and invest in major new infrastructure projects that could play a “pivotal role” in boosting economic performance and creating employment opportunities. “While this is at odds with the austerity agenda of the previous administration, it is one of the few tools the government has available to boost the economy,” he said.Yet the skills gap that looks bound to widen after the UK's divorce from the EU still has to be addressed. “Unfortunately, it doesn’t seem as if the skills gap will be at the top of the political agenda any time soon, and over the long term this could be extremely detrimental to the national economy,” says Adam McGiveron, partner and advanced manufacturing sector head at law firm Shakespeare Martineau.“The decision to leave the EU without doubt poses a serious problem for talent acquisition, as many businesses source much-needed talent from the EU. Adapting to marketplace changes as and when new agreements are made will be needed to overcome the ramifications of the Brexit vote.“Many businesses rely heavily on imported labour because it is the only way to access people with the necessary and appropriate skillset for certain fields of work. If replacement measures aren’t sought swiftly by the government, business owners believe that overseas workers might see no future in British manufacturing and seek employment elsewhere.”And if all this was not enough, the government also faces the possibility of a second independence referendum in Scotland, which voted substantially in favour of remaining in the EU and where the ruling Scottish Nationalists are holding out the prospect of another independence vote if the outcome of the Brexit negotiations does not turn out to their liking.Mrs May says of those negotiations, “We will be looking at the next steps that we need to take, and we will also be looking at the opportunities that are now open to us as we forge a new role for the UK in the world. We must be clear that we are going to make a success of it – that means no second referendum, no attempts to sort of stay in the EU by the back door – that we are actually going to deliver on it.”Brexit, she insists, means Brexit. But, until 2019 at the earliest, nobody will really know what Brexit means.

For more news and features about the impact of Brexit in the UK and across the globe, visit our Brexit section.

The following sections may also be of interest: Enterprise, International Assignments

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© 2016. This article first appeared in the Autumn 2016 edition of Relocate magazine, published by Profile Locations, Spray Hill, Hastings Road, Lamberhurst, Kent TN3 8JB. All rights reserved. This publication (or any part thereof) may not be reproduced in any form without the prior written permission of Profile Locations. Profile Locations accepts no liability for the accuracy of the contents or any opinions expressed herein.

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