PwC cautions clients to prepare for a Hard Brexit

19 April 2018 5 min. read
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Big Four professional services firm PwC has maintained its view that a Hard Brexit is the most likely outcome of the UK Government’s negotiations with Brussels, with less than one year to go until Britain formally leaves the European Union. According to PwC, businesses should have contingency plans in place for the harshest exit scenario, which would mean complete separation from the EU and a return to an arrangement that existed before Britain's entrance into the organisation.

Last year, PwC published a paper suggesting a dreaded Hard Brexit was the most likely result of negotiations between the UK and the EU, following a thorough investigation of all the possible outcomes. A year on, and with less than a year now left for the UK and EU to strike a deal, the Big Four firm has published an update, in the shape of ‘Brexit: Lighting the way’, in which PwC’s opinion remains largely unchanged.

While PwC did use the publication to welcome the recent agreement on the transition arrangement, the firm warned that businesses should not depend on this alleged “breathing space”, and that while Brexit looks less likely to be a chaotic No Deal scenario, it would be prudent for executives to plan for a Hard Brexit – albeit an orderly one. This is because four significant issues still remain unresolved in regard to Britain’s proposed exit. There is still no agreement on the future framework for trade, no formal dispute resolution mechanism needed for future trade relations, and the question of the Irish border remains a volatile issue, before the governance of the Withdrawal Agreement can even be mooted by UK and EU Parliaments.

According to the report, the UK’s lack of willingness to consider a customs union, along with the EU’s continued accusations of Theresa May’s negotiating team “cherry-picking” favourable aspects of the EU, and abandoning any commitments to the wider organisation the Conservative-led Government does not agree with, means that an orderly Hard Brexit remains too likely for businesses to ignore.

Possible future scenarios

In order to reach this conclusion, PwC drew on a recent comment from President of the European Council, Donald Tusk, who stated that the UK’s “pick and mix” approach to negotiations means that free trade agreements, similar to those of Norway, Iceland and Liechtenstein are off the table, as those nations all agree to European Court of Justice jurisdiction, free movement of labour from EU nations, sacrifice a degree of regulatory autonomy, and make substantial financial contributions to the EU. In fact, the UK’s “Red Lines” are so stringent that even a free trade agreement in line with that of Turkey – which conforms to none of these criteria but is willing to sacrifice independence in its trade policy for access to the EU market – would be unworkable.

According to Tusk, and PwC, deals in line with those currently in place with Canada and South Korea are therefore the only viable options for the UK. A deal of this nature covers most areas of trade and investment, but it would not ensure freedom of movement for any industry, including passporting for financial services – something which was a key aspect to the Bank of England’s recent warning that some 75,000 jobs could exit the City of London post-Brexit.

Other industries bracing for a Hard Brexit include architecture, and the professional services sector. Britain’s architecture market is worth around £4 billion, however 74% of architects believe frictionless access to the European Single Market is essential to maintaining this – with a further 60% saying they have already considered leaving the country for the mainland after the separation concludes. Recently the European consulting industry also issued a joint call for all governments across the EU to support open trade and easy movement of consultants between the EU and the UK after Brexit. The leaders of thirteen national consulting associations, Britain’s MCA among them, published the collective manifesto emploring the UK and EU to maximise the ability of UK and EU27 nationals who are consultants to travel, live and work freely within the EU27 and the UK.

Stick or twist

Just some of the major implications of a Hard Brexit include the likely imposition of World Trade Organisation tariffs and possible lengthy customs checks at ports and airports. That is the most orderly option open to Hard Brexiteers, as well, as if at midnight in Brussels, and 11pm in London, on March 29th 2019, there is no ratified withdrawal treaty, there would be legal chaos unless all sides agree to a special extension of the negotiations window, which could prove complicated.

Feargal O’Rourke, PwC Ireland’s Managing Partner, said, “With just under one year until the UK formally leaves the European Union, the realities of Brexit continue to come into focus. The EU and UK transitional deal agreement reached on March 19th should see the status quo maintained until December 2020, but the deal is not fully guaranteed. It still depends on both parties agreeing a Withdrawal Agreement in the next 12 months. Whatever form it takes, Brexit will impact your business and we strongly advise you to prepare now. Disruption and change is coming and preparation now is key.”

Speaking to the press, O’Rourke added, “All in all, on the balance of probabilities, we still think it’ll be a hard Brexit...I’m not sure we’re going to see anything for the next two months that would allow us to switch position,” before noting that PwC will re-evaluate after the upcoming June summit of EU leaders.