InvestmentsMay 31 2016

What could a vote to leave look like?

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What could a vote to leave look like?

When the EU referendum takes place on June 23 this year, many believe the outcome will end the uncertainty that has dogged the UK since David Cameron called on the British public to make a decision about the country’s EU membership.

A vote ‘out’ of the EU is likely to raise more questions than it answers, though. So what are the next steps in the event the UK votes to leave the EU?

The Wealth Management Association’s deputy chief executive John Barrass says wealth managers and other financial services firms with retail clients should provide reassurance: “The first thing you’ve got to do is reassure them because they’re the ones who are most affected by uncertainty. [Reassure them] that nothing will change in the short term.”

As Goldman Sachs points out in a recent paper ‘Brexit: The uncertainty shock of leaving the EU’: “The negotiation of a UK withdrawal from the EU would be conducted under Article 50 of the Lisbon Treaty. From the date on which the UK prime minister informs the EU Council of the UK’s decision, Article 50 contains a two-year time limit for departure. During this transition period, existing EU legislation would apply to the UK.

“During the transition, the UK government would have to construct a new trading, regulatory and legal architecture.”

But David Page, chief economist at Axa Investment Managers, says: “For most of those two years, it will be uncertain exactly what the UK is able to establish in terms of a trade relationship with the EU.”

So what are the existing models the UK could replicate and what level of EU market access do they offer?

London’s status as a global financial centre and gateway to the EU would be threatened if it is no longer the dominant force in clearing European financial markets. Eoin Murray, Hermes Investment Management

The OECD states this means trade with the EU is subject to the EU’s common external tariff. Switzerland’s arrangement under the European Free Trade Association means it is still required to make contributions to the EU budget and, under this type of agreement, there would be no passporting rights for banks.

Mr Page predicts: “My own suspicion is we would get something close to what we currently enjoy in terms of goods, because the EU has been quite good at promoting competition and a single market in goods. Also, the EU runs quite a large surplus exporting goods to the UK. But it’s going to be more difficult to get a reciprocal arrangement and something that’s as close to, or as beneficial for, services exports because the EU hasn’t been good at implementing a single market in services but also because the EU runs a large deficit importing services from the UK.”

The issue of passporting would perhaps be one of the most pressing for the UK in a post-referendum world.

Eoin Murray, Hermes’ head of investment office, explains the EU’s passporting system allows financial services businesses to operate in other member states without setting up a local branch. He warns: “If the UK loses the ability to provide cross-border financial services, the industry will face additional costs, such as establishing local branches, maintaining local capital and the compliance costs of seeking approval from local regulators. London’s status as a global financial centre and gateway to the EU would be threatened if it is no longer the dominant force in clearing European financial markets.”

Professor Chris Rowley, of Cass Business School, says: “The UK could strike post-Brexit trade agreements with greater focus on financial services, not only with the EU, but also Asia and the US.”

But he accepts red tape is unlikely to lessen with Brexit “as it is part of global business life”.

The ‘leave’ campaign has not ruled out calling another referendum even after securing a vote to leave.

JPMorgan Asset Management’s chief market strategist for UK and Europe, Stephanie Flanders, observes: “The next leader of the Conservative party might have to promise [another referendum] to become the next party leader.”

Clearly, there is much at stake as Britain’s EU referendum may create a ripple effect. A poll by Ipsos Mori based on interviews with between 500 and 1,000 adults in eight European countries, reveals almost half think their own country should hold a referendum on its EU membership. It found majority support for a referendum in Italy and France.

Could a vote to leave be the beginning of the end for the EU as we know it?

Ellie Duncan is deputy features editor at Investment Adviser