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Brexit – next steps and the impact for investors

With the Brexit deadline looming, what should investors be thinking about next?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

George Trefgarne

Published on 16 November 2020

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Brexit should be firmly back on investors’ minds after last week.

Not only did we see a big shake up within the office at No.10 Downing Street over the weekend. Last week the British government also suffered a resounding defeat on proposals in the Internal Market Bill in the House of Lords on Monday 9 November, by 433 votes to 165. The defeat signals Brexit has returned as an issue and that another shootout in Parliament has commenced. It could last until Christmas.

While I am sure very few people will welcome this somewhat depressing development, the euphoric global market reaction to the announcement from Pfizer that it has a vaccine which is 90% effective overshadowed the news. Vaccine developments saw the FTSE 100 rise by 4.7% to 6,186.29 on Tuesday 10 Novemeber. This could serve as a reminder that if the remaining Brexit obstacle can be removed from investor sentiment towards the UK, there is the prospect of compelling opportunities for investors.

Unfortunately, we are not there yet. There is still a great deal of uncertainty about the anatomy and timing of a deal. Both sides have said they remain apart in relation to fisheries, state aid rules and so-called “level playing field” provisions, such as future environmental regulations.

Here is what we know:

The Brexit deadline looms

Although we formally left the EU at the beginning of the year, the Brexit transition, or implementation, period in the original Withdrawal Agreement expires at 11pm on 31 December. What that means in practice is that we then abruptly and finally leave the commercial frameworks of both the EU Single Market and the Customs Union with, as it stands, not much to cushion the fall. That is, except the framework offered by the rules of the World Trade Organisation. In theory, this would mean queues at Dover and other risky outcomes.
The economic context is key

We’ve seen 314,000 British redundancies in the third quarter, and the Bank of England forecasting a second recession due to the second Lockdown. So it is not unreasonable to assume that both sides are straining every sinew to achieve a deal.
No Brexit deadline extension?

An extension of the current transition period is almost impossible. It is barred under the UK’s EU Withdrawal Agreement Act, 2020. Section 33 says that “A Minister of the Crown….may not agree to an extension of the implementation period”. Confusingly, Section 39 goes on to say that a minister may change “the definition of Implementation Period completion day”, i.e. what happens on 31 December. This is an apparent contradiction, nobody has explained.

More likely is a series on Phase-In plans to allow business to implement the changes to tariffs, rules and other arrangements – including those between Northern Ireland and Great Britain – gradually. These could be, to all intents and purposes, a series of mini-extensions to give businesses times to adjust.
Joe Biden weighs in

The prospect of a President Biden in the White House gives a further push towards a deal. The United States is a co-guarantor of the Good Friday Agreement. The Irish lobby in America has influence, especially in the Democratic Party.

In September, four congressmen wrote to Prime Minister Boris Johnson urging him to withdraw controversial clauses in the Internal Market Bill – already defeated by the House of Lords. The bill overtly breaks international law by imposing checks between Northern Ireland and the Republic, contrary to the original Withdrawal Agreement which we signed last December.

After the letter was published, Mr Biden tweeted support, saying: “We can’t allow the Good Friday Agreement that brought peace to Northern Ireland to become a casualty of Brexit. Any trade deal between the U.S. and U.K. must be contingent upon respect for the Agreement and preventing the return of a hard border. Period.”
What happens next?

Finally, it is worth considering the legal process of ratification for the new trade Treaty with the EU. On the EU side, it must be approved by the member states in the Council of the European Union and voted on in the EU Parliament. Depending on certain legal constraints, there is a small possibility national parliaments will get involved too, although if that happened the council may have powers to approve the Treaty temporarily.

On the UK side, it is also complicated. There must be a parliamentary vote approving the Treaty under the so-called Constitutional Reform and Governance Act, 2010 and then an Act of Parliament to implement it. This could take several weeks to pass, with numerous debates and votes in the Commons and the Lords.

So, we are not out of the Brexit woods yet. However, given the desire for a deal on all sides we must hope we will be soon and that Britain can at last concentrate on a proper economic recovery.

George Trefgarne is CEO of Boscobel & Partners, a political consultancy. Hargreaves Lansdown may not share the views of the author.

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