It is now just two months until the UK is – in theory – due to leave the European Union. In this special report we have tried to summarise the current position for you: what has happened, what might happen and – most crucially of all – what it might mean for your savings and investments.
But first, a word of caution. The bulk of this report was written on the morning of Saturday, January 26th: practicalities dictate that it is always necessary to write a couple of days ahead of sending something to our clients. Be aware therefore, that events – and we have never known anything as unpredictable as these Brexit negotiations and the attendant political manoeuvring – may have moved on by the time you read our report.
The History
It seems a remarkably long time ago but on Thursday 23rd June 2016, the UK went to the polls to vote on our continuing membership of the European Union, with then Prime Minister David Cameron repeatedly stressing that if voters chose to leave the EU they would be choosing to leave the single market and the customs union, and promising that whatever the result, “Parliament will enact it.”
17.4m people duly voted to leave the EU, with 16.1m voting to remain. David Cameron promptly resigned and Theresa May – who had supported Remain in the Referendum campaign – took over as Prime Minister.
Article 50 – the UK’s formal notice to leave the EU – was triggered on 29th March 2017, meaning that the date of leaving the EU was set for Friday, March 29th 2019.
As everyone reading this report will know, there then followed two years of torturous negotiations with the EU over the terms of the UK’s ‘divorce’, with the Prime Minister agreeing to pay the EU a ‘divorce settlement’ of £39bn.
She eventually brought her Withdrawal Agreement (frequently shortened to WA) before parliament on January 15th, having postponed an earlier vote as she feared a heavy defeat in the Commons. However, the result in January was exactly what had been feared in December. Theresa May suffered a heavy defeat, losing the vote by 432 votes to 202. More than 100 Conservative MPs voted against the deal – although they very quickly returned to the fold to defeat an Opposition motion of no confidence in the Government.
This week will see another vote in the Commons on Tuesday 29th when Theresa May will put ‘Plan B’ before parliament – although there are dark mutterings that ‘Plan B’ will look very much like ‘Plan A’.
What does the Withdrawal Agreement propose?
Theresa May’s deal includes five main subjects. Firstly, there is the size of the ‘divorce bill’, which – as above – currently sees the UK paying the EU £39bn. There is then the rights of EU citizens in this country, fisheries, a ‘transition period’ and – most contentiously of all – the ‘Irish Backstop’. Let us look at these in more detail.
Freedom of Movement and EU Citizens’ rights
There is no doubt that ending freedom of movement was a contributory factor to many people voting ‘Leave’ and it is currently scheduled to end when the transition period finishes. Future immigration rules are not included in the negotiation process, meaning that the UK will have the flexibility to set its own criteria.
The existing rights of EU citizens living in the UK and Britons living in Europe have already been guaranteed in the negotiations.
Fisheries
Almost without exception, UK constituencies that have a significant fishing industry voted to leave the EU. The withdrawal agreement only says that both sides will make a commitment to use ‘best endeavours’ to reach a future deal. Essentially, UK fishermen see this as very much favouring the EU and giving EU fishing vessels licence to continue what is seen as the overfishing of UK waters, without any commitment on when this will end.
The transition period
Under the current proposals, the UK will leave the EU on March 29th but remain in the single market – and be bound by its rules – until the end of December 2020, theoretically giving the two sides time to work out a new trading relationship. The transition period can be extended by joint agreement before July 1st 2020 if both sides agree more time is needed.
During the transition period, the UK will have to follow all EU rules and European Court of Justice rulings – another big bone of contention with Leave supporters.
The Irish Backstop
The Irish Backstop has been the biggest sticking point in the negotiations – and certainly the source of much of the political wrangling. So what exactly is it? It is effectively an insurance policy, designed to make sure that the border between Northern Ireland and the Republic of Ireland remains open as it is today – that is, as a ‘soft’ border with very easy movement (for both goods and people) between the two parts of Ireland.
The backstop arrangements were agreed between the UK and the EU in November 2018 as part of the draft withdrawal agreement. If there is no agreement between the UK and the EU before March 29th then that raises the possibility of a ‘hard’ border between the North and the Republic, with all the consequent practical and political difficulties.
Inevitably, this is an emotive subject: the Democratic Unionists – the party Theresa May is reliant on for her parliamentary majority – are adamant that Northern Ireland cannot be treated differently to the rest of the UK. Advocates of a very soft Brexit maintain that a hard border between the North and South would jeopardise the Good Friday Agreement and risk a return to the ‘troubles’. Brexiteers suggest there is no realistic prospect of a hard border whatever happens, and that the threats are just part of the EU’s negotiating stance and a ploy to keep the UK chained to the EU ‘in perpetuity’.
The draft deal envisages a decision being made in July 2020 on what would have to be done to make sure the border stays open after the transition periods. If a new trade deal is not in place, Britain would need to extend the transition period, go into a customs union that would cover all of the UK – or treat Northern Ireland differently to the rest of the UK.
The DUP will not have this last option and Brexiteers will not have the prospect of an indefinite customs union, arguing that the current arrangement gives the EU no incentive to make a deal.
You pay your money and you take your choice. What is certain, though, is that you will hear the words ‘Irish backstop’ an awful lot of times between now and the end of March.
Would ‘No Deal’ really be that bad? And is it likely to happen?
For most people, their view on a ‘no deal’ Brexit probably depends on how they voted in the original Referendum. If the UK were to leave the EU on March 29th without a deal, it would revert to trading on World Trade Organisation rules (which govern most of the trade done throughout the world). So there are rules and regulations in place to govern what would happen after March 29th.
It is important to note the practicalities though. There is emphatically not a majority in parliament for a ‘no deal’ Brexit. It may be the most popular option among the British public – a recent opinion poll placed it ahead of Theresa May’s deal and remaining in the EU – but it is not the most popular option among MPs. At this stage it still feels that doing some sort of deal with the EU is far more likely than a ‘no deal’ Brexit – and Sunday’s papers brought us threats of several Cabinet resignations if the Prime Minister goes ahead with this option.
Could there be a second Referendum?
Much has been made of a campaign for a ‘People’s Vote’ – a second Referendum on membership of the EU. The prospect of this now seems to be receding, with increasing opposition to a second vote in both main parties. A delay to Brexit – giving the Government more time to reach a deal with the EU that it can get through Parliament – seems far more likely.
What will it all mean for your savings and investments?
At the beginning of the year, the FT-SE 100 index of leading shares stood at 6,728 having fallen 10% in the final quarter of the year and 12% for the year as a whole, as world markets suffered their worst collective year since 2008. As we write, the FT-SE stands at 6,809 – barely up on the year but certainly not having fallen any further for the continuing uncertainty over
what will happen with Brexit.
When he was Chancellor, George Osborne frequently made the point that world events had more impact on the UK economy than anything he did as Chancellor, and I suspect that the same might be true for Brexit. China’s economy ‘only’ grew by 6.6% last year and the consensus for this year appears to be an even lower 6.3%. Weak economic data is threatening growth in the Eurozone and the trade dispute between the US and China remains unsettled.
So Brexit is by no means the only game in town, and while ‘no deal’ might give the stock market a short term shock, in the long term – and remember that saving and investing is always for the long term – other events will be at least as important as Brexit. That is why we review all your savings and investments regularly, and make sure that they remain in line with your overall financial planning requirements.
Monday morning update…
As we have noted above, the bulk of this report was written on Saturday, January 26th. But over the weekend…
● Tory rebels are apparently prepared to throw their weight behind a plan demanding changes to the Irish Backstop, but which otherwise supports Theresa May’s plan
● Irish Deputy Prime Minister Stephen Coveney has said that the Backstop “cannot be changed”
● Education Secretary Damian Hinds has said that the UK “will definitely” be leaving the EU on March 29th
…So nothing is certain and – as someone said when the UK/EU negotiations started – “nothing is agreed until everything is agreed”.
The only thing you can count on is that, whatever happens, we will be here to answer any questions you might have, whether it is on Brexit or on any other events affecting your savings and investments.