Brexit chaos spells trouble for risk managers

With less than a fortnight until the UK’s expected departure date from the EU, you would have hoped that there would be some sort of plan by now.

Instead, British businesses have been plunged into chaos, with very little certainty over what the weeks, months and even years ahead might bring.

Theresa May’s deal has suffered two of the biggest parliamentary defeats in history, yet she continues to press ahead in trying to get it through. It is not yet clear whether this will be possible.

Unsurprisingly, British businesses are in revolt, concerned about the negative effects of continued uncertainty.

Mark Browridge, director general of the Enterprise Investment Scheme Association, said:

“It’s madness… Uncertainty breeds fear and that’s what we will see more of with the agreement not passing the commons. How can any business plan with political backdrop we are currently experiencing? We will now almost certainly see a slow-down in the economy that could have been easily avoided.

“If the markets and the economy know what the issues are, they react and solutions are put in place to counter them - but with the current Brexit calamity all bets are off. We are entering uncharted waters and anyone who tells you they know how this will play is lying.”

And there could reputational consequences for many corporates, says Cedric Lenoire, a senior risk professional at a leading insurance company: “Most importantly, I believe the reputational risks [of Brexit] are under-estimated.

 

What is currently happening cannot be good for the credibility of the UK on the international scene. No doubt this will be felt by British businesses over the long-term. In other words, will German/French/Spanish/etc. companies remain eager to trade with British organisations? Will EU consumers still want to buy British goods/services after this mess? Reputational risk at its best here

“What is currently happening cannot be good for the credibility of the UK on the international scene,” he adds. “No doubt this will be felt by British businesses over the long-term. In other words, will German/French/Spanish/etc. companies remain eager to trade with British organisations? Will EU consumers still want to buy British goods/services after this mess? Reputational risk at its best here.”

Deal or no deal

The continued rejection of Theresa May’s deal undoubtedly makes an unstructured crash out of the EU more likely.

MPs have voted against a ‘no deal’ Brexit, however this vote has no legal standing and it is still the default outcome for the 29 March in the absence of a deal or an extension from the EU.

For risk managers, this means that it is imperative to have plans in place to mitigate against the risks associated with the UK leaving without a deal.

Even if a deal is eventually passed or even if we end up staying in the EU, the timeline and outcomes are both too uncertain for risk managers to sit back and do nothing.

Jo Willaert, president of FERMA said: “Unfortunately, [the] vote confirms that most organisations were right to base their Brexit preparations on a hard, no deal Brexit outcome.”

Yet more delays

The government has voted in favour of a delay to our departure date. But it’s worth remembering that all Theresa May can do is ask and whether such an extension is permissible will depend upon an agreement from all the EU member states.

And it is not yet clear how long that extension will be. The prime minister has said that if she can pass her deal next week, she will ask Europe for a short extension of a few months. If the deal tanks again, she has said that she will ask for a much longer delay, which could last for years.

Either way, the decision as to the length of the extension is not May’s to determine, with some EU leaders suggesting that only a substantial delay will be tolerated.

Assuming May’s requests for an extension are agreed, risk managers will have more time than expected to prepare but will also have to deal with the uncertainty for far longer.

The timetable for clarity could vary from 11 days to a few years, and the outcome could be anything from changing our minds and staying in the EU to a hard exit and a million possibilities in between.

The UK Parliament’s rejection of the proposed withdrawal agreement and then the request for an extension prolongs and aggravates the uncertainty. There is frustration, and a certain fatigue about the continuing disorder and lack of clarity.

Unsurprisingly, this throws up substantial issues for the risk management industry. Risk managers are having to plan for a huge number of varying outcomes and the political situation is changing almost daily.

Clive Clarke, former chairman of Airmic and risk and insurance expert, says: “I think the continuing uncertainty for the country and business can only be more damaging as we get closer to the proposed Brexit date.”

Willeart added: “The UK Parliament’s rejection of the proposed withdrawal agreement and then the request for an extension prolongs and aggravates the uncertainty. There is frustration, and a certain fatigue about the continuing disorder and lack of clarity.

“It also confirms the necessity for companies to have professional risk managers that have the expertise to prepare for various scenarios and support the implementation of appropriate measures to ensure business continuity whatever the post Brexit business environment.”

Dealing with the uncertainty

Ferma and Airmic have teamed up to help the risk management community understand Brexit related risks and mitigation strategies.

To do this, they spoke with several senior level risk managers across Europe.

All agreed that companies need a comprehensive understanding of the threats before they can even start to look at implementing or even developing mitigation strategies.

This means that risk managers need to work closely with other functions in an organisation including HR, legal, finance, supply chain, quality control and supply chain specialists.

FERMA commented: “[Planning] usually took the form of a multidisciplinary approach to fully understand the business unit risk exposure to Brexit (such as tariffs, supply chain friction and regulation). All risk management teams involved had to interface very closely with other departments to coordinate these actions.”

The research found that companies are adopting a wide range of mitigation measures, some of which have already led to significant costs.

These include:

• Stockpiling components and parts to ensure production can carry on for several weeks in the event of a ‘no deal’. This has led to more inventory stocks.
• Ensuring operational continuity, by running functions such as quality control and regulatory compliance out of both in the UK and the EU.
• Transferring records to the EU.
• Searching for alternative sourcing outside the UK, to avoid supply interruption.
• Integrating Brexit risks into an Emerging Risks Insurance Programme, with a plan to use the captive to mitigate future export control risks to the business units.

Getting a head start

Ferma found that some companies started preparing for Brexit very early, just a few months after the leave vote in 2016.

Most of these preparations were made on the assumption of a hard Brexit, especially for critical sectors like healthcare, where continuity of medical supplies to patients is at stake, both in the UK and the EU.

For instance, Ipsen, a French pharmaceutical company that develops and markets medications, has been preparing since late 2016.

One of Ipsen’s medicines is manufactured in the UK and distributed to more than 80 territories worldwide.

Because of stringent regulations around distribution of medicines in Europe, the company has had to plan carefully for what might happen if the UK leaves the EU without a deal.

Current regulation states that in order to sell medicinal products in the EU, businesses must hold market authorisation and products must be released in an EU country.

That means that any drug that was tested and certificated in the UK, would not be able to be distributed in any other European markets following a no deal departure.

Ipsen is well advanced in preparations for Brexit and the potential scenarios and challenges that this may introduce. We are truly confident there will be no disruption to patients

Complex regulation means it can take up to 18 months to transfer market authorisations and move tests from a UK site to another European site, so Ipsen needed to act straight away following the vote for independence, regardless of whether a ‘no deal’ outcome seemed likely back in 2016.

So far, the company has taken significant steps to prepare. These include:

• · Starting to transfer product Marketing Authorisations for EU markets to France as early as Autumn 2016
• · Taking steps to transfer batch control and release activities for the EU to Ireland.
• · Increasing stocks of medicines held both in the UK and EU countries to avoid any potential disruption to patient supply.

Anne Piot d’Abzac, VP chief risk officer at Ipsen says: “Ensuring there is no disruption to patient supply of medicines remains our priority for patients in the UK, EU and beyond.”

“Ipsen is well advanced in preparations for Brexit and the potential scenarios and challenges that this may introduce. We are truly confident there will be no disruption to patients.”

“We are watching developments closely and hope that a sustainable solution between the EU and the UK can be reached quickly in order to create political and economic stability that will allow our continued commitment to investment here in the UK.”