Guidelines for Understanding and Reacting to Brexit’s Impact

(Editors Note: To help our readers better understand the impact of Brexit, we called in an expert. The following is a guest blog post from Frank Fanzilli, a SugarCRM board member and former global CIO in the financial services industry).

Brexit – What Happened, and What Comes Next?

Now that we’ve had a few days to reflect and move past the utter shock of the UK’s historic vote to leave the European Union, it’s important for organizations in every country to develop a strategy for dealing with what comes next.

We have entered an era of economic and political uncertainty with no easy fix, and one that is slightly different from that of the past decade. As an organization, it’s important not to overreact, and think you must come up with all the answers to deal with the economic impact of Brexit right away. Sure, the value of the British pound immediately fell to $1.35 against the dollar — its lowest level since 1985. And the U.S. stock market dropped 600 points the day after the decision. But frankly, those are minor issues, and a correction may already be under way. The full extent of the economic impact of this vote won’t be known for some time because, as you’ve probably read, the United Kingdom must invoke the “Article 50 notification” first. After that, it has two years to negotiate its exit from the EU.

So, while England and the EU take a methodical approach to how to best navigate this mess, I suggest you do the same. If you are in the financial services or technology sectors with operations in the UK, it is unlikely that there will be any changes in the short term: A contract that was enforceable yesterday will be enforceable today. The UK’s financial services regime, including EU directives and regulations, remains in place until further notice. But there will be lots of noise, there will be distractions, and yes, there will be more volatility.

What is different about this crisis is that, while it is of course an economic story, it’s also a huge political story — and the largest in the West, at least in my recent memory. And last week’s Brexit vote was just the first political domino to fall. It seems likely that a second vote on Scottish independence is coming. (Scotland voted to remain part of the UK in 2014.) In addition, far-right politicians in France and the Netherlands are now calling for their own EU separation referendums. I’d say the chances of other countries leaving the EU aren’t likely, but then again, I never thought we’d be at this point either.

How Brexit Affects the Technology Industry

Finding talent — Tech companies with offices in the UK might have trouble finding and hiring enough skilled engineers and developers. Without the EU’s “freedom of movement” allowances to let workers travel between countries, companies are now worried about a shortage of qualified employees.

Funding — British entrepreneurs face the potential loss of EU business and research grants. London’s technology industry has been on the rise for the past several years, partly because Great Britain benefits in large part from funds such as the European Innovation Fund. If that dries up, it sets the tech industry back. It goes the other way too: About 50 percent of all European funding comes from venture firms based in London. I don’t see how London venture capitalists will continue “business as usual” until the regulatory implications are better understood.

Free trade uncertainty — This was a major topic at this week’s EU meeting. Leaders in the UK want to maintain “single-market access,” which offers free movement of goods and finance around the EU without tariffs. Unless a new deal is reached — and it appears the EU will play hardball on this — by the time the UK leaves, a UK-based company outside of Europe will trade with the EU under World Trade Organization rules. This would mean UK exporters will pay new EU import tariffs, as well as face other fresh barriers to trade.

Data flow and data privacy — This is the biggest issue, in my opinion. The United States and the European Union are in the process of making final adjustments to their latest data privacy agreement, which governs the flow of data between the United States and Europe. With a major player in the European Union now backing out of the coalition, it throws things into chaos.

Right now, U.S. multinationals and tech firms are running out of ways to legally process the data of European citizens. This is because the EU has so far been unable to finalize an “adequacy” decision that would declare the United States safe as a destination for Europeans’ personal data. When it leaves the EU, the UK will be in the same boat. If British companies want to process the personal data of employees and customers on the European mainland, the country must win an adequacy decision. This means that, even though it’s leaving, the UK must reform its privacy laws to be in line with the new EU rules or face big barriers to cross-border data flows.

Meanwhile, global tech firms must deal with the new EU rules. These rules clear the way for massive fines for privacy violations, and allow people to opt out of being profiled online, but they do at least welcome the uniformity that they promise.

How can businesses protect themselves against the likely forthcoming changes in tech policy? For one, it’s vital to have flexibility in cloud options and the ability to adapt solutions to suit the particular needs of their customers and comply with data sovereignty laws. Modern SaaS companies leverage multiple infrastructure service providers in different countries so that customer data can reside wherever legal requirements force a business to store that data. In contrast, legacy SaaS providers operate a single, vendor-specific cloud, putting all of their customers’ data at risk under the umbrella of that vendor. In this next generation of SaaS, technology companies operate their own cloud and also enable other service providers to deliver that SaaS service on their clouds, either private or public.

Impact to the Financial Services Industry

One note of caution: Operational volatility — especially in trading — is likely to increase for the near future. Investors and their assets will undergo a flight to quality — we’ve already seen that. Minding the shop will remain as important as ever, to make sure that key systems continue to operate without fail. And understanding risk will be a key to institutions’ ability to navigate the crisis successfully.

Until now, most global banks have done business in the EU by setting up regulated businesses in the UK and using their right to “passport” into the rest of the European Union. Now, thousands of jobs may be moved out of London because these banks will no longer be able to run their European businesses from the UK — nor would it make political sense. Dublin, Frankfurt and Luxembourg seem like the most likely places for banks to shift operations, but moving infrastructure and people is expensive and time-consuming.

U.S. banks operating in the UK may also have to deal with new sets of financial regulations — a process that will take time and create more uncertainty. However, there is ample time to set up contingency plans to influence the changing legal and regulatory requirements.

imgresWhat Should Businesses Do?

Nothing can predict what the coming months will hold, but any kind of lasting economic upset is looming, it will happen slowly — hopefully giving sufficient time for businesses to make the right course corrections. Here’s a bulleted list to get your comprehensive plan together:

  • Determine how your employees are taking this news. Reassure them that it will be business as usual until more is known. But also be thinking about how you can offer additional information, guidance and training.
  • Figure out how to best communicate with customers, partners and investors. Come up with answers for questions like, “For customers in the UK and Europe, how will this change their buying behavior? For customers that pay us in depreciating currencies, should we alter payment options?”
  • Calculate what your optimal cash buffer would be in the event that Brexit leads to a liquidity crisis.
  • Evaluate your own company as well as competitors in your industry so you recognize the advantages and disadvantages that all industry players will face as the economic and regulatory situations changes.
  • Assess the impact on your ability to maintain your workforce. Will there be any implications for EU nationals working for your organization in the UK, or for UK citizens working elsewhere in the world? You must understand how this will affect workforce mobility across our organization.
  • As the UK and the European Union work through Article 50 negotiations, monitor how to adapt to changes related to corporate taxes, HR laws and international data management laws.

Most importantly, avoid overreacting and distracting yourself from your current business objectives.

-Frank Fanzilli