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31 January: End of an era – the beginning of a new cross border financial treaty

The day of the UK’s departure from the EU might seem like the end of a long process, but it is now that crucial negotiations on the UK’s future economic relationship with the EU will begin.

Until December 2020, when its transition period will come to an end, the UK will remain a member of the EU customs union and the single market, and the cross-border provision of financial services with the EU will be guaranteed. Meaning that until the end of this year, the UK/Europe split will have no direct regulatory impact.

It’s easy to get caught up in all the twists and turns in the Brexit drama being played out on the political scene to date. However, Quinn Perrott, co-CEO of regulatory technology firm Traction, urges us to think about the opportunities following the transition period.

“With the ink barely dry on the Withdrawal Agreement, the chest beating rhetoric has already started in earnest,” said Perrott. 

“From Mr Varadkar’s demands that the UK “follows existing rules” in order to access EU markets, to UK chancellor Sajid Javid calling for a “bold and innovative” approach to post-Brexit regulatory oversight of markets, both sides are unsurprisingly unwilling to sing from the same hymn sheet at this stage in the trade talks,” he added.

Despite heated political sentiment and the polarised nature of the debate so far, once the UK has finally departed, both camps will need to focus on practicalities. From then on, the “key issue from an investment and economic perspective will be to understand how the thorny topic of the “future relationship” will be resolved,” in the words of UK Equities head Richard Buxton at Merian Global Investors.

“The Chancellor’s recent announcement at Davos that the government’s “first priority is getting an agreement with the EU” would seem to lend credibility to this argument. How the details and results of the negotiations will emerge may ultimately have more to do with how ministers perceive that the debate will play out in public opinion than anything else,” said Buxton.

Aarti Sakhuja, an S&P Global Ratings credit analyst, calls the past three-and-a-half years “the easy part”. “The focus now shifts to trade talks, which the UK government is keen to conclude before the end of the year,” she said.

“Westminster wants growth and it aims to be able to diverge from EU standards so that it is free to negotiate trade pacts with other countries and trading blocs,” continued Sakhuja.

Pan-European group Alpha is a private equity investor in the mid-market segment and invests throughout Italy, France, Germany and Benelux. As such, the firm doesn’t expect a regulatory impact to its business as such. But according to Milan-based Valentina Pippolo, partner and head of Italy at Alpha, where there is uncertainty there’s both opportunity and risk ahead.

“Brexit may present an opportunity for some of our portfolio companies to further expand or consolidate their markets as UK firms wrestle with the uncertainty that lies ahead, she said, and added: “On the other hand there is the risk that our portfolio companies may be faced with challenges presented by the potential new trade arrangements that could impact access to the market or their attractiveness.”

Pippolo, who was involved in the execution of deals such as the Remazel acquisition in 2014, Calligaris in 2018 and Laminam last year, invests mainly in the construction and building materials, distribution B2B, retail, oil and gas, industrial goods, business services and consumer goods sectors.

“At a macro-European level, it is difficult to say what the impact will be during the transition period and with the trade negotiations ahead but certainly the industry is paying very close attention,” she said. 

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