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The Brexit Column: What banks can teach us

The Brexit Column: What banks can teach us

Banks have got on and are facing the Brexit challenge head on. Richard Bernau argues other sectors could learn something from their approach.

Richard Bernau

Director, Deal Advisory and Market Intelligence Team

KPMG in the UK


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The Brexit Column: What banks can teach us - chalk board

Sometimes it’s good to recognise you’re in a spot of bother. If you can’t, the problem might be what psychologists call ‘normalcy bias’: the idea that people underestimate the chances of a radically altered reality because they are hardwired to believe things will carry on as normal. Unable to compute what is happening, they wait in vain – possibly fatally – in hope that all is well. 

Bank executives might exhibit several psychological effects from Brexit, but normalcy bias is not one of them. Every bank executive I’ve spoken to is 100% clear about the fundamental impact Brexit could have on their services and most are throwing the kitchen sink at resolving the issue. Loss of passporting and the time needed to establish operations elsewhere are obvious reasons for their prompt and active response, but there are other reasons too – lessons that other sectors can learn from.

Despite their systemic importance to the economy and the fact that tax generated from financial services is equivalent to all government spending on defence and transport, banks understand they are not the most loved of institutions. They will never enjoy enthusiastic public support. The conclusion banks have reached, is that they need to find their own post-Brexit solutions without clinging to the status quo and without relying on anyone else to fix it for them.

Banks have mobilised cross-functional teams, they have broken down the challenge into manageable chunks – business model, legal structure, permissions, regulation, client impact, operations, outsourcing, data protection, human resources and tax – and they are assessing the impact in granular detail. 

I can’t stress enough the importance of this kind of grounded approach. A UK-based bank might decide it can simply convert its European branch into a subsidiary to preserve access to its EU27 clients. Easy, right? But if they view that decision from a combined capital, operations, data and tax perspective, a profitable unit might suddenly look like a less attractive option at group level. 

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Time to get radical

The lesson here is twofold. First, don’t work in silos: your tax team, HR, regulation experts, lawyers and so on all need to know what the others are doing to build up a holistic picture. Second, think radically. Yes, you might be able to find a way to mitigate the effect of new border controls, tariffs or regulations. But from a profitability perspective, might it make more sense to retrench from Europe, or to Europe?

Who can learn most from the banks? The obvious candidates are industries such as airlines or nuclear power producers, since they are regulated at a pan-European level, like banking. Just as failure to agree a deal or transition by March 2019 would mean a hard stop for some banking operations, it could also mean flights are grounded to and from the UK, or that our nuclear power plants stand idle without an effective replacement to Euratom, the EU’s nuclear regulator. For these industries, the cliff edge is particularly high and the rocks below, especially jagged. 

The parallels between banking and other industries – and the lessons banking can teach others – only stretch so far however. 

For a start, banking has been through the regulatory fires like no other industry for a decade. From Basel III and IV, through MiFID I and II to ring-fencing and now the EU’s General Data Protection Regulation (which one senior banking executive told me it was “bigger than Brexit”), banks are battle-hardened and have more tools and experience to draw on. 

Their other advantage is having such a strong regulatory regime. As a firm, we have just finished an intensive couple of months work with several banks and insurers to help them respond to the regulator’s request to see every firms’ Brexit contingency plans. This has focused the mind. For sectors without this level of scrutiny, self-discipline and self-imposed staging posts and deadlines are the best alternative. 

None of these Brexit strategies will work if there is not pressure coming down on an organisation from the very top however. Leaders have to start thinking the unthinkable and accept that just because it’s scary, that doesn’t mean it can’t happen.

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.

© 2020 KPMG LLP, a UK limited liability partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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