A guide to the people impacts of Brexit€¦ · The EEA Option The UK exits the EU but becomes a...

A guide to the peopleimpacts of Brexit

Baringa’s Brexit capabilityBrexit will drive fundamental transformation at everylevel of the operating model for financial services firms.Governance, legal structures, technology, operationalactivities and people will all be significantly impacted bythe change.

p Baringa’s Financial Services team specialises in helping firmsunderstand and respond to all these dimensions of change, advisingand supporting our clients as they navigate the most complex, strategictransformation of their businesses. We are unique in our ability to bringtogether these skills within a single team, combining capabilities tobring the very best advisory and delivery services to our clients

p Our credentials span banking, insurance, asset management, capitalmarkets, and commodities sectors. We have advised on, and supportedboth specific Brexit responses and all aspects of strategictransformation, and are trusted advisors to our clients, supporting theirmost critical change.

For more information please contact:

A guide to the people impacts of Brexit

Alex WoodheadPartner and Brexit Lead, Financial [email protected] +44 7818 458 999

Mel NewtonPartner and Head of People Transformation [email protected] +44 7813 441 455


IntroductionBrexit presents a myriad of challenges to the UK financial services industry. It is imperative that firms do not allow immediate legal and regulatory complexities to overshadow other Brexit considerations.

Brexit and the anticipated associated loss ofpassporting (the ability to freely conductcross-border business), could lead to theerection of implicit trade barriers for financialfirms trading into the European EconomicArea (EEA). The FCA identified that over fivethousand non-EEA institutions currentlyreside in London and utilise one of the EU’s“passports”.

Consequently, firms must now consider howto restructure their businesses in order toensure continued market access. This couldmean setting up or relocating hubs to alocation within the EEA, which will demandan increase in EEA-based operations andpersonnel. These changes will require legal,regulatory, process, operational and physicalchanges. They will also mean the movementof tens of thousands of jobs.

Currently, regulatory and legal restructuringplans are front of mind, and most firms haveset out their response to a “clean break”scenario. Despite many institutions alreadyannouncing their plans for relocation, fewhave considered the wide range of ‘people’impacts this entails, and the capabilitiesrequired to effectively manage thesechanges.

This guide considers these impacts acrossthe three primary potential outcomes:

Based on Baringa’s extensive experience inhelping clients with Brexit planning and theseparation and transformation of theiroperating models, and incorporating furtherinsights from our People and ProcessExcellence capability, we have developed acomprehensive guide to the key peopleimpacts of Brexit on the industry.

This can only ever be a guide, however. Thechallenge will always be specific, and unique.Existing business models and strategies willdetermine the extent to which these issueswill impact a particular firm, and indeedwhether they can at the same time provide acatalyst for reinvention. Whatever yourparticular situation, however, we stronglyrecommend considering these peopledimensions as part of your overall Brexitresponse.

The EEA Option

The UK exits the EU but becomes a memberof the EEA and of the European Free TradeAssociation (EFTA), remaining a member ofthe single market. It maintains passportingrights and free movement of labour but hasthe ability to negotiate trade deals with therest of the world .Clean Break

The UK gives up full access to the SingleMarket and falls back on World TradeOrganisation (WTO) rules. It loses passportingrights and free movement of labour but hasthe ability to negotiate trade deals with therest of the world

The Enhanced Third Country Option

The Enhanced Third Country option: The UKnegotiates a bespoke deal maintaining EUregulation and elements of the passportthrough third country ‘equivalence’ regimes,ends free movement of labour but has theability to negotiate trade deals with the restof the world.

Firms must now considerhow to restructure theirbusinesses in order toensure continued marketaccess.

Key people considerationsPeople challenges will be structural, cultural and operational


p Consideration of where EU-facing rolesand associated support functions will belocated

p Consideration of impacts of movinglocation to governance structures anddecision making processes

p Impact of local regulations on governancerequirements.

p Relocation supportp Local recruitmentp Local compensation and benefitsp Redundancy p Distributed management, management

information (MI) and reportingrequirements.

p Employee engagementp Impact of local, versus organisation-wide culturep Opportunity to create new culturep Adjustment of reinforcing mechanisms to maintain desired culture: leadership, policy and

process, environment, roles and competency, incentives and accountabilities.

p People with the right skills, capability andknowledge in the right location

p Increased competition for specific skills innew locations

p Local brand for recruitmentp Retention and attritionp Individual career paths and Employee

Value Proposition (EVP).

p Employee mobility supportp Local employment lawp Local / global working practicesp Distribution and management across

regions.

Brexit

Orga

nisational

Cost

De

sign an

d Talent

Workforce

Gove

rnance

Culture


Example financial services firm typesThis analysis considers five “typical” firms, and the impact of different Brexit scenarios for Group, UK and European stakeholders

Firm type

Non-EEAheadquarteredinternational bank

UK-headquarteredinternational bank

UK domestic bank

EEA-headquarteredinternational bank

UK assetmanagement firm

Structure

p London subsidiary allows forpassporting of services into theEU

p Small corporate presence in therest of EU, likely in the form ofbranches.

p UK (most likely based in London)subsidiary

p Further global branches andsubsidiaries to serveinternational markets.

p UK only, no EU or internationalbranches or subsidiaries.

p EEA subsidiary, likely to have aUK subsidiary alongside this

p Branch network acrossinternational locations.

p London office only.

Client locations

Global

Global

PredominantlyUK with someEU clients

Global

Global clients

Workforce nationality

p Predominately nationalhires in the respective HQcountries

p A split in the London officebetween UK/EEA nationalsand nationals from HQcountry.

p Predominantly UK/EEAnationals in London withlocal hires in theinternational locations.

p Predominately UKnationals but likely tohave international / EUhires too.

p EEA nationals, with highpercentage of nationals ineach respective country.

p EEA nationals,predominately from theUK.

Headquarters (HQ)

US, APAC etc.

London

UK, not necessarilyLondon

EEA

London

Impact key

Limited

Moderate

Considerable

Fundamental

Branch

A branch is an office or presence of anoverseas parent company; it does notconstitute a separate legal entity from its‘parent company’. The overseas companyhas complete ownership and control ofthe branch.

Subsidiary

A subsidiary company is a company thatis owned/part owned by anothercompany. The subsidiary is incorporatedin the host country, requires its owncapital base and must operate under thehost country’s regulations.

Firm type 1: Non-EEA headquartered international bank


Option

EEA and EFTAmember

Clean break

Third way

Capabilities, Organisational Design and Governance

p Little change incapabilities andorganisational structure

p Some governancestructures may move toEuropean hub.

p Core capabilities,European leadership rolesand governancestructures are required tomove to a new hub withinthe EEA.

p There will likely be a needto split out and moveEuropean-facing roles toan EEA centre; newgovernance structureswill be required.

Talent

p Limited impact ontalent.

p Organisations mustassess theirdependencies on EUstaff, given potentialmigration issues

p While new structuresare being established, amobility programmeshould be initiated

p Strategically, there is arequirement to recruitsignificant numbersinto a European hub.

p Talent mobility will becritical in the shortterm while sub-teamsare being set-up

p The business will needto find and recruit intonew European sub-teams.

Workforce

p Given the internationalnature of the currentoperations, HR are likelyto be well set up to dealwith global mobility.

p There will be a need toaddress and acceptincreased scope ofemployment law in newterritories; therequirements may bedifferent to HQenvironment.

p Similar to the ‘CleanBreak’ scenario, ascertain operationsmove to a Europeancentre, increased scopeof employment law andrequirements must beconsidered.

Impact

Limited

Fundamental

Considerable

Culture

p Culture will continue tobe driven from HQ withlocal culture intact.

p As European presencebecomes moredominant, there will bea greater influence ofEuropean culture and aneed to cater for thiswithin the business

p Local language willbecome critical for thenew operations,although Englishremains the businesslanguage.

p Culture will initiallycontinue to be drivenfrom HQ but theEuropean presencemay become moredominant over time.

Cost

p Limited costimplications.

p Significant costimplications withregards to the set up orexpansion of aEuropean hub.

p Investment inrelocating currentemployees,supplemented by localrecruitment andtraining required –demand, andassociated cost, fortalent may increasedue to competition.

p Cost implicationsassociated with the setup of European sub-teams or the relocationof current employees.


p While the UK is just one of a number ofregions in which the business operates, alarge percentage of global revenue is likelyto be generated from the UK subsidiaryand its access to the EU

p There is a need to consider changes in EUoperations in line with global strategy andprioritise markets and investmentsaccordingly.

p The UK head needs to consider that asignificant portion of EU-facing business,and the associated support staff, may needto move out of the UK to a European hub.

p The European Head is likely to have a largerrole due to the creation of a Europeanregional HQ of a significant size

p Likely to be heavily supported / led byleadership team from global lead geography.

p There is an opportunity to buildsomething new and haverenewed focus on opportunitiesacross the EU markets.

p n/a

p Increased profile and power baseof European hub

p Significant opportunity to buildsomething new.

p There is a risk around maintaining thesame level of service in the new Europeanhub and the associated reputationalimpacts of this

p Cost implications need to be considered,both in the set up of new operations butalso where there is a fragmentation of thebusiness and an associated loss ofefficiencies.

p Potential downsizing of the UK operationacross people, systems and facilitiesdepending on the percentage of EU-facingbusiness generated through the UK.

p Ability to recruit requisite talent in local market, giventhe increased competition for financial services talent,as more financial institutions relocate

p Need to create a working relationship and governancestructure with global HQ

p Greater scrutiny on local operations from regulators /executive team / shareholders, therefore, increasedtransparency of decision making is needed; goodevidence of this through MI will be required.

UK Head / COO

European Head / COO

+Point of view Positives Challenges

++

Global Head

++ +

Firm type 2: UK-based international bank


Option

EEA and EFTAmember

Clean break

Third way


p Little change incapabilities and structure

p Some governancestructures may move toEuropean hub.

p A number of corebusiness lines andassociated supportfunctions will need tomove to a newhub/bolstered existinghub within the EEA

p Some key governancestructures will need to beextended.

p There will likely be a needto split EU-facingbusiness lines andaddress governancestructures to cater forthis.

Talent


p There will be a need toeither recruit or moveEU-facing roles– thecompetition for talentacquisition is likely tobe strong, especially inpopular locations.

p Talent mobility will becritical in the shortterm while sub-teamsare being set-up

p There will be a need toidentify which talent isrequired in the EU-facing team or whetherfurther talent isrecruited.

Workforce


p There will be a need forincreased localworkforce management(HR) capability in theEuropean hub

p Where staff do not wishto relocate, the UK EU-facing roles faceredundancies.

p Need for increased localworkforce managementcapability in Europeanhub.

Impact

Limited

Considerable

Considerable

Culture

p Culture will continue tobe driven from UKbase.

p The new European hubwill exert greaterinfluence over the firmculture and there willbe a need to cater forthis within HQ

p Local language willbecome critical for thenew operations,although businesslanguage remainsEnglish.

p Impact on the culturewill depend on level offragmentation ofteams; however, it willstill likely be driven outof HQ.

Cost


p Cost implicationsassociated with the setup/expansion of EEAoperations, includingincreased facilities andoffice space – subjectto increasingcompetition and costs.

p Cost implicationsassociated with the setup of European hubteams to workalongside UK teams.


p Brexit will reduce the significance of the UKoperations within the global strategy as EUactivity is split out, and there is a parallelreduction in non-EU client activity previouslydriven through passporting via the UK


p The UK Head will need to consider theimplications of a small but significantelement of the organisation moving toEuropean hub.

p This may have an effect on the degree ofinfluence the UK Head has on key strategicdecisions depending on the degree to whichkey financial services markets move to theEU.

p The European Head will have a significantincrease in local team size and authorityover certain products and services

p Increased influence over global strategicdecisions.

p n/a

p n/a

p Opportunity to create a moresignificant centre of excellence.

p Cost implications, both in the set up of newoperations, but also where there is a fragmentation ofthe business and an associated loss of efficiencies.

p The firm might have to initiate a redundancyprogramme where staff currently in EU-facing rolesdo not wish to relocate

p There is a risk that the UK market becomes lessimportant as focus shifts to the EU market.

p Ability to recruit requisite talent in local market, giventhe increased competition for financial services talentas more financial institutions relocate

p Need to create a working relationship and governancestructure with global HQ

p Greater regulatory scrutiny on local operations asimportance of operations increases; the business willneed to ensure it generates MI to evidence compliancewith local legislation and that its governancestructures are reinforcing this.

UK Head / COO

European Head / COO


++

Global Head

++ +

Firm type 3: UK domestic bank


Option

EEA and EFTAmember

Clean break

Third way


p Little change incapabilities and structure.

p May create smallcapability in Europeanhub to be able to dealwith certain productsgoverned by EUpassports / regulations

p Formal governancestructures unlikely to beneeded but challengesmay arise throughmanaging remoteworkforce.

p Limited extra capabilitiesrequired to deal with EU-facing business; littleneed for formalgovernance structures.

Talent


p Challenging to recruitlocal skills with limitedorganisation profile

p May have to offerdifferentiated packagesand provideopportunity to gain UKexperience.

p May be able to resourcesome key roles from UKon rotating basis –talent mobilityprogrammes will beuseful.

Workforce

p Limited impact onworkforce.

p Workforce are likely tobe managed remotelyfrom UK for supportfunctions, e.g. HR,Finance, IT

p Local recruitmentexpertise may need tobe bought in.

p May be managed fromUK with some keymanagerial roles inEuropean hub.

Impact

Limited

Moderate

Limited

Culture

p Limited impact onculture.

p Need to considerworking practices toengage with theEuropean hub teameffectively

p To ensure local workingpractices areappropriatelyscrutinised, strongcontrols / MI andreporting are required.

p Rotating UK employeesmay be able to drivelocal culture in linewith HQ to someextent.

Cost


p May have to pay apremium for localemployees due to lack of brand outside of the UK

p Recruitment andretention will createadditional cost.

p There are limited costimplications associatedwith mobility of keymanagerial staff.


p n/a – UK domestic bank does not have aglobal head

p Little impact to role and sphere of influence,although there may be a need to considerwhether some key revenue streams mayshift to alternative locations and the impactthis will have to the UK strategy.

p The role of European Head may not haveexisted prior to this - opportunity to createsmall operation to deal with certainproducts governed by EU passports /regulations.

p n/a

p Opportunity to work in newmarket environment andpotentially rotate UK key talentto grow experience.

p A chance to build out asubsidiary operation undercontrol of UK parent.

p n/a

p The UK Head will lack direct control and oversight ofthe European function – need to ensure thatappropriate governance structures, controls and MIare in place.

p May be challenging to raise profile with UK-basedparent

p Potentially quite a limited role with little opportunityfor local interpretation.

UK Head / COO

European Head / COO


++

Global Head

++ +

Firm type 4: EEA international bank


Option

EEA and EFTAmember

Clean break

Third way


p Little change in capabilitiesand structure.

p High amount of “churn” asUK-focused operations areformally established whilstEU-facing roles are moved

p Core capabilities, leadershipand governance structuresrequired to be split acrossthe London and the EEAsubsidiaries

p As EU-facing roles move backto European hub, increasedgovernance required aroundlocal activities.

p There will likely be a need tosplit out UK-focused teamand address localgovernance structures tocater for this.

Talent


p May need to split talent across Londonand Europeanoperations

p Local talent inEuropean hub moredifficult to attract

p Potential to lose some key talent to increased localcompetitions.

p Need to identify whichtalent is required in theEU-facing team andwhether UK-based staff will relocate orwhether further talentis required

p Loss of key talent fromUK operation difficult to replace in Europeanhub.

Workforce


p Smaller headcountmove from UK to EEAoperations but can beabsorbed into existingmajor operational unit.

p Manage redundancy inUK operations and/ortransition of key talentto European hub.

Impact

Limited

Considerable

Limited

Culture

p Culture will continueto be driven from HQ.

p Limited culturalimpact as culturecontinues to bedriven out of HQ

p If the firm begins toplace lessimportance on theUK market anddownsizes the UKoperations and staffnumbers, culturemay begin tofragment.

p Culture will continueto be driven from HQ.

Cost


p Cost of fragmentingthe business andprocesses

p Cost of recruitmentand retention to buildincreased breadth ofoperations outside UK– may include anincrease in near-shoreoperations (lowercost, same country).

p Limited costimplications for smallredundancy andhiring programmes

p Limited talentmobility will increasecosts in the shortterm.



p The UK may lose level of importance as aglobal hub or at least its dominance withinEurope.

p The European hub is likely to have a higherdegree of focus, with previously London-based EU facing business lines moving intoit, and a potential increase in staff

p May not require a huge change in operatingmodel if most business was focused outsideof the UK, across the EU.

p n/a

p n/a

p Increases importance ofEuropean hub.

p Benefits of London hub maybe reduced, e.g. access todepth of talent and liquidity

p Cost implications need to be considered, where thereis a fragmentation of the business and an associatedloss of efficiencies.

p Lose cachet of working in global centre of excellencep The UK may need to become more aligned with other

European officesp The UK is likely to lose some headcount which is a

challenge operationally but may also have an effecton the culture within the UK organisation.

p Need to compete more globally to access trade flowspreviously achieved in London

p Potentially see more competition from locally-basedorganisations and non-European HQ’d organisationsmoving to be based within the EEA.

UK Head / COO

European Head / COO


++

Global Head

++ +

Firm type 5: UK asset management firm


Option

EEA and EFTAmember

Clean break

Third way


p Little change incapabilities andstructure.

p Front, middle office andleadership teams arelikely to move to an EEAlocation to establishlicensed managementcompanies within theEEA

p Governance andoversight may bechallenging through thisfragmentation.

p Support and supervisoryteams are likely to needestablishment in an EEAlocation in order toestablish licensedmanagement companies,however leadership andportfolio managementroles may prove moreresilient in the UK.

Talent


p There will be a need toeither recruit or moveEU-facing roles. Thecompetition for talentacquisition is likely tobe strong, especially inpopular locations

p May have to offerdifferentiated packagesand provideopportunity to gain UKexperience.

p Role moves or foreignrecruitment remainslikely

p May be able to resourcesome key roles fromthe UK on rotatingbasis.

Workforce

p Limited impact onworkforce.

p Need for local HRknowledge andcapability fordevelopment andretention of bestresources

p Local recruitmentpractices may berequired.

p May be able to keepmore key managerialroles in the UK, howeverthe duplication ofmiddle office functionsremains likely.

Impact

Limited

Fundamental

Moderate

Culture

p Limited impact onculture.

p Will be difficult toinfluence the Europeanhub culture – may needto accept this as an‘outlier’

p Will need to buildstrong controls / MIand reporting to ensurelocal working practicesare appropriatelyscrutinised.

p Culture will continue tobe driven from HQ.

Cost


p Recruitment andretention will createadditional cost

p Increased MI /reportingrequirements.

p Cost implications willbe dependent on theextent to which thebusiness’s funds aredomiciled in the EU

p It is likely that costswill be driven primarilyfrom the increase inoperational staff in theEU locations.


p As Asset Managers become restricted in how much activityis allowed to be outsourced to a delegate, there will be aneed to fragment front office personnel, or potentially,drive the activity for EU marketed funds to the EEA entirely

p The Global Head will need to reevaluate the strategicdirection of the firm to determine whether the UK willcontinue to be a key base

p Other regions, such as APAC, where mutual fundrecognition is being established may look increasinglyattractive.

p Loss of passports may lead to some funds to move fromthe UK to a country in the EEA

p In order to continue to distribute to EU investors, some ofthe UK operations will likely have to move to an EEAlocation; portfolio management could then be delegatedback to the UK, providing certain regulatory conditionsare satisfied.

p Opportunity for a larger European operation – may attractanglophiles or individuals with specialist interests.

p n/a

p Opportunity to work in newmarket environment andpotentially rotate UK keytalent to grow experienceand expertise.

p Independence to someextent from the UK-basedparent

p An increase in importance ofthe European entity if theactivity for EU-marketedfunds are driven to the EEA.

p There will be a fragmentation of talentacross the EEA and potentially a loss of keystaff where relocation is demanded

p Specialist skills in Luxembourg and Irelandfor fund domicile may no longer be able tobe paired with deep portfolio managementexpertise in London. This could result ininefficiencies where duplicate governancestructures and support functions arerequired across these locations.

p If a specialist function is set up to continueto service EU clients, this may need to belead remotely from the UK which couldcause oversight issues and managementchallenges.

p May be challenging to raise profile withnon-globally recognised, UK-based parent.

UK Head / COO

European Head / COO


++

Global Head

++ +

This document: (a) is proprietary to Baringa Partners LLP (“Baringa”) and should not be re-used for commercial purposes without Baringa's consent; (b) shall not form part of any contract nor constitute an offer capable of acceptance oran acceptance; (c) excludes all conditions and warranties whether express or implied by statute, law or otherwise; (d) places no responsibility or liability on Baringa for any inaccuracy, incompleteness or error herein; and (e) the relianceupon its content shall be at user's own risk and responsibility. If any of these terms is invalid or unenforceable, the continuation in full force and effect of the remainder will not be prejudiced. Copyright © Baringa Partners LLP 2017. Allrights reserved.

About Baringa PartnersBaringa Partners is an independent business and technology consultancy.

We help businesses run more effectively, reach new markets and navigateindustry shifts. We use our industry insights, pragmatism and original thoughtto help each client transform their business.

Collaboration runs through everything we do. Collaboration is the essence of ourstrategy and culture. It means the brightest and the best enjoy working here.

Baringa. Brighter Together.

For more information, please contact: Alex Woodhead, Partner and Brexit Lead, Financial Serviceson [email protected] / +44 7818 458 999 or Mel Newton, Partner and Head of PeopleTransformation on [email protected] / +44 7813 441 455

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