The Brexit Vote
A brief analysis of the opportunities and challenges facing the accountancy profession in Malta following the Brexit vote
The dawn of June 24, has rewritten history. The immediate reaction to the results of the UK referendum on whether to stay or quit the EU was one of utter surprise to many of us. The result shocked investors, and stock markets plummeted around the world, with key indexes dropping 10 percent in Germany and about eight percent in Japan and Britain. The pound almost instantaneously dropped to its lowest level since 1985, plunging more than 10 percent from about .50 to as low as .35 on concerns that severing ties with the single market would hurt the UK economy and undermine London’s position as a global financial centre. The Bank of England pledged to take “all necessary steps” to keep Britain stable. Authorities ranging from the International Monetary Fund to the US Federal Reserve and the Bank of England have warned that a British exit will reverberate through a world economy that is only slowly recovering from the global economic crisis. As president of the European Council, Donald Tusk’s reaction soon after the official announcement of the Brexit vote was
“What doesn’t kill you, makes you stronger”.
Perhaps reality is somewhere between the doom and gloom being professed by a number of financial gurus and Donald Tusk’s over optimism. What was made abundantly clear though, was that both the EU and the UK must understand that uncertainty is bad for business, and delays by either party in ‘biting the bullet’ can only disrupt trade, and consumer confidence and rock even further capital markets and other financial institutions within the Eurozone, a situation which must be avoided at all costs.
While many may concede that the market will eventually find its own equilibrium, the million dollar question is when and at what cost? Many contend that Brexit is a wake-up call to the EU. The truth is that the European Union was faced with a number decisions it had to take not only to maintain financial stability during the European debt crisis in late 2009, but it also had to address a number of other important socioeconomic problems that have been gripping Europe over the last few years, namely immigration, terrorism and the degenerating environment. Clearly, some of the decisions then taken by the European Commission, although, in the best interest of a Unified Europe, did not go down well with a number of European citizens, including politicians of a number member states. This has caused division, not only within the establishment itself but even more so, at individual member state level. This is one area where I believe that the EU should focus its attention on: educating the citizen on what the Commission is seeking to achieve.
Undoubtedly, the Brexit vote was a crippling blow to those who believe in a unified Europe, much to the delight of Eurosceptics. While it is a win for democracy, which must be respected, the ripple effect of this change across the globe cannot be underestimated. While attention is being focused on the economic impact of Brexit, the social and cultural impact of the UK’s intention to withdraw, do not seem to have been given enough attention. Education, travel, transport, proper governance and administration, among a number of other social implications, need to be factored in when assessing the full impact of an imminent exit by the UK from Europe.
From a more insular perspective, one needs to be aware of Malta’s long historical ties with Great Britain, which ties have in fact moulded the basis of our society as it exists today. The country’s educational, legal and medical systems, our business knowhow, even our cultures have been significantly influenced by our long relationship with Britain. Even our language is a result of our British influence; we are bilingual and English is a national language, of course, along with that of our native tongue. All these have been instrumental in the evolution of Malta as a country. Moreover, the UK has always been a strong ally to Malta even when it came to Malta’s accession to the EU and has always supported Malta when it voiced its opinion on key issues after it became a member of the EU.
This perhaps explains the present sentiment being shared in Malta, which is one of caution rather than being overjoyed in sharing the spoils, at the UK’s expense, as a result of the Brexit vote by trying to capitalise on the situation. The situation is still very fluid and things can change dramatically when and if the UK invokes its rights under Article 50 to the Lisbon treaty to withdraw.
The UK is still reeling from the Brexit vote, but it is unbelievable how the two forerunners in the UK exit campaign have within two weeks of the referendum, stepped down and irresponsibly moved away from the consequences and uncertainty that this referendum brought with it.
Referenda on important issues like this, although necessary, are dangerous, as votes can be swung by a coalition of the disillusioned and misinformed. In my view, the leave vote in the UK was a protest vote; a protest against immigration, the establishment, politicians in general, and a feeling that the poor were being left behind. With the benefit of hindsight, it is now clear that those voting and leading the leave campaign did not expect to win. Now that the results are out, the leaders do not seem to have a road map to follow, to steer their country into what they themselves believed to be in the country’s interest. Sadly, a political vacuum has now been created in the UK and it would be interesting (if not amusing) to see how this political tangle will unfold, if it weren’t so tragic.
A close colleague of mine who lives in the UK, did not hesitate to remark that the positive side of all this is that suddenly the English seem to be interested in politics. For the first time, after this veto to stay, his daughters wanted to discuss who would be the better leader of the Conservative Party. The younger generation are now asking why anyone could have ever thought that voting leave was sensible.
Clearly, there are a number of lessons to be learned and all this is food for thought for many of us. One must be conscious of the number of opportunities and threats that this change could create. These will, undoubtedly, directly or indirectly, impact the accountancy and audit profession in Malta. In my view, among other things, the more relevant considerations to be borne in mind would be as follows:
A number of other jurisdictions within continental Europe (Frankfurt, Paris, Luxembourg and The Netherlands) have been trying to lure away financial services from London since the Brexit Vote. We have a robust regulatory framework supporting the financial services sector in Malta, which has gained the country respect and admiration (if not envy) from other jurisdictions. Malta has all the competencies to attract and handle banks, lending houses, insurance companies and other regulated entity spin-offs emanating from the Brexit vote. Whether Malta will jump on the bandwagon to tap into these opportunities or whether it will choose to take a more cautious approach has still to be seen. While recognising the opportunities arising from the instability and uncertainty within the British financial sector, one must be innovative and must carefully look at the existing infrastructure to determine whether Malta has the necessary resources to attract those UK financial services entities wanting to move their operations elsewhere. Unless we are convinced that we can handle the added pressures of more work with the same, if not higher professional standards, we should not try to attract any of the spillovers of the UK financial services sector. Clearly, this calls for consultation with all stakeholders concerned.
The gaming industry
The UK, Gibraltar and the Isle of Man boast a thriving gaming industry. They host some of the biggest names in the gaming industry. UK-based gaming companies operating in the EU market risk losing access to the European market and migrating to other jurisdictions within the EU could be one option. Malta could certainly be a favourite and there are a number of reasons for this, including those noted earlier.
Tourism and the hospitality market
Thirty percent of Malta’s total tourism emanates from the British market. The unprecedented drop of the GBP to the Euro will make it more expensive for the British tourist to visit Malta. The cost of accommodation will also rise and their spending money won’t go as far as it did before 23 June 2016. The extent of the loss in the UK market and whether this can be recovered from other markets depends where the pound finally settles. When it comes to flights, this situation is less clear and very much depends on the individual airline and whether the price is in pounds or euros. Airlines EasyJet and Ryanair have argued that flights will become more expensive. But British Airways’ owner IAG says Brexit will not affect business. On the contrary, holidays to the UK are expected to become cheaper.
Purchasing or renting property in Malta, and indeed any other eurozone state, will be more expensive and any UK interest in local property market is likely to drop. On the other hand, Malta could be an interesting proposition to those disillusioned British people, who can afford it, to gain access to Europe by acquiring Maltese passports under Malta’s Individual Investment Programme (IIP). One of the prerequisites of this scheme is for foreigners to acquire real estate in Malta. If this happens, then this uncertainty in the property market is likely be mitigated. Sceptics of this programme argue that it is an open secret that, many of the subscribers to this scheme were non-Europeans wanting to gain access to the UK. With Brexit, these sceptics believe that the IIP is destined to fail.
Attracting specialised UK professionals to Malta
Among the biggest challenges for Britain is to protect the ability of professionals such as investment managers, accountants and lawyers to work in the EU.
This too could be a golden opportunity for the profession in Malta, particularly in the light of the acute shortage in the supply of professional accountants (ACCA, BA, MIA, and ICAEW) in Malta, in spite of the fact that some 150 accountants graduate each year. This shortage of professional accountants has been triggered by the unprecedented demand of accountants following the boom in our financial services sectors and the offshore gaming industry. Many accountants in Malta pride themselves in having a UK qualification, that is, the ACCA qualification. This, along with the fact that Malta’s business law and tax regimes follow the UK model and that business correspondence is done in English, can only entice young budding UK professionals to take up employment in Malta. Trying to attract UK professionals to Malta would be even more plausible should there be a spillover of the UK financial services market to Malta.
This feature is intended to create an awareness of the changes ahead of the profession, in the near future and the challenges and the opportunities that will come our way in the future as a result of the Brexit Vote. These, along with a number of other regulatory changes brought about by the recent transposition of a number of accountancy- and tax-related EU Directives will certainly leave us with no other option but to keep our thinking hats on to steer successfully through the rough seas ahead of us. Once we reach calmer waters, I am sure that there will be interesting opportunities to explore.
There are a number of other lessons to be learned from the Brexit Vote. What is abundantly clear is that we must embrace the change ahead of us all. We must be proactive and take all the steps necessary to re-position ourselves better amid all these changes.
How things will unfold in the coming weeks and months is anyone’s guess. Given that this article was submitted to the publishers within a few weeks of the vote itself (in fact, just before Theresa May took up office as the second ever female Prime Minister of the UK) the thought process behind this article emanates mainly from my own immediate reactions and those of other stakeholders to this infamous UK referendum.