Mercer | Brexit and Financial Services

UK EU Referendum

Brexit and Financial Services: The Need to Plan Ahead

Britain’s decision to leave the EU will have a major impact on the global financial services industry, and not just organisations based in the UK.

Two areas of strategic importance for the FS industry from a people perspective are: workforce implications and the impact of retirement liabilities.

Firstly, workforce repercussions will continue to emerge as political fall-out from the vote becomes clear. However, there are some fundamental issues around workforce location that require significant planning regardless of what happens next. Fortunately, most, if not all, regulated participants in the banking and asset management industry will already have robust contingency plans in place to face up to disasters and market disruption.

In the face of tight regulation around operational risk, many will also have thought through the implications of “Brexit” in terms of evaluating alternative locations for their UK operations; some will opt to stay, some will opt to move elsewhere, but all market participants will be impacted in some way by the decision.

Skilled labour from EU countries makes up a large percentage of the workforce in the UK financial services sector, particularly in London. It is likely that restrictions will be placed on EU workers within the UK workforce so companies should review their workforce plans. In an era of rapidly evolving business models in banking and asset management, primarily the disruption coming from digital challengers and fintech, it is not just traditional FS expertise such lending, portfolio management and compliance that are hard to find, but new skills such as ecommerce, innovation and big data analytics that are scarce. Less freedom of labour movement makes it all the more critical for talent managers to access smart tools such as workforce analytics and long-term strategic workforce planning to future-proof the organisation.

Attraction and retention strategies should also be reviewed as the fundamental employee value proposition may have changed. The UK banking sector is also likely to seek changes in banking regulation, particularly as it affects pay. We may see an end to the bonus caps and other EU-sponsored controls although the Financial Conduct Authority and Prudential Regulation Authority will want to ensure that the direction and spirit of the Financial Stability Board’s requirements continue to be fully met in the UK.

Relocating staff to new locations or creating entirely new centres of operations and trading outside the UK may be a complicated undertaking for those organisations that decide to move some or all of their business. While dramatic exchange rate movements may make some locations more or less attractive in the short term, few organisations will be basing investment decisions on volatile market and asset prices. Relocation decisions are more likely to be based on external labour market fundamentals, which requires in-depth analysis of key drivers such as local labour costs, current and future skills availability, comparative costs of living and employment legislation. Companies should, for example, be considering the impact of an end to reciprocity on state healthcare costs for foreign nationals across member states.

Robust internal and external data and insight is critical to inform the right decision.

As well as undertaking external labour market analyses, human resource functions should be working closely with other support functions such as finance, legal and compliance to create task forces that can understand the big picture and partner with consultants, such as Mercer, who can provide valuable expertise and knowledge not available within the organisation.

The second major people impact we see for financial services relates to the provision of retirement benefits for employees. As large employers in the UK, FS organisations are responsible in some way for a significant portion of the country’s pension schemes.

The funding status of traditional final-salary schemes, or defined benefit plans, feeds through directly to the balance sheet of plan sponsors in terms of a potential liability. In financial services, regulated firms are also required to set aside capital to mitigate the balance sheet risk of such liabilities. As capital adequacy rules in particular for the banks have progressively tightened under increasingly burdensome regulation, the risk-adjusted cost and the impact on the balance sheet of maintaining and managing defined benefit schemes has spiralled.

Market volatility and uncertainty in the wake of the Brexit vote will also have a major impact on the value of scheme assets set aside to meet future pension liabilities and consequently create greater variability in capital costs. FS organisations may, therefore, need to accelerate plans to review and mitigate defined benefit pension liabilities and deal with asset volatility. It has never been more important for plan sponsors to work in partnership with scheme trustees to arrive at sensible outcomes.

And it doesn’t stop there. Defined contribution pension schemes, in which the employee not the employer bears the risk of meeting future pension needs, will also be impacted by market uncertainty as the underlying investments in these schemes fluctuate in value. Employers need to pay close attention to the impact on the financial wellness of the employees who are depending on defined contribution schemes to fund their retirement. This may require a fundamental review of the overall employee benefit package and should certainly entail an appraisal of the intrinsic value that employees perceive from their “total reward”, for example through the use of employee surveys. For financial services, this is all the more poignant, given the tight regulatory regime imposed on the cash element of total reward in terms of fixed and variable pay.

Finally, we believe communication on the part of the employer is critical to address the many concerns that employees may have about Brexit. A communication strategy that is aligned to the overall business goals and objectives requires expert understanding of the issues involved.

Financial services organisations should be making full use of the many internal and external resources available. Mercer is a leading consultant in advising financial services companies to manage their people issues. Our experts are ready to advise on any of the issues outlined in this note.

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