No-deal Brexit: how prepared are the EU and UK?

UK prime minister Boris Johnson has ordered ministers and officials in his new government to “turbo-charge” preparations for a no-deal Brexit, unnerving currency markets and businesses — and leaving EU leaders wondering if he is bluffing.

The new prime minister’s pledge to leave the EU with or without a deal on October 31 means both sides stand perilously close to a cliff edge, peering down at the prospect of medicine shortages, flight disruptions and endless border queues.

To underline the UK’S shift in tone, chancellor Sajid Javid will this week announce a further £1bn for no-deal planning — on top of the £4.2bn set aside for all Brexit funding by the government so far.

The European Commission insists it will not be doing any more contingency planning to deal with the fallout before October 31, a move designed to avoid giving Brexiters a “soft” hard landing.

Should the UK crash out in three months’ time, EU officials calculate a chaotic exit would bring UK negotiators back to Brussels from November 1 to try to secure some continuity for businesses.

Here the Financial Times considers where the biggest impact from a no-deal Brexit could be felt.

Data flows

Vast volumes of personal digital data from EU and UK citizens are transferred by businesses and public sector bodies across the English Channel every day.

Under a no-deal exit, the legality of these data flows will be under question, having an impact on businesses including tech groups, healthcare companies or any services that deal with EU customers.

The disruption to data flows would be a significant barrier to trade and, in the worst cases, could force British companies to halt their European operations.

A system of contractual clauses offered by Brussels, allowing nonEU companies to carry out data transfers in compliance with European law, could offer a fallback.

Large businesses with big legal departments that have anticipated a crash exit may well have already signed up to such alternative measures. But the CBI, the UK employers’ group, has warned that small and medium-sized enterprises have little awareness of what a hard Brexit means for them and the contingencies available.

In the longer term, the UK says it wants to sign an agreement on data flows with the EU that would effectively treat Britain as if it were still a member state. There are a handful of these “adequacy” arrangements between the EU and third countries, but Brussels officials have warned it could take “years” for it to be concluded.

VERDICT: Both the UK and the EU face equal damage

Financial services

After a no-deal Brexit, the UK’S lucrative financial services sector would lose “passporting” rights that allow British-based companies to operate in the EU’S single market.

The prospect of mass disruption of the market after a hard Brexit means financial services is one of the few areas where regulators such as the European Central Bank and Bank of England have been co-operating on risk before Britain’s expected exit.

While companies have been left with most of the burden of preparing for no deal, Brussels has taken important contingency steps.

These include temporary access to clearing houses operating in the UK that will end in March 2020, 18 months for central securities depositories that settle trades and a six-month window to allow contractual changes to over-thecounter derivatives.

Financial services groups also face thornier logistical issues on exit day itself. October 31 falls on a Thursday, which means UK companies would face the difficult logistical exercise of switching the systems they use to report transactions midweek — although many EU countries enjoy a public holiday on November 1.

In the longer term, with or without a divorce deal, the City of London will be striving to gain limited market access rights under an EU system known as “equivalence” after Brexit. This is granted to non-eu companies if the European Commission decides that the country’s financial regulations are just as tough as those of Brussels.

But even if agreed, the financial sector will not enjoy the depth of market access it enjoyed while the UK was a member state — and equivalence can be withdrawn by the commission at short notice.

VERDICT: A key part of the UK economy faces significant disruption

Customs

Britain would fall out of the EU’S customs union under a nodeal Brexit, meaning UK companies would have to fill in customs declarations, change labels on food products and get health checks for exports containing animal products.

A UK communications campaign has been launched to inform companies about what they need to do to prepare.

But British businesses have criticised the government over a lack of information on how to prepare for the cliff edge, for example on issues such as dealing with new tariff changes or how customs checks would function on the Irish border. There is currently an invisible frontier between north and south, but a no-deal exit would be likely to mean border infrastructure returning to the island.

Sam Lowe, senior research fellow at the Centre for European Reform, said companies had failed to prepare because they did not believe a crash exit was realistic.

“So far the whole strategy required companies to sign up to things and engage, but they haven’t been doing it enough,” he added.