Exiting the European Union Committee
Oral evidence: The progress of the UK’s negotiations on EU withdrawal, HC 372
Wednesday 26 June 2019
Ordered by the House of Commons to be published on 26 June 2019.
Members present: Hilary Benn (Chair); Joanna Cherry; Stephen Crabb; Mr Jonathan Djanogly; Peter Grant; Wera Hobhouse; Andrea Jenkyns; Jeremy Lefroy; Mr Pat McFadden; Craig Mackinlay; Seema Malhotra; Mr Jacob Rees-Mogg; Stephen Timms; Hywel Williams; Sammy Wilson.
Questions 4435 - 4483
Witnesses
I: Claire Walker, Co-Executive Director, British Chambers of Commerce; Martin Manuzi, Regional Director for Europe, ICAEW; Giles Derrington, Associate Director of Policy, techUK; Alan Vallance, CEO, Royal Institute of British Architects.
Witnesses: Claire Walker, Martin Manuzi, Giles Derrington and Alan Vallance.
Q4435 Chair: On behalf of the Committee, can I offer a very warm welcome to our panel of witnesses this morning? They are Giles Derrington, associate director of policy at techUK—welcome back—Claire Walker, co-executive director of the British Chambers of Commerce, Martin Manuzi, regional director for Europe, the Institute of Chartered Accountants for England and Wales, and, last but not least, Alan Vallance, CEO, the Royal Institute of British Architects. You are all very welcome. We have a number of questions, as ever on this Select Committee, to put to you. Some will be directed to individual witnesses specifically. If you could keep your answers as succinct as possible while imparting the information that you think will help the Committee, we would be really grateful. Can I begin by asking each of you in a sentence—and I mean a sentence—to summarise what a no-deal Brexit would mean for the sector that you represent?
Giles Derrington: Thank you very much to the Committee for having us all here today. I hugely appreciate the opportunity to give evidence. From the tech sector’s point of view, we have been very consistent throughout the Brexit process that no deal is the worst outcome of the range of outcomes that are available to us. In terms of its impacts, it would have significant impacts on some of our key issues, for example data flows and our ability to recruit talent, but also a wider perception or reputational damage to the UK as a place for the global tech sector to come and grow and develop. The biggest concern for us is that, if we spend time dealing with a no-deal Brexit impact, the ramifications over the next 10 years, in terms of our failure to catch up with the competitors, could be quite significant in the very long term.
Claire Walker: Thank you for inviting me here today. The British Chamber of Commerce is a network of 53 accredited chambers in an expanding global network. We have the broadest membership base of any of the business organisations. We bring together 75,000 businesses across the UK, which represent about 6 million employees. About 70% of those are in the service sector. BCC has a wide range of views in the membership around the Brexit process, so we have very much focused on getting practical answers for our members around the terms of trade in the future and the business environment as outcomes of the negotiating process. Very clearly, a messy and disorderly Brexit would be a significant change to the operating environments for the service industry, so our focus is on making sure we get as many answers as possible for our businesses.
Q4436 Chair: You are saying a no-deal Brexit would be a significant change.
Claire Walker: It is a significant change in market access.
Q4437 Chair: Is that a significant change for the better, for the worse, or what?
Claire Walker: It is a significant market change for our members. A messy and disorderly Brexit is a concern and something that BCC is concerned about.
Martin Manuzi: Good morning and thank you for the opportunity. For ICAEW, as a public interest membership body, a no-deal Brexit raises very serious and significant concerns. It is damaging and it is disorderly. The reference to an exit on WTO terms, as in what the WTO gives us, really does not answer our concerns and our main issues for accountancy services. I could base all that, and I will with the opportunity later on, in relation to the impact on the economy, UK plc overall, and therefore our members and how they support, secondly in relation to our export of training and accountancy services, and thirdly in relation to the integrity and stability of capital markets and our contribution to that. I am happy to elaborate on those areas later.
Chair: We will explore those in more depth.
Alan Vallance: Good morning. Thank you for the opportunity to appear. The RIBA is also a public member interest body. I should declare I am a fellow of the ICAEW, just for full disclosure purposes. The RIBA is in a similar position, or has a similar view, in that a no-deal Brexit would be probably the worst possible option of a number of different options. The bigger issue in the short term and into the medium term is certainty. Our members are businesses. They need certainty. The issues of clarification around things like professional qualifications, the ability for people to work in different jurisdictions and clarity over tariffs on goods for construction materials are very relevant. We would be more than happy to explore all those issues with the Committee in due course.
Q4438 Chair: Given what you have all said about the impact of a no-deal Brexit, do you think that the people you have been talking to in Government understand what you have just said? Picking some of the words, you said “worst possible outcome”, “damaging”, “disorderly” and so on. Is that message being heard? I do not know if anyone would like to comment. I ask for obvious reasons. There is currently a process going on to decide who the new Prime Minister is and there is much discussion about whether a no-deal Brexit will be pursued as a matter of public policy. Does it worry you that there seems to be a disconnect between the views that you have expressed here today and what those who are seeking to become Prime Minister are arguing for? Is it that the message is not heard about your views, or it is discounted, or what? What is your explanation for what is going on?
Alan Vallance: Over the last three years, my team and I have been engaged very extensively across the whole of Government. We have had over 100 meetings with DExEU, DIT, DCMS, BEIS and MHCLG. My summary of that experience is that there has been a very good engagement across all the Government Departments we have been involved with, and we have explored all the issues in great depth. I am clear that there is a very solid understanding across the Departments and indeed the Ministers and Secretaries of State we have spoken to, but it does feel a bit as if we have to go round and renew that information because of the turnover of individuals in the Departments and across the Ministers as well. There is a constant process of updating people. My own view is the message has been very clearly heard, but the implications of all that are so complex that it is very difficult to see through to the solutions.
Martin Manuzi: I would echo that. We have been very appreciative of the access given to civil servants and Ministers to explain our issues and our case. We have had repeated requests to back things up with further evidence and we have done a lot of that. Then, if you like, the proof of the pudding is what that has resulted in, and of course we have been disappointed in the way in which services was addressed in the White Paper, the Chequers paper. We have expressed our concerns about that and those issues remain.
Claire Walker: I would echo that there has been good engagement. We are on record saying that some of the no-deal preparation was too late and came too late in the process. Most of it was not launched until just before Christmas last year, obviously at that time with the 29 March deadline. We have also been really focused on the questions that remain unanswered. We have published 24 unanswered questions in February last year, and we now have 14 of those still outstanding. We have been working with Government Departments on getting the answers for them. They are all in development and I would not want to say at any point that they are not in development, but have they translated to practical answers for businesses to implement at this stage? No, they have not.
Giles Derrington: I think, broadly speaking, there is a recognition that no deal is certainly problematic. They are hearing that not just from us but directly from our members. Because tech covers quite a lot of different Departments, there is a divergence at times between how ready and prepared we feel Departments are to deal with no-deal Brexit. There is also a recognition that a lot of the things that Government can do have been done. There are an awful lot of things that the UK Government are simply not able to solve. For example, on the issue of data flows, transfer from the EU to the UK is not within the UK Government’s gift and yet will be a significant impact due to a no-deal Brexit.
There are things, however, where the push back of the date for a potential no deal to 31 October has meant that further clarity on various issues is needed. For example, a couple of our members have warned that HMRC has currently not clarified what it wants to do with some of the 2019-20 tax supplementary forms. That is fine in terms of the businesses using those forms, but for our members, who provide the tax accountancy software, they need to know what they are now to get them in place for October. Frankly, they needed to know that probably in January of this year. The longer the delay, the bigger the impact no-deal Brexit will have across different sectors.
Q4439 Chair: Can I follow up one thing you said in your original answer? You talked about the reputational impact on the UK tech sector over the medium to long term. You were not talking just about what will happen at the end of October. Could you say a little bit more about that?
Giles Derrington: Tech, by its nature, is a very international business. A lot of the people who work in tech are very internationally minded. We are seeing the reputational impact, rightly or wrongly—and I am not trying to ascribe judgment—from the UK somehow closing itself off from the rest of the world; that is having an impact on the kind of people who want to come and work within the sector, a sector that is already suffering from skills shortages.
The other side of this is that the short-term hit has long-term impact. For example, we saw that in the first quarter of this year, due to Brexit uncertainty, venture capital investment in the UK fell by about 58% in terms of the deals done.
Q4440 Chair: 58%?
Giles Derrington: 58%. Established firms were getting their funding through, but it was the new firms, the more risky, innovative start-ups, that were not getting deals done in the UK. That means that in 10 or 15 years’ time, those firms that may have started here but may have gone to Holland, France or wherever else to start will be growing. Our ability to act as a global tech hub relies on our ability to have a thriving ecosystem of very large multinationals, strong UK mid-tier successful growing firms and exciting start-ups. All three have to work in tandem. If you lose one, the long-term impacts of that are going to cascade over five or 10 years. In an industry that moves very quickly, it is then very hard to re-catch up, as it were.
Q4441 Mr McFadden: Could I go along the row and ask you to outline, in simple terms for us, the difference for your sectors in trading on single market rules and WTO rules?
Giles Derrington: There are a huge amount of differences. The most stark—I am sure we will come to this later on—is the question of data flows. Within the single market, there is automatic recognition for free flow of personal data between the UK and the rest of the EU. Outside the single market, that is no longer the case. We have to rely on less concrete measures and individual businesses bear the burden for taking those measures in their contracts. There are also a whole load of regulatory questions and other regulatory barriers that become quite complex the longer you have a no-deal Brexit.
Tech regulation around the world is moving very rapidly, both within the EU and in the UK. The Government’s own Online Harms White Paper is a good example of that. The divergence question becomes quite stark, possibly quicker than in some other sectors, because of that pace of change. For example, the new European Parliament has talked about whether they will reopen the ecommerce directive. The ecommerce directive in limitation of liability is a fundamental underpinning piece of legislation for all tech firms around the world. If the UK does not match speed with that, that would have a quite significant impact on the types of business and types of models that our members can deliver and whether they have to effectively create two different versions of the same product. That is obviously not a cost-effective solution.
You also have the wider issues around mobility of workers, which I am sure we will touch on as well. A huge amount of our members utilise not just free movement but actually the mobility of workers to be able to deliver products across the continent.
Claire Walker: It is an immediate change in the way that companies have been operated. It is fair to say it is probably the biggest most of the companies will ever see in their lifetime. To expand on some of Giles’s points, mobility is obviously a key issue for the service industry in a way that for goods it is less of a problem. There are issues around moving staff around. That is particularly important for professional services but also for some of the creative industries, where their mode of operation is moving people around very quickly. Obviously, passporting and being able to operate as a business in that market will change dramatically. There is recognition of qualifications, which I am sure colleagues will touch on.
I also wanted to flag that, while we are specifically talking about the service sector, and that is right and proper that we give it focus, there is a real linkage between the service sector and goods. Very much, some of our companies and our membership would be, for example, manufacturing cranes, but they would also be leasing cranes. There is a real mesh between problems for the service sector and problems for goods, which I know, as a Committee, you have looked at. There is a huge range of issues.
The other thing to flag is that many companies have prepared, but also, as we have previously spoken about, many companies cannot do full Brexit preparations because not all the answers are there. The level of preparation will depend on which part of the service sector they are talking about. Some industries within the service sector, such as the finance industry, are probably relatively prepared, but other industries within that sector are really struggling or unable to prepare.
The last comment I wanted to make was that businesses are making decisions that are probably the right ones for them to protect themselves over this uncertainty, but they may not be the right things for us as an economy as a whole. They will be making decisions to move offices overseas or to look at other ways of working. Those may be the right decisions for their bottom line, but may not necessarily, with this ongoing uncertainty, be the right decision for us as a country.
Martin Manuzi: Let me substantiate the comment I made at the start that the WTO terms do not really answer our key questions. I would point to two areas specifically. Of course, there are others, but I will focus on those. The first one is on professional recognition, which Claire also mentioned. In short, in an exit on WTO terms, we will lose the legal certainty in relation to the professional recognition afforded to ICAEW, its qualification, and the other UK professional qualifications in accounting and I believe in other areas too, or the majority of other areas too. That is massively important to us in relation not only to individual migrant professionals, of which there are not a huge number, but it is massively important for our standing and the attractiveness of our qualification, both in Europe and globally, so it is very important.
Basically, the WTO terms do not have any answers there. In 1998, there were disciplines and accounting regulation that were approved by the WTO. They were never implemented to this day, and anyway they are far more generic than the very specific elements of the EU legislation that basically say, “There is no need to requalify when you move countries to offer the same services”. There is a very focused approach, which says, “What is the gap between country A and country B? We need to cover that”. Once that is covered, through a test, you have access to the same professional rights, so that means statutory audit signing rights and other regulated services. WTO does not give us anything. While I am on the topic, the existing EU trade agreements with other third countries go nowhere near the legal certainty that is under the single market at the moment.
The other area is the regulatory framework. I refer to that in relation to the integrity and stability of our markets, in terms of what that requires in relation to the European auditing profession and how that works together to provide assurance on the corporate reporting by companies that have listings across our regulated markets, on which pensions depend, and all those things. The WTO terms have absolutely no relevance to the questions that arise from the fragmentation of that system when the UK leaves. Those are two examples.
The final point I would make—and we are under no illusion here, so it is good to say it directly—is that of course we would like the European single market for services to be more developed, and there are limitations to it. We want to see that develop, but actually it is the only one of that type anywhere else in the world that gives a basis for market access. We see that as the opportunity to grow further.
Alan Vallance: From our perspective, I would echo many of the comments made by colleagues and add to them. UK architecture is a global powerhouse. It exports something like £500 million of services a year, albeit that about 23% of that at our last count goes to the EU, so actually a lot of it goes outside. The WTO framework for services is a basic platform on which we can build and develop services, but situation is quite a bit more complex. On the topic of, for example, construction materials, the UK is I think the biggest importer and a net importer of construction materials from the EU. When an architect is designing a building in the UK and getting construction materials from overseas, they need certainty around the basis on which tariffs may or may not be charged. Right now, we have members who are planning work that will happen after October who need to factor those sorts of things into their cost and pricing decisions. There are issues now around how that works going forward.
The issue of mutual recognition of professional qualifications is a particularly personal one to me. I qualified as a chartered accountant in the UK. I emigrated and I lived in Australia for 20 years and I had to requalify to become a chartered accountant in Australia, so I have been through the issue of having to become mutually recognised in a different jurisdiction. That layers additional cost and time to become equivalent in a country where the qualifications are pretty equivalent. At the moment, one of the challenges that the architecture profession faces post a departure is that, if you look at the UK, Canada, America, Australia and New Zealand, of those five jurisdictions four of them have a mutual recognition agreement in place between Canada and the US, the US, Australia and New Zealand. Now Canada, off the back of the CETA deal, has a relationship between Canada and the EU. Post departure, depending on the terms of any departure, of those five jurisdictions, UK architects would be the most disadvantaged because they may not be able to practise in any of the other four jurisdictions, but each of the other four can. There are some real practical issues about how they work forward.
My experience of working with architects is they are very creative individuals and they find ways through and make their business successful, but that is not helped by not being clear about the terms of the departure. Again, there is that lead-time uncertainty. The technicalities of those terms of departure are really key.
Q4442 Mr McFadden: Can I stick with you, Mr Vallance, and ask you about this GATT 24 issue. The putative Prime Minister yesterday admitted that we could not do this unilaterally, no doubt setting up the EU for blame for this particular bird not flying. Let us leave that aside for a moment. Can you explain, from the point of view of your sector, how a GATT 24 provision would impact, given that it applies to goods? It looks unlikely, but even if that was in place how would it apply to a service sector like yours, in terms of the consequences that you have just outlined to us?
Alan Vallance: There are direct consequences, in terms of the framework and its impact on services and the provision of services being offered between jurisdictions. That is one part of it. At the moment, it is unclear in terms of the detail of what that might look like. For architects, as I have mentioned before, the issue is much more relevant, in the sense that they are currently designing projects. They design buildings in the UK and overseas and they operate on sometimes very difficult margins. Pricing of those projects is really key. When you have a large degree of variability in your planning and you are pricing decisions as you are putting bids in, one of the issues you face is, “Will I make a profit on this deal or not?” There are some really current, practical, relevant business issues that need to be thought through. It is the transition, the timeline and the lead time; that is the key for us.
Q4443 Mr McFadden: Are there any comments on GATT 24 along the row?
Giles Derrington: I am not an expert on GATT. I should say that to start with. Broadly speaking, my understanding is that GATT requires, as you say, a deal. The withdrawal agreement, as it currently is, or a similar type of agreement mutually agreed between the EU and the United Kingdom would effectively fulfil the provisions of GATT 24.
Q4444 Mr McFadden: But we are told the withdrawal agreement is dead.
Giles Derrington: Any agreement that can be mutually agreed between the two parties allows for that transition, which is effectively a usage of GATT 24. That also then allows you to build in the various provisions we have, as you have seen, in the transition period on services as well, and so it actually provides some much needed stability over the next two years. It allows you that breathing room. Obviously the difference with the talk about utilising GATT 24 is you need to have an agreement of some kind.
We are not, as an industry, broadly speaking, talking about tariffs, which is what it really relates to. Once you do the tariffs you can tack all the other things that, frankly, GATT does not provide a significant amount of rules around on to that agreement, as you sort of see in the withdrawal agreement in terms of the building blocks that are put into that.
Claire Walker: I would agree with Giles. It is clear that the operation needs a deal of some sort in order to unlock that transitioning period. That transitioning period is really important. We know, and I think other colleagues have said, that that time to plan is really critical and unlocks some of the things that have been agreed already if there is a deal. That is a really important thing for businesses to take time to plan. For many of these businesses, depending on the sector, they have already experienced quite big, substantial changes in the way they operate recently.
Q4445 Mr McFadden: The transition period does not apply, because the withdrawal agreement, we are told, is dead. The transition period relates to the withdrawal agreement. This GATT 24 provision is intended, by those who support it, to replace these things, not to sit alongside of them. It is in the event of no deal that they are advocating it, not something that sits alongside the current withdrawal agreement and a transition period, just to clarify that.
Giles Derrington: The point I think we are trying to make is the withdrawal agreement is a version of utilising GATT 24. Not having the withdrawal agreement, or not having any agreement, means you cannot utilise GATT 24, because GATT 24 requires actual agreement.
Q4446 Mr McFadden: Yes, exactly. Can I ask one final question to all of you? It is more general. Given the consequences for your sectors that you have outlined to us in the last 20 minutes or so, what is your view of the normalisation of this no-deal outcome in both the political debate and in the public mind, through phrases like “No deal is better than a bad deal”, “Do or die”, “Come what may” and so on? There is a sense in which the no-deal outcome is becoming the defined Brexit outcome. What is your view of the normalisation of a no-deal Brexit?
Giles Derrington: I obviously do not want to comment on the language that elected parliamentarians use. I do not think that is necessarily our role. I would say a couple of things though. The ability for businesses to talk about the impacts of no deal as individual businesses is quite hard. If you are, as a business, to come and say, “No deal completely destroys my business”, that has an impact on your investors and whether they are going to invest in the next round. If you are a listed company it has an impact on your shareholders. Actually, there are quite a lot of things that mean you have to and rightly should be cautious. You also have a lot of employees who, understandably, you do not want to worry unnecessarily if you can possibly help it. At the moment, the reality is you have to plan for the worst-case scenario.
The other thing is that the discussion around no deal at times seems to suggest that there is an alternative way forward for the United Kingdom. Indeed, I was speaking to a member recently. We have a small amount of members—about 4%—who said in our last survey that they thought no deal would be beneficial for this business. Speaking to one of them, who works in the data centre part of our market, they were saying that, “Post a no-deal Brexit, perhaps we could get rid of things like the emissions trading scheme, which impacts on the costs of my business”.
The reality is that those decisions are still left to elected politicians. I do not want to prejudge, but our sense would be that those kinds of things are not going to fundamentally change. Broadly speaking, the approach of Parliament towards things like climate change is not going to change, and possibly, potentially, for good social policy reasons. There is a tendency with no deal that, because of the frustration about the lack of confidence and clarity, because of the lack of certainty about what comes next, it creates a basket into which people can put their best-case scenario and say, “At least I would have something that I could then go and argue for”. That is fundamentally different from the cold hard realities and the likely practical outcomes over the next five or 10 years.
Claire Walker: We have a broad range of views in terms of our members around the end point of Brexit, but I think we have been very consistent and they have been very consistent that they wish to avoid a messy and disorderly Brexit. While that is still on the table, we need to really focus on, if that was the scenario, whether businesses have all the information they need at the moment, and the answer is no. While it is something that we wish to avoid, and we have been vocal on the fact that we wish to avoid it, we also need to make sure our businesses still have clarity about what the operating conditions and trading conditions would be for them in those circumstances. At the moment, we do not have all this.
Martin Manuzi: I hope to be interpreting your question in terms of normalisation in the right way, but if not please do correct me. I get the sense that where it is leading to is whether there is ample discussion of the actual consequences of this and if we are sufficiently placing enough importance on them. Our major concern overall is the impact to UK plc of a no deal in economic terms. Basically, as our members, nearly 100,000 or so in the UK, as the partners of business who advise those businesses, who work directly within them, we are concerned about their prospects. That is the main focus we have.
When we think about it further, we realise that this tremendous economic instability and uncertainty is actually creating the most testing and challenging financial reporting planning and corporate planning environment that we have had for many years. Whatever the preparations and contingency planning, which we are trying to encourage and support, we think—and I would like to have this on record very clearly—as a profession that it is likely that after 1 November we may well see a flurry of profit warnings from companies finding themselves in completely unprecedented circumstances.
That is clearly for companies who primarily have activities that span across the EU and the UK, cross-border and all those things, but let us not forget the overall impact across the economy to other companies. A thing that we ask ourselves, and it is really impossible to predict in advance, is what the cumulative effect on market confidence of the issuing of such profit warnings will be. A systemic loss of confidence clearly can have macroeconomic impacts. We are not here to do scaremongering or the sky is falling in, but these are the things we are thinking about as companies are addressing what the risks that are key to them are and how they are exercising judgment on their impacts.
We also need to understand that all that can ultimately have an impact on the tax take, which, in turn, has consequences. To go back to your point on normalising a no-deal Brexit, we think it is very important to have some consideration of the practical impacts. Of course, we know the Bank of England stress-testing in banks is done, but what about the wider economy? For us, that is the major concern overall for the impacts on our members overall. It is linked to but a bit separate from those other elements on accountancy services into Europe, but we need to be frank on that.
Q4447 Chair: Was there anything you wanted to add very briefly, Mr Vallance?
Alan Vallance: The RIBA is a registered charity, so I would not make any comments. We act apolitically. It is not so much the normalisation of whatever this thing is. It is the clarification of the terms of the departure so we can plan.
Q4448 Mr Djanogly: On Mr Manuzi’s last point, you gave a very stark and chilling account of what you think might happen, but you were talking in quite general terms, I have to say. I think it might be helpful for the Committee if you could just be a little bit more specific in terms of the specific regulatory difficulties that you think might occur. There are issues with reporting standards, I believe, but I think you need to be a bit more specific as to what your concerns are.
Martin Manuzi: In my last remarks I was referring directly to UK plc and companies of that nature. There are a host of other issues in relation to the structure and functioning of the, if you like, pan-European system for corporate reporting and audit. I am happy to enter into that if that is where your question is leading, but my earlier remarks were not meant to be stark and chilling in any way. It was just to say companies will be needing to look at and they are looking at what their particular risks and concerns are. We have heard from financial services and other major sectors of very deep concerns about what the loss of access in regulated markets to those markets over the Channel could be. It is very possible and probably likely that they will be looking again at what their profit forecasts will be, and they may well be issuing statements.
Q4449 Mr Djanogly: Mr Manuzi, I am not arguing with you. I was just saying that the way you put it, in general terms, it could be said that you were going along the Project Fear approach. You need to be a little bit more specific in terms of the regulatory issues that are going to come up that are going to actually make a difference.
Martin Manuzi: Certainly the intention is not to be in any Project Fear. The majority of our members work directly in business and advising businesses and we know they are looking at their viabilities, their sustainabilities, their risks. We know that and it is very well documented in the press regularly that financial services and other sectors that rely on those passporting issues have major concerns about the impacts. I am just referring to issues that may arise there.
In the regulatory environment overall, effectively the UK is removing itself from a comprehensive system of working together with all other European regulators for audit and audit professions on a whole range of issues, in terms of who is approved for audit, who can own audit firms, how those audit firms are inspected, how they are allowed to support the admission of securities on another regulated market and all that. Without any decisions on Brexit, there is a legal void in relation to how that will function.
The UK authority, the FRC, has been clear about actions it would need to take in relation to enabling the EU securities on UK markets to remain listed, but those actions will require quite a lot of resources. It will require, for the first time, registering the EU auditors directly with it, and that the FRC would undertake the inspections and sanctions of that. It will be needing to have access to working papers and data. There are quite a lot of unanswered questions as to whether that will function. Giles, you were talking about the data issue earlier.
The other aspect of this is how the EU member states, where UK entities have, in particular, debt securities on some EU member state markets, will legislate for that and if we are in a situation where we might have overlapping, duplicating, onerous, non-aligned regulation across those countries. For a European audit profession, we have our troubles, and I would be needing to acknowledge that. How can we work together to support what markets need? That is timely, relevant, accurate financial information on what is going on.
Q4450 Sammy Wilson: Mr Manuzi, could I follow up on one of the points you made there towards the end? You expect that, if we move to a no-deal situation, there could be profit warnings. A lot of companies could be making profit warnings. I have listened carefully to what all of you have said and where you feel the problems lie at present: the uncertainty, future risks, difficulties with not knowing whether qualifications are going to be accepted, regulations, the future pricing policies because of unknowns about tariffs. All of those things are current at present. Those are current considerations that businesses have to make, yet we do not have a plethora of profit warnings at present. Indeed, some of the business surveys indicate that, even with the challenging environment, many firms are thinking that in 12 months’ time they will be in a better position than they are now. If all the things that you are saying are likely to lead to the profit warnings after no deal are present now, why are they not leading to these profit warnings?
Martin Manuzi: Would you like me to address that? We hope this does not come to pass. We have talked all along about the desire to avoid a no-deal Brexit. I was just putting on record that, as a profession that supports businesses, that advises businesses, and particularly those that have a large reliance on access to European markets, in a situation where that access is, over one day, no longer there, it leads us to think that it is likely that those companies will be thinking again about what their prospects are and may need to communicate that to markets. That is what we are saying. That is not a prediction. That is something people need to be aware could be a consequence if there is a no deal that results in a real dislocation in terms of access to markets for those entities that rely on the market access in that way.
Sammy Wilson: I understand that, given the picture you have painted at present and the difficulties you say that is causing businesses, if businesses see those already emerging or already there, surely they—
Chair: Sammy, sorry, could you speak up a little bit? We are having trouble hearing. Also, to our witnesses, the acoustics in this room are awful, basically, so if everyone could speak up that would be of great assistance to one and all.
Q4451 Sammy Wilson: You have talked about all the things that could lead to those profit warnings. Presumably, if firms feel or believe that they are going to have difficulties business-wise because of those issues, they are obliged to give the profit warnings now, not wait until no deal. It is one of the reasons why I think the question is about if this is not simply another piece of speculation about what is going to happen in the event of no deal, but not based on any real evidence. Firms are not already experiencing the difficulties that lead to them having to give profit warnings, and yet you are saying all the difficulties outlined now are simply the problems that are likely to arise as a result of no deal.
Giles Derrington: I have a few points. A lot of our bigger members have done a lot of no-deal planning. I am sure they have a lot of their processes in place correctly. The big question mark outstanding for almost all of our larger members on the no-deal risk register is what happens to other aspects of the economy. For example, if you are in the digital advertising industry, there is the question of what happens to automotive and whether that impacts on them. Therefore, people may not advertise automotive vehicles so much, which has a direct impact on your bottom line and you cannot necessarily know that until the time, but there is a significant risk as they hear what comes from other industries.
On the point about what is happening now, we had a techUK member just two weeks ago resign their membership of techUK on the basis that they were pulling all of their infrastructure and all of their work out of the UK and no longer needed a UK association: “Sorry, we can no longer see you as a viable place to invest”. There are those things happening now. Inevitably, they are at the smaller end than the very large businesses, because tech is still a growing sector. The UK is still a very good place for tech companies, and therefore there will still be tech investment. The question is the scale and level of that tech investment compared to what it would have been. We still expect the centre to grow, but the impacts are significant.
In terms of the other data we are seeing, it is worth saying a lot of the indicators are lagging. Companies are only reporting their 2018 profits now, so there is some time to be taken to understand the full impact on the full sector because of the way reporting requirements work. KPMG’s tech market survey, which is a positive and quite strong piece of work from them, says confidence in the sector is high, but the backlog of work, i.e. the work that has built up with firms on delivering digital services, is now falling at the sharpest rate it has since 2011. It is those kinds of things. Eventually, you eat into that backlog to a significant degree, and then you see the impacts. There is a long tail because the UK has been such a successful pro-growth, pro-business environment. That is having an impact.
The final thing I would say in relation to that is in 2015, if you were putting a tech company anywhere in the world outside of the US, the UK was your obvious choice. Certainly, if you were going anywhere in Europe, you did not bother to look anywhere else. It was the only place to be, so you would establish here. You would invest here. Now what we are seeing is members saying, “For regulatory purposes, we have to speak to other jurisdictions”. That is about, for example, if they are in fintech, where their financial regulator will be, in data flows where their data protection authority will be. “Because we are having to do that, we are now listening to other countries, and they are presenting some quite good offers”. A good indication of that is the French Government. They are making some quite strong pro-tech arguments at the moment and pro-tech policy development. They are seeing that. They are not necessarily not investing in the UK at the moment, but they are splitting the difference and saying, “We would have been 100% in the UK. It is now 50% in the UK, 50% in France”. It is that kind of thing.
Again, we talk about the long-term impact. That impact is, over the long term, quite significant. It is why you see the UK, for example in VC funding overall, is still well in advance of any other European company, almost double what Germany got in 2018, but the amount of VC funding the UK got was down 20% on 2017 and the amount Germany got was up, I think, off the top of my head, in the region of 30%, so the gap is closing. What worries people is that at some point you do end up with that gap closing sufficiently that we are no longer the obvious global hub for tech outside of America.
Q4452 Hywel Williams: Good morning. What sort of proportion of the members you have are not preparing at all for a no-deal scenario? Of the ones that are preparing, what are they prioritising?
Claire Walker: Our figures and our membership surveys are broadly in line with other figures we see from the Bank of England and others. It is about a third that are not doing any kind of preparations. There are a few variants in that. Obviously you would expect large multinational organisations who trade internationally to be doing large quantities of preparations. You also expect those that are operating in Northern Ireland to have done more preparations. It is those small and medium-sized enterprises that probably have the least amount of preparations.
One of the things we are most concerned about is upstream and downstream costs. For example, a domestically trading property company might think that they might not need to do any kind of no-deal preparation; all of their operations are in the UK. We have been encouraging people to go through our Brexit checklist, because if they do that they might realise that potentially one of their clients might have a relation to importing or exporting goods, so a delay for them in a no-deal scenario might mean they are not able to bring cash flow through and pay their tenancy, and that might cause problems for the business. There is a huge range of variants and the level of exposure and understanding is really different. There is a small but significant minority that are doing very little planning.
Alan Vallance: From the perspective of architects, we are generally seeing that the smaller the practice the less they do because they do not have the capacity to plan. The issues that they face are very complex. The profession is characterised by a concentration of a small number of very large firms, the Zaha Hadids, Grimshaws, Fosters, who already operate internationally, are very well versed and have done a lot of planning. Other firms are much smaller. There is a very long tail of small practices. Something like 90% of firms have fewer than 10 employees. As you go further down into the smaller practices, they have had less capacity to plan.
The RIBA has been working very closely with DCMS and MHCLG as well. We have run workshops. We have produced documentation, but the issues are very complex. The smaller the practice, the more of a challenge it is for them to plan what to do. That said, the devil is very much in the details. If you are looking at, for example, a project that is currently being planned in Europe post the departure, whenever that is, the specific issues that firms face are, “Do I need, as an individual or as a firm, to set up an office there? Do I need to register as an individual architect with that local jurisdiction?” They are the things they need to look at now.
In the medium and long term, I would point to a report we did in December 2017, “Global Talent, Global Reach”. We worked with Frontier Economics. We looked at the UK’s export of architecture services. As I have mentioned, it is about £500 million a year. Of that, they did some work around the various options and scenarios. No-deal Brexit was going to have the most impact and they said that it would have an impact of about £73 million or so. I recognise they also said there were opportunities for trade deals with other nations that would replace that business over time. The challenge is how you do that. I would rather not have to replace that in the first place, but there are opportunities.
The problem with that, for us as a profession and for other professions, is we need the building blocks in place before we leave to be able to plan to substitute and replace. That is where the challenge probably is as much as anything else. Where I mentioned before about mutual recognition of qualifications, if we do not have those arrangements in place with other jurisdictions we cannot start to plan to replace that work now, other than doing what architects do very well now, and that is partner with other local partners. In the Middle East, for example, they will work with an architect of record in the UAE through their practice to make sure they can get the work done. As I say, they are very ingenious, but it is a gap we would rather not have to fill.
Q4453 Hywel Williams: Is it just a function of size? I am thinking of specialist small architecture firms in conservation, for example, might be small but might be working overseas because of their particular expertise.
Alan Vallance: That is a very good point. There are very definitely examples of great firms who are dealing with things like conservation architecture. Sharjah, for example, is a jurisdiction where conservation architecture is a really important issue. We have UK architects working in the Middle East on things like conservation, flood-resistant design and a whole host of specialties. The point I made about planning was a very general one. There are smaller firms that are very specialised and are very busy doing important work overseas right now.
Giles Derrington: When we last surveyed our members, around 42% said they had taken no active steps to prepare for no deal. For smaller firms, which we classified as having below 50 staff, that number increased to 65%. The reasons for that are myriad. To be clear, we allowed people to select multiple reasons, so these do not sum to 100%. The biggest reason, about 49%, is they simply cannot predict the impacts. That slightly goes to what I was saying earlier about the wider impacts on the people you supply, not being able to score that properly. For about 22% of firms, there was also a lack-of-resources question. That raised to about 30% for smaller businesses, where they simply did not have the time and money to be able to do things like hire the lawyers you need to do the reformation of contracts. It is worth saying that is a big lift in terms of the data flow question, adding what are called standard contractual clauses into your contracts to allow data to flow freely. One of our large members had to change in the region of 168,000 contracts. If you think of a smaller business, obviously they have fewer of them, but that is a lot of legal time still for them to be able to deliver and pay for. There are a lot of challenges.
It is also worth saying that tech regulation, in the UK, Europe and around the world, is rapidly developing as well. A lot of our members also have to think about lots of other things at the same time. For example, there are some of the issues around the age-appropriate design code proposal that the Information Commissioner’s Office recently put out, which has a lot of significant concerns for our members. There is the Online Harms White Paper and similar things happening elsewhere. Their time is quite split at the moment and their ability to plan for a myriad of things, all of which have quite significant potential impacts on their business, means there are challenges the smaller the firm.
Martin Manuzi: ICAEW has a very extensive Brexit hub, providing a whole host of guidance, materials and signposting to our members. For members in business directly, I think it is obvious and probably reflects what others have said that those advising or working in businesses that have greater transnational interactions will have prepared more. We can come back to the Committee if statistics are possible to draw out.
If I may, I would like to focus on two preparatory areas relating to pan-European structures that are registered in the UK and also the situation in Ireland. There are special considerations in both cases. Without delving into all the legislative detail, as we stand at the moment it is possible for the large accounting firms to base their pan-European structures and decision-making and all that in the UK. On exit day, minus any other agreements and equivalency and things like that, that will not be possible, because the UK auditors will no longer be considered European auditors, and that will have to move. We are aware of the firms having had to plan for that. It is regrettable for us that that would happen, because it also has implications on a long-term basis in terms of the leadership role our profession in the UK has played in Europe and in the world. We are very proud of that and that is shifting away because we will no longer meet or be part of the European legislation. That is a serious concern for us, as well as involving costs and other things for the firms themselves.
The situation in Ireland is very important as well. That relates to the relationship of the whole of the UK and Ireland, as well as Northern Ireland and Ireland, if I can put it that way. I hope I have done so correctly and politically in the right way. The basic point is this: to date, the UK and Ireland have shared, if I can put it that way, both the regulatory body and the professional body. If you are a UK body you are also an Irish body and vice versa.
What we have seen, because of advice we understand has come from the Attorney General in Ireland, is the arrangements we have in place for UK auditors to also act as Irish auditors will not be possible. We have to have other arrangements in place. Because it is not possible to reach an agreement on that and publically implement that before exit day, there is a tremendous amount of uncertainty as to whether UK firms and UK-registered people will be able to accept Irish audits and vice versa. We are seeing that the UK auditors have had to not take up that work. There are a set of issues for us between the UK and Ireland that have been discussed for over two years now, where there is still quite a lot of uncertainty as to how that is going to work out.
Q4454 Craig Mackinlay: I will raise that I am a fellow of the Institute of Chartered Accountants. You have mentioned the Northern Ireland and Ireland issue regarding audit qualifications and auditors’ ability to vice versa sign. That arrangement predated Ireland and UK membership of the EU, I assume. Would that be the case?
Martin Manuzi: I think that is true, yes.
Q4455 Craig Mackinlay: We have drilled down into quite a number of these interesting points about mutual recognition of qualifications. As I understand it, the mutual recognition directive has two parts to it: an automatic recognition, which I think applies more to dentists, doctors, nurses and midwives, and then there is the general system, Architects have the automatic system, have you not?
Alan Vallance: Architects are with dentists, yes. 2005/36/EC, yes.
Q4456 Craig Mackinlay: Yes, but let us focus on the accountants and what I know and care about. We would be under the general system, whereby I could not—not that I want to particularly—pitch up in Budapest with a sign, “Mackinlay Chartered Accountant starting practice”. I could not do that. I would have to take some of aptitude, whatever it might mean. There is not an unalloyed ability to do that freely even now. That is the case, is it not?
Martin Manuzi: May I respond on your first point first? I realise this is an issue where there can be different interpretations, and legal interpretations too. Just because something predated the EU, it does not automatically follow that it can revert.
Q4457 Craig Mackinlay: I understand that, but this uniqueness with Ireland has nothing to do with EU membership. That is the point I was making.
Martin Manuzi: Yes, I think that is right, but then the European legislation has come in, and that has to therefore be followed, to say that the UK‑Ireland situation is the most advanced implementation of what is possible for the rest of the EU. We very much hope that will pan out to the other European countries.
Q4458 Craig Mackinlay: I suppose the mischief I was trying to make—as you are aware, I am very much in favour of Brexit—is that these bilateral arrangements were possible between countries before being members of the EU and would eminently be possible post EU membership. That is the point I am making: they are not unique.
Martin Manuzi: I will address that. First, on the idea of automatic qualification versus an aptitude test, yes, that is right. It is different for us as compared to others, because in every country there is a tax system or a system of company law that is slightly different, so a professional needs to show a capacity to understand that and express professional judgment. That exists.
What we do know, though, is that system of accepting, let us say, 90% of your qualification and therefore needing to only do 10% is a tremendous improvement on anything that is in any EU free‑trade agreement. The WTO does not exist on this for any effective purposes. If we lose that, we lose a great deal, because we go back to the kind of requalification that Alan suffered all those years ago.
Alan Vallance: It was a pleasure.
Martin Manuzi: Or the pleasure.
Q4459 Craig Mackinlay: I would like to focus on Mr Vallance’s experience in Australia when converting from being a UK chartered accountant to being an Australian one. I understand that, again, it is not the full scope of all the exams.
Alan Vallance: That is correct.
Craig Mackinlay: It is a sort of conversion of aptitude.
Alan Vallance: Yes, I converted for law and tax exams specifically. Yes, that is correct. It was not full but partial.
Q4460 Craig Mackinlay: I do not want to lead you too much, much as I would love to. It is not entirely dissimilar to me wanting to set up as a chartered accountant in Budapest.
Alan Vallance: That is exactly right, yes. I might add a couple of comments. Under the EU professional qualifications directive, which covers architects, at the moment, if you are qualified in any one of the 28 jurisdictions, you can operate freely in any one of the others.
It was very welcome in January when the Government laid down the changes to the Architects Act that then ensured that EU‑qualified architects could continue to operate in the UK post departure. The picture is a little more difficult going back the other way. There is EU Commission guidance to the 27 around recognising the UK qualifications of architects, but it is not clear whether that is certain or not. That is a day one fix, which is terrific and we welcome it, but over time, as the qualifications potentially diverge, that could create an issue around qualifications.
I have in my hand the agreement between Canada and the US. It is a four‑page document, which recognises mutual qualification between the two jurisdictions. Obviously there is a lot of detail underneath it, but those mechanisms exist; they could exist relatively easily. It will be no surprise to some members of the Committee that we have been doing a lot of work behind the scenes. We have already mapped our qualifications against the other major countries around the world. Those sorts of steps would be relatively easy for us to assist, but, in our case, it relies on the regulator, which is the ARB, under the guidance of MHCLG, to make those steps happen.
This is one of the things we would very much encourage. The existence of those agreements is very common around the world. We would very much welcome getting on and putting those plans in place, because that will be a major building block to start to build trade outside of the EU.
Q4461 Craig Mackinlay: I wanted to go on to ask you about your experience. You seem to be very good in this area of professional qualification transfers. Do you know what has happened under the CETA agreement, the Canadian agreement, in terms of that qualification recognition for architects and accountants?
Alan Vallance: I do. Off the back of the CETA deal, there is another agreement between CALA, which is the Canadian Architectural Licensing Authorities, and the ACE, which is the Architects’ Council of Europe, which is the overarching body for the recognition of qualifications. There is now an agreement in place between CALA and the EU, effectively, such that Canadian architects can practise in the EU. One possibility down the track is that Canadian architects can practise in the EU post the departure and UK architects may or may not be able to. That is one of the practical issues we need to work through and resolve very quickly, if we can.
Martin Manuzi: If I might just come back on your bilateral point, bilateral interaction has always been a part of market access. It tops up and refines the legal certainty that we have today. As we are trying to expand our training offering outside of established markets like Cyprus, Greece and some of CEE, we are concerned that it will be a tremendous amount of resource and effort just to get those things in place and there will not be a compulsion on the part of any member state, because it will no longer be required in the law, to accept that. For us, that is a major concern.
I go back to the point about the standing of our qualification. Generally, when we talk to our members, the standing of our qualification is the one of the most important things they want to see maintained. There are question marks about our standing. That is dissuasive in relation to attracting people to come in and train. We do not want to step away from the EU‑wide legal certainty for our qualification that we have today.
Q4462 Craig Mackinlay: Of the professional institutes, the ACCA are, dare I say, a little bit more global sometimes in their training and the uptake of people taking their examinations. I remember being driven to the airport in Malaysia and the taxi driver was ever so proud that he was doing his ACCA qualifications. There is a gold standard of these types of qualifications, and I know the ICAEW is similar. For whatever reason, the ACCA seems to have more of an international reach. That is something that is not going to disappear. When that gentleman passed his exams, I assume that he would end up with some sort of status in Malaysia. How does that work?
Martin Manuzi: Here is not a moment to do ICAEW advertising, but 25% of ICAEW intake are from outside the UK.
Craig Mackinlay: I was just taken by this gentleman.
Martin Manuzi: It is a good example. The question is about what kind of training we are offering in relation to a route into getting statutory signing rights in that country. A lot of the qualification you mention is outside of that for business.
Q4463 Craig Mackinlay: Would it not be true that most big firms would not actually use UK auditors? It could happen and it probably does, but the reality of the big international accountancy firms is that they have a partnership or a loose confederation. In the French arm of Ernst & Young and the German arm of PwC, there will be local German‑qualified people but within that partnership framework. It would be very rare that you would get a UK‑trained and registered auditor being the sign‑off partner in Estonia. That would be very rare, even though it could be done.
Martin Manuzi: Yes, if the Chair permits, I will answer that, because it raises a very important point about our growth model. As ICAEW, our growth model is about training in‑country with nationals from that country and other nationals as well, less so a UK‑trained person coming in to take that role. What we are interested in is the legal certainty and maintaining that, which enables us to set up in an increasing number of countries to offer a qualification that is seen as part of the route to national signing rights. You are right in everything you say about the structure of the firms. That is what the main firms tell us they primarily want. It brings us back to legal certainty, which is the most important thing for us.
Alan Vallance: I would echo the comment in terms of professional membership as a member of the ICAEW but also the RIBA. British professional charter‑body qualifications are seen around the world as the pre‑eminent qualification still. There is a great attraction for people in other countries to want to be members of our bodies. That offers tremendous opportunity and influence. The issue of mutual recognition of qualifications is one thing, as distinct from the standards of education to be qualified as a particular architect. We validate 50 universities outside of the UK for their courses. It is a really important issue, and there is an opportunity there for us.
Q4464 Seema Malhotra: Sometimes I do have to pinch myself when we are having these conversations, because I do not remember these being part of any of the dialogue at the time of the referendum. It does seem to me that there is an example of babies being thrown out with the bathwater here on things that are clearly not working in the interests of our economy and our businesses.
If I can come to my question, it is just a very brief question following up on the discussions we have been having about small businesses. You have outlined in some detail the challenges in regulatory or operational terms for small businesses in terms of increased risk, cost and complexity. I have two very specific questions. First, how much do you and your members assess the risk that this could result in your members being pushed out of business, with it becoming too complicated to carry on and trade? What evidence is that based on?
Secondly, there is a great set of costs that look like they are coming down the road for businesses, small businesses particularly, where preparations may have been less easy, particularly in the event of no Brexit. If a business has increased costs, those costs are going to be passed on somewhere. In which way do you see costs being transferred to consumers? If so, what could the impact be on customers in terms of pricing and access to professional services, particularly?
Claire Walker: It is a really interesting question. In terms of assessing the risk, only time will tell. We have not been focused on asking how many of our companies are going to fear a very significant outcome for them. We have been focusing on what they are doing at the moment. One of the reasons we have been doing that is because companies have understandably been waiting for a political resolution first after the referendum in terms of what an outcome would look like.
One of the things we hear consistently from them is that they are frustrated that they are unable to know what that end goal is. We hear very much that businesses feel they have the ability to plan. Colleagues have talked about some of the particular sectors, like architects, being very creative, but they do not know what that endpoint is at this moment in time. That is an area of concern, but it is not something we have data on. Time will tell on that.
The other question is around cost. Again, it is unclear where some of that cost or additional resource is landing. What we can say, though, is that we know investment levels are some of the lowest we have seen for a long time. The quarterly economic survey we released in quarter one showed low investment. We know companies are holding back, probably because they are putting resources into other kinds of Brexit preparedness. We do know it is having an impact. Again, time will tell on how that will play out.
Alan Vallance: From our perspective, I am aware of projects that are being put on hold. The devil is in the detail, and Claire’s comments are very apposite. Until we have clarity about some issues, we cannot plan.
If I may, I might just mention the fact that the RIBA does a monthly future trends survey where we survey firms. In May we surveyed 226 firms, and there is a summary written by Adrian Malleson in my team that pretty much summarises where our position is at the minute. He says, “Commentary from practices this month continued to reference difficulties caused by the lack of clarity around Brexit. Clients remain cautious, fees are under pressure, and projects are being put on hold or delayed. But some practices seem more optimistic, reporting an increase in enquiries, a resilient domestic sector and a reluctance to acquire work through fee discounting. This complex picture suggests an architectural market that is unsure of future workloads. Many practices face significant downward pressure and uncertainty is a common theme”.
The issue is at the firm level. Projects that are put on hold have an impact on the firm. Those projects could be sufficiently important in and of themselves to impact materially on the future existence of the practice. I have not heard of a specific example of that, but I have heard of projects that are being impacted. As to the longer term, depending on the details, as Claire has pointed out, firms can then plan and manage their way through accordingly.
Giles Derrington: I have a couple of things to add. As I explained earlier, there is a challenge with the wider impact on the economy, and that hits people. In the advertising industry, because there are two very large players in the digital advertising industry, some of those third, fourth and fifth players are already operating on quite fine margins. If those margins get cut further because competitiveness becomes higher, that does make it hard for them not necessarily to maintain a profit, but it makes margins much tighter. That will have an impact.
I was speaking to one of our relatively small business members, who invests from outside the UK in and who has a hub in the UK. They were very simply saying that no deal equals no investment for them. That is a very simple calculation. The UK no longer becomes a place to put their bets. There are challenges like that.
There is one thing I would direct you to, if you have not seen it. The Northern Irish Department for the Economy did a very impressive report, by our reckoning, on the impact of non‑tariff barriers in the trade in services between Northern Ireland and Ireland. It is a very comprehensive piece of work and it is certainly something that we would like to see replicated for the United Kingdom as a whole. The report said that, for computer services, if you were to convert the impact of non‑tariff barriers into an equivalent tariff, the impact on consumers was around 33%. For telecoms, which is also part of our sector, it was about 16%.
If you think about those costs being passed on, you are getting quite significant changes. As ever, it is hard to nail down the direct impact on services, so there is some equivalency and some educated guesswork that goes into those numbers, but they are certainly the most comprehensive figures we have seen about the kind of impacts you might see passed on to consumers.
Q4465 Stephen Timms: I want to raise some questions about the data issues that have arisen a couple of times in the evidence already. First of all, I have a question to Mr Derrington. The Prime Minister said in February of last year that she wanted the UK to keep its place on the European Data Protection Board, which oversees GDPR. Unfortunately, she did not manage to negotiate that. If we leave on the basis of the deal the Prime Minister negotiated, we would continue to comply with GDPR but would no longer have any influence over its development. Is that scenario a concern for the tech sector or are people reasonably relaxed about that happening?
Giles Derrington: When you are thinking about a managed process of Brexit, there are concerns. In theory, were you to have—and I appreciate the comments made earlier about the withdrawal agreement or a withdrawal agreement—a withdrawal agreement, there is still a small possibility you might be able to negotiate something. We have said before to the Committee that we thought it was unlikely that the UK would be able to maintain its membership of the EDPB directly. That would be challenging in almost any scenario. Certainly in a no‑deal scenario that is simply not going to happen.
The impact of that does mean that, in order to take part in the one‑stop‑shop mechanism, which basically protects you from multiple different GDPR claims by different member states, you would need to have someone based in an EU member state responding to an EU member state’s data protection authority. There is a cost to that. They have to be handling a significant amount of work; it cannot just be a brass plaque‑style arrangement. For smaller businesses, that inevitably has a cost and knock‑on consequences. For people who only have one location within Europe, it inevitably means that there is a good argument for moving yourself to the place where you are going to be delivering those services from. It does have an impact.
The wider challenge, particularly in relation to a no‑deal Brexit, is that you will not have an adequacy agreement either. The adequacy agreement is actually the most fundamental thing not just for our sector but, frankly, any businesses that is moving personal data around Europe and increasingly the rest of the world, because, as we know, GDPR is being rather successfully exported, broadly speaking, by the EU as the regulatory model for data protection around a significant part of certainly western economies and, increasingly, into Asia and elsewhere.
Q4466 Stephen Timms: If we were to leave the EU without a deal, the future free flow of data between the UK and the EU would depend on getting an adequacy determination. As I understand it, the Commission would not even start to look at that until we had left the EU. Do you know why that is? Clearly, there would be a problem straightaway on that basis.
Giles Derrington: It is correct that they have been pretty consistent in that they will not negotiate an adequacy agreement until the UK is a third country. There is an interpretation of the rules around GDPR that says that an adequacy agreement application must be made by a third country, and so there is a legitimate interpretation that you could make that you have to be a third country in order to apply.
From our perspective, both we and the UK Government have said very clearly to the EU, “Actually, we could start this process now”. There has been some preliminary work on trying to scope some of the things you would need to deal with, but we should also be aware that an adequacy process itself will take a significant amount of time anyway, whenever it starts. It is important that it does start, because what we definitely do not want to see is a rushed process to help the UK out that is then challenged in the ECJ, as has been the case with numerous elements of data protection over the last five or so years. If it did fall, that would create significant chaos.
We do want a managed and proper process, and that takes a significant amount of time. As we have explained to the Committee before, the fastest ever adequacy agreement took 18 months. That was between the EU and Argentina. By 31 October, were we to have the transition period as initially envisaged within the original withdrawal agreement, we would have about 14 months left before we would have to look at extensions to the transition period. Even now, with the current model, it would be very tight. In no deal, we are starting with a clear gap. Some within the EU have talked about it being longer than a standard adequacy process by a factor of years. We do not necessarily think that has to be the case, but we have to have our eyes wide open about the realities of the situation.
Q4467 Stephen Timms: If we left without a deal there would be a gap of at least 18 months and possibly a lot longer. You have told us that two-thirds of firms with fewer than 50 staff are not making any preparations for this at all. What sorts of problems are they going to start to run into from 1 November onwards if we leave without a deal?
Giles Derrington: There is a myriad of problems. It is worth saying that the UK Government’s decision to unilaterally, as it were, in the event of no deal declare the EU adequate so that data can flow from the UK to the EU is beneficial and helps firms that are purely exporting personal data. The challenge is more acute on the EU side. If you are, for example, a German business contracting with a UK partner, you would have to be putting in place standard contractual clauses to make sure you are not subject to a breach of GDPR within Germany.
What we are beginning to see is that, rather than do that, EU companies are doing one of two things. Either they are just not contracting with a UK entity—it is easier to contract with a French entity, to pick a member state, because you know that relationship will continue—or they are putting in place frustration mechanisms in the contract to say, “If you do not have an adequacy agreement or you do not have the legal basis for being able to transfer data in the future, then it is your problem and not ours and we can terminate the contract because you have failed to deliver supply”.
There is one other point I would make, which is quite important in all this. On 9 July, the European Court of Justice is due to hear the Schrems II case, which looks specifically at whether standard contractual clauses provide sufficient levels of data protection. Were the ECJ to find that they do not, which would be similar to the decision they made around safe harbour with the US, then you could—I stress “could”—see SCC struck down as a legal transfer mechanism. That would cause a huge problem for the UK, and indeed for the rest of the world, which relies on standard contractual clauses to have free flow of data with the EU.
Q4468 Stephen Timms: Mr Manuzi, you commented earlier on about the implications of a loss of the ability to send data between the UK and the EU on the audit profession. Could you just tell us a little bit more about what is being done to address that worry?
Martin Manuzi: Yes, thank you. Giles has given a very comprehensive answer, which is a good framework for looking at the specifics of our case. For the last two years or so, I have been involved in a group that has talked to the largest and a number of other major accounting firms and all the other professional bodies, and this has repeatedly come back to us in relation to the fact that within the audit sphere there is a specific requirement for adequacy in relation to the potential for the EU to place reliance on third countries. Frankly, we have found it very hard to get to the bottom of whether the overall agreements that could be reached across sectors would actually resolve the issues between regulators and between the firms themselves. To be honest, as far as I am concerned, we are still waiting for that answer and for clarity on that.
To your other point, this underlines the importance not only of an orderly withdrawal but a good implementation or transition period to sort out these equivalence and adequacy assessments. The equivalence assessment for our area would be, if you like, the integrity of the regulatory structure, education and training, et cetera, for audit. We very much wish to see those things addressed, so that we do not have these legal voids, which raise lots of questions as to whether between firms and, perhaps more importantly, between regulators there is the possibility of liaising on the working papers and other data that is transferred.
Q4469 Stephen Timms: We need a transition period, which we would not get if we left without a deal.
Martin Manuzi: We need this to be clarified in law. It does seem like, after an orderly withdrawal, you need a period of time to put these things in place. The other question about equivalence and adequacy is when the procedures are done. Some people might say that the political might override the technical, or whatever, but, when they are done, how long will they last for? What certainty do they give us? That has also been a question that has arisen on quite a number of occasions for us.
Q4470 Stephen Timms: Can I raise one other question, Chair? The EU has a number of data adequacy agreements with other countries around the world. What has been negotiated so far to enable the UK to continue to benefit from those agreements? Might exiting the EU affect data transfers between the UK and the USA because of the arrangements there?
Giles Derrington: As far as we understand it, of the other adequate countries, i.e. the third‑country adequacy agreements given by the EU, all but Andorra have been negotiated to provide some resilience in the event of no deal. There are questions around some of those about exactly how they all work. If I am honest, we have been trying to get very clear and detailed answers, with varying levels of success, out of Government about some of these. For example, it is certain that data can transfer from the UK to Canada; it is slightly less clear whether data can transfer from Canada to the UK. Importantly, when it comes to the point about the longevity of this, a lot of those agreements talk about a transitional period, and it is unclear how long the transitional period might be.
In terms of Privacy Shield with the US, the US and the UK have negotiated mechanisms to effectively piggy‑back on to Privacy Shield, but it does require the US firms that utilise Privacy Shield to change various elements of their terms and conditions to reflect the fact they are going to utilise the UK as well. What are the challenges with that? We have been quite surprised at how many US firms, even relatively large‑sized ones, have clocked this and are doing it. For what it is worth, there are about 4,700 companies that are registered with and utilise Privacy Shield in the US. Getting all those to make those changes to their terms and conditions does take time. We have been quite surprised, largely because it needs to be publicised on the US side rather than the UK side, at how many have clocked that they need to make that change.
Claire Walker: I just have two general points. I mentioned the first one before. The level of awareness in small businesses, excepting those that know they have specific issues with audit, around this being an issue for them is really quite worrying. We hear that from chambers. For example, a hospitality business might not realise the fact that they are going to be contracting data to and from the EU and that there will be a change.
The other one is that all members will have remembered that when GDPR came in businesses took a long time to adapt to that change and it was a very concerted effort to get businesses of all sizes to adapt and change. We all received emails right up to the deadline and beyond around that. Whatever agreement is reached, whatever the outcome, it will take a period of time for some of these companies to adjust. The GDPR change was a huge change. The longevity point is really important. How long is this going to last before another change? It is not just about training, adaptation and making sure that companies are aware of what they need to do; it is also about making sure they build systems for the future.
Q4471 Stephen Timms: Mr Vallance, do you have anything on data specifically?
Alan Vallance: I would echo the points my colleagues have made. I am as briefed on the detail of data as Giles would be about professional qualifications, so with the Chair’s permission I would take a written submission and take that question on notice, if I could.
Q4472 Jeremy Lefroy: I just have two things. First, on GDPR generally, from what you were saying, Mr Derrington, because we will no longer have an input into GDPR and because it is becoming certainly a regional if not global standard, it seems that we have in fact lost control over our ability to influence the way that goes.
Giles Derrington: GDPR is becoming the global standard. There are obviously pockets where that is not the case: China would be the most obvious example. If you think about the big multinational firms, they are rolling out GDPR across their entire global practices on the basis of two things.
First, in order to interact with any of their EU data they have to be compliant with GDPR. If you are talking about the massive data sets that are used to develop things like machine learning or AI, you want as much data as possible so you do not want to split your data sets. Secondly, there is also a recognition within the industry that data protection is something that the public are rightly concerned about, and the industry wants to maintain the highest possible alignment of data protection standards across their businesses.
In terms of the loss of control, as you put it, the UK has said and the Government have said, rightly in our view, they will continue to maintain alignment with GDPR. We are not saying, as an industry, that GDPR is a perfect regulation. There are significant challenges with the way GDPR works. In some ways, the challenge will be when GDPR mark 2 comes around and any developments are made. How does the UK engage?
If you look at the managed Brexit process, there was a clear sense of a Government objective of wanting to find ways to engage and have a close relationship with the European Union that allows us to input in that way. That is certainly something that our members would support. Broadly speaking, our members are much more in favour of alignment than divergence across the whole range of regulations.
Under a no‑deal scenario or indeed a scenario where you are taking a simple Canada‑style free‑trade agreement, that simply is not possible and is not going to happen. We would be not in a position to significantly influence the way GDPR develops in the future, which, if I am honest, would be frustrating, because we had a lot of input into GDPR as it was developed and within the European Union at the moment we are the leaders in terms of thinking about the next phases, so not just data protection but things like data ethics. One of the key challenges for the UK is how to export a solid and pro‑business but balanced regulatory measure on some of these new developing technologies first into the European Union as our next market and then help that to expand globally. That link would be more broken.
There are ways we could look to do similar things through OECD and indeed the WTO under their joint statement initiative, but they are much slower, more long term and more difficult, and the UK is one of many rather than the leading voice.
Q4473 Jeremy Lefroy: There is a risk—in fact quite a strong risk—that we become a rule‑taker rather than a rule‑maker, or at least a contributor to rule‑making.
Giles Derrington: There is certainly that significant risk. The thing I would obviously say is that the UK will still be a place where a lot of innovation happens, so we will still have a voice in that debate. The Information Commissioner, the UK’s data protection commissioner, does also have a global role, so we can utilise that as well. In terms of the factor of scale in our ability to influence, yes, it will certainly be diminished.
Q4474 Jeremy Lefroy: I would now like to move on to some service professionals, particularly musicians and others. We understand that a third of UK musicians rely on work in the EU for at least half of their income. You might not necessarily know about musicians, but there are other areas with personal service such as IT professionals or engineers where a lot of their income might come from working in the EU. How will self‑employed and small businesses manage in the circumstances of no deal?
Claire Walker: I am happy to take this one. Quite a few of our members in Bristol and the south-west are in the creative sector. There is real concern. A number of them are in film and some of the musical industries. Very specifically, what they rely on is to be able to move people very quickly without friction. Some of the people we have in our membership will be filming at very short notice. Obviously, that changes depending on schedules or in terms of outcomes, so it is very difficult to plan. The areas they are particularly concerned about are the mobility issue and the business‑travel issue, if they need to be in the European Union for more than 90 days. It is unclear as to what the requirements will be. There is real concern.
The other area of concern for them that is particularly concerning is around EU funding. Some of those sectors have received good funding from Creative Europe in particular, and they are unclear as to how that would progress. We do have members who have managed to start some big‑name projects such as Peppa Pig and others through that funding, and they are concerned about how that will be impacted. There is real concern there, and mobility is at the heart of that.
Q4475 Jeremy Lefroy: Have you had any indication from the UK Government as to whether the funding that has been there will be replaced and replaced on a permanent basis at the same sort of level that it has been around at the moment?
Claire Walker: There are a number of different funding streams. Some of them will be replaced and some of them will not. That is of concern to that sector. Again, going back to previous comments we have made, that is a change in market. It is a change in the way they have operated, which is difficult for them. Critically, this comes back to those mobility issues. They are at the heart of some of these service industries, such as photography, film and those types of areas. Yes, there is concern.
Alan Vallance: I would echo that point. I sit on the Creative Industries Council, so I have an overarching view across the sector, including musicians. For architects it is a very similar story. Some of them are asked to go at very short notice on projects. It may be that they are needed for a short period of time or they are needed for a longer period of time, wherever the project might be within Europe.
One of the things we are very keen to be clear about is the future visa situation both for UK architects working in the EU but also for EU architects working in the UK currently and in the future. That is a really important issue for us. I would echo the points on funding as well. There are many different sources of funding, so in the context of infrastructure projects, whether it is the European Investment Bank or others, future clarity around the funding arrangements for major pieces of work is also really critical. We are encouraging Government to look at that all the time.
Q4476 Jeremy Lefroy: I would just like to follow up on funding, particularly around SMEs, which will often face critical funding shortages. I am not so concerned about bigger businesses, though I am concerned. In the case of a disruptive exit, have you had any conversations with the Treasury or the Government more generally about the provision of working capital? Particularly, I am talking about facilities to avoid massive problems with cash flow, whether that is through high street banks or even directly. Ultimately, cash flow is what will bring businesses down most quickly, if people either simply lose business, lose the ability to collect payments or have a disruption in contracts.
Claire Walker: We are working across Government and with private‑sector partners, and nothing has been agreed at this stage. This is partly to do with the lack of clarity to the end position. You are right to highlight that those are areas of concern for many of our businesses.
Q4477 Jeremy Lefroy: We had understood that there was some preparation for that. I may be wrong on this, but we had thought that there would be some short‑term funding made available through various channels to cover blips in cash flow. It worries me if there is nothing like this in place, in the case of leaving without a deal, for SMEs. It happened at the time of the financial crash in 2008. The Government very rapidly put in place temporary funding mechanisms whereby companies were able to draw down money at fairly short notice to cover short‑term cash flow needs to avoid the loss of jobs. Are we saying that there is not that kind of contingency in place at the moment?
Claire Walker: I could certainly check that and come back to the Committee on it. I am looking at colleagues. I am not aware of any.
Alan Vallance: We have had discussions around the issue, but in terms of clarity about what that mechanism would be, we would have to take that question on notice, in terms of if there is such a thing or the degree to which we have had that feedback.
Q4478 Jeremy Lefroy: Could I urge all of you, potentially, to engage with the Government on that? I am sure we will do the same and ask questions here, but that really worries me. I had understood that there was something more advanced. If you as representatives of very large sections of the economy are not aware of it, that worries me greatly.
Giles Derrington: If I may comment very quickly, Chair, yes, we certainly would all agree with that point. I do not think there is anything as advanced as, “There is clarity and here is what is going to be happening”. It is also the same for the tech sector, which often relies more on equity rather than debt finance compared to other sectors. Those are private venture capital agreements, so in some ways those are harder to replicate with Government funding because we are talking about equity stakes and all that kind of stuff. There is a slightly more complex question there, but there is also the question of short‑term and day‑to‑day business banking, which I entirely agree with.
Q4479 Stephen Crabb: Can I ask you a question, Mr Derrington? I want to raise a theme that is perhaps a bit different from what we have been talking about so far this morning, but it is one that gets raised from time to time, most recently in the context of the controversy around Huawei. Why has Europe proved so poor at producing globally significant tech companies?
Giles Derrington: It is quite a complicated question. I would slightly challenge the premise in terms of our ability to produce really good tech companies. Are we producing a Google? There were comments many years ago from the French about how they were going to produce a French Google. Arguably there is no need for a French Google, so why would you produce one?
The UK has been really successful at things. We have led the world in fintech technology. We are very well placed to lead the world in medtech technology and certain elements of the app economy, particularly in terms of B2C technologies. We have a number of very successful small companies.
There is also a wider point here, by the way, which is that the entire economy is digitising. The difference between a successful UK car company and a successful UK tech company is increasingly blurring. The average modern car has about 400 million lines of code in it, which is significantly more than any app you will find on your phone. Are they tech companies or are they not?
What we are very good at in the UK is finding where existing industries buff up against new technologies and effectively creating the next generation of an industry. That is what we have been working on.
It is also worth saying that we have some of the biggest telecom providers in the world here such as BT or Vodafone, for example. We are quite successful, but we are quite rightly ploughing our niche, as it were.
Q4480 Stephen Crabb: You point to some UK strengths and successes there, but, standing back and looking globally, would you say that the EU as a marketplace is a benign environment for tech companies to grow to a global scale?
Giles Derrington: As with any regulatory environment, it has challenges and benefits. To answer the question in some ways tangentially, if you look at China as a market, China is a massive market and it has therefore produced massive companies. If you are starting with, as it were, a domestic market of about 1 billion or 2 billion people, there is significant space to grow in scale.
The challenge that some of those companies have now, particularly when you are talking about data protection questions, is how you export to the west, because you then have to start complying with GDPR as the global standard. What the EU has been quite successful in doing is setting that global framework within the EU, which allows those companies to develop and grow within the EU and then to pass on to get global share of the market.
Different countries have different strengths and weaknesses. There is a recognition from the EU side now that some of their regulatory measures have not necessarily been as beneficial as they could be. If you look at the Digital Single Market programme, some of that is an attempt to address that. If you look at the next phase of the Digital Single Market, the likes of Martin Selmayr have talked about the next phase of that being to put digital at the heart of all the regulatory decision‑making the EU does.
They are actually developing quite quickly, but, again, if you look at some of the success stories around Europe, there are an awful lot. Whether that is SAP in Germany or Skype in Sweden, there are huge numbers of successful firms. It is very easy to think of the GAFA companies—that is, the Googles, Facebooks, Microsofts and so on—and assume that is all of the tech success stories and then look at China and see the likes of Huawei and think that is the other side of the tech success stories. Actually, the EU in general and the UK in particular have been very successful more generally.
Q4481 Stephen Crabb: Would there be any of your members who see Brexit as an opportunity to do things differently or to be slightly more removed from the EU regulatory framework to give them more freedom of movement to do things globally, or is that the wrong way of reading it?
Giles Derrington: We have asked this question. Broadly speaking, and specifically on no‑deal Brexit, about 4% of our members think it could potentially have a positive impact on their business compared to about 69%, who see that there will be a negative impact. There are some that think it does not necessarily change them. In terms of the question of regulatory alignment versus divergence, it is a little bit more nuanced. About 60% of our members say they would like very close regulatory alignment with the European Union. Off the top of my head, about 20% think that there are opportunities for divergence there.
The key point I would make is that one of the reasons the UK has had such a strength in growing itself as a global hub for tech is that it has been the conduit particularly between the US and Japan into the European market. People have set up here, put their R&D here, put their sales hubs here and allowed that to then serve their European market. Post Brexit, you will have to take a different tack, and it is not entirely clear what that tack is.
As I mentioned before, there are certainly things the UK could do outside the European Union to support the UK tech sector. For example, we have members who say, “Getting rid of GDPR would help my specific business”. Is that likely to happen? No. On a policy level, do we think parliamentarians would seek to weaken data protection? No, probably not. The evidence of the last Data Protection Act to pass through Parliament is that, when challenged, parliamentarians go further than the current EU standards.
The final point I would make is that the world is becoming more protectionist in general, and the UK is not immune to that tendency. When our large multinational members report back to California or Tokyo, you have Brexit; you have the ICO’s age‑appropriate design code, which is significantly challenging; you have the proposals for a digital service tax. All of those have policy benefits and weaknesses, and we can have a debate about any single one of them. The idea that the UK on its own will automatically become a Singapore‑style low‑regulation and low‑tax economy in order to support tech does not really seem to be the direction of travel and arguably nor should it be, because there are significant public‑policy challenges that need to be addressed.
The final point I would make is that globally these regulatory questions are being dealt with as well around the world. What is more important than ever is for the UK, not just with the EU but the rest of the world, to be having those global conversations. Take data ethics. How are we going to regulate the ethical use of AI at a global level? The UK has been leading some of the world efforts on that. It has managed to export that to the EU quite successfully, so they are a little bit behind us but developing. It is a big lift to get the US and Japan not to just take their read from the EU.
Q4482 Stephen Crabb: I will just finish with one comment, and it relates to the point you were making about funding earlier on. Last week, I met with a US hedge fund that manages $15 billion of assets. They still believe that the UK is the very best place in Europe to invest in tech, whatever happens with Brexit, even under a no‑deal scenario.
Giles Derrington: If I may very briefly come back, certainly, as I have said before during the course of this session, we still think the UK is the best place in Europe to invest. However, there are significant challenges. On the whole, what we are seeing is that people are saying, “The UK might be the best place to invest, but it is no longer the only place to invest, and we need to spread our bets”.
Finally, when it comes to VC funding in the UK, the European Investment Fund funds many firms. About 40% of VC firms have EIF money in them. About 40% of that money goes to the UK tech sector. Post Brexit and certainly post a no‑deal Brexit, we will no longer be able to utilise EIF funds, and the EIF has what is called an 80/20 rule, where 80% of the money it gives to VCs has to be spent on EU funding vehicles and EU businesses. We will be in that 20%, and we can compete strongly in that 20%, but a) it is smaller and b) we are also competing with the US, Japan and other major international markets. Will we be the best place in Europe? Yes. Will we be four times as great as we were in 2016? That is a harder thing to argue with.
Q4483 Chair: I just have one final question. You have been very clear and helpful to the Committee in expressing your views. Imagine we were sitting here in the second week of October and instead of me in the chair you had the new Prime Minister, who had you in front of him and said, “I am weighing up whether we should leave on 31 October with or without a deal. In other words, should we have a no‑deal Brexit?” In a word, what answer would you give on behalf of the sector you represent?
Giles Derrington: No.
Claire Walker: No.
Martin Manuzi: It has to be no on the basis of what I conveyed earlier, but the earlier elements need to be explained.
Alan Vallance: We would say no as well.
Chair: You would say no. Thank you very much for coming today. As you can tell, we much appreciate it. We had lots of ground to cover and you have given us much to think about.