The ACT Cash Management Conference kicked off Wednesday morning with a look at the key risks to treasury in 2016. Opening keynote David Marsh, managing director and co-founder of the Official Monetary and Financial Institutions Forum (OMFIF), identified the possibility of a British exit from the EU (Brexit) as a major risk to European treasurers.
“If Britain were to leave—we are a net payer into the European Union—it leaves Germany and the other countries a bit more exposed,” Marsh said. “If we leave, that’s going to have a big knock-on effect on people up and down Europe. It will actually lead to a dismantling effect. I think it will certainly lead to Grexit; the Greeks have a lot of respect for Britain and a lot of them have a lot of money here as well. And so, it will have a colossally bad dismantling effect on the European Union.”
Following Marsh’s speech, treasury and finance professionals in attendance were polled on whether they are in favor of a Brexit or not. The majority voted that they would prefer the UK to stay a part of the EU.
Next, during a panel session, moderator Peter Matza, engagement director for the Association of Corporate Treasurers (ACT) asked treasurers how they would address the Brexit at their respective businesses, should it happen. “As treasurers, you’re faced with a very substantial event,” he said. “How do we look at it as treasurers and say what do we do about risk management in that case?”
Julie Fabris, treasurer for Britax Childcare Group, a UK-based manufacturer of children’s car seats, responded that she has been having discussions with her team about a potential effects a Brexit could have on her company. “We feel it’s reasonably limited, but there is a lot of FX volatility out there and we have a lot of FX exposures,” she said. “So the first thing in my mind is how to manage that. I think that’s only going to get worse, and you can already see it in the sterling/euro rates at the moment. In the long term, I think there’s a risk to Europe itself.”
Asim Iqbal, head of treasury for the AA (Automobile Association), explained that he doesn’t even want to think about the implications of the UK leaving the EU. “We’d repeal a lot of the legislation, and what would replace it?” he asked. “For me, it’s just an area I don’t want to go down. The AA has a small euro exposure, and to be honest, the business hasn’t even contemplated the idea [of a Brexit]. So there are big risks for us if that happens.”
Iqbal added that, as the treasurer, he’s trying to raise the issue across his organization, but so far, it hasn’t gained much traction.
Charles Barlow, group treasurer for global sewing manufacturer Coats, noted that his company is also just beginning its Brexit talks. “I’m not quite sure what we’re investigating yet, because we don’t know what we’ll be voting for,” he said. “That’s going to be very difficult, because you’ll be voting for a change that will happen over the next two years.”
Barlow added that perhaps the best way to understand what a Brexit might mean is to look at the four freedoms that Europe is built on:
- The free movement of goods
- The free movement of services and freedom of establishment
- The free movement of persons (and citizenship), including free movement of workers
- The free movement of capital.
“Maybe the way to consider how the Brexit is going to affect your company is to look at those four freedoms, and say, ‘How would we be affected if any of those freedoms were to be taken away?’ It’s quite depressing; our initial thoughts identified only potential problems and no potential benefits,” Barlow said.
Graeme Middleton, head of European group treasury and tax for Honda Motor Europe, said that all corporates across the UK and Europe need to look at how they’re going to do business in a world with the UK outside of the EU, even though many of them, up until this point, haven’t thought much about it. “It seems that we’re only just considering it as companies now,” he said.
To further prepare for a Brexit, Barlow recommended that treasurers work diligently to fully understand their companies’ cash, gaining an even better understanding of the facilities being utilized—particularly off-balance sheet financing, which might not get picked up in normal reporting. “I think potentially when there could be a crisis, you should get all the facts together before that crisis happens so you’re in a better position,” he said.
Fabris noted that in the current environment, it is difficult for any treasurer to get all of the facts together, turn them around and then produce a treasury and risk management strategy. Nevertheless, treasury must keep pace with the business’ overall strategy. “These days, businesses are changing their strategies quicker and quicker. You need to be able to point the risk out to the board, to your CFO, understanding where the company is going,” she said.
Middleton added that, even for a global company like Honda, the Brexit is a significant risk and his company is working on how it might respond. “We’re putting together a risk strategy in terms of what Brexit could mean for Honda,” he said. “We’re going that in the UK and we’re raising those risks up to Japan. And I have quite a big input into that, raising those risks up to the board. So these risks are all being taken seriously.”