OPINION: Four political risk factors to watch in the UK this year
With vaccines rolling out and Brexit done, 2021 looks like it will see a relative easing of political risk in the UK. But there are several 'known unknowns'. We've outlined four to watch.
1. A more interventionist government
A long-awaited refresh of the Government's 2017 Industrial Strategy looks like it isn't going to happen after all. Instead, the Chancellor Rishi Sunak is expected to present a set of big 'visionary' policies around the time of his Spring Budget Statement in early March.
That shift partly represents both the shift in personnel at No.10 Downing Street, moving away from the approach of the Prime Minister's former top advisor Dominic Cummings, who favoured big bets on specific technology classes. Perhaps more significant is Brexit and, of course, COVID-19. The ink isn't dry yet on the Brexit deal and key elements remain to be agreed (see below), whereas COVID makes it almost impossible to set out a clear plan for how the economy will be guided. The Treasury's announcements are expected to sketch a vision for the economy and how to boost growth, rather than present detailed policies.
Still, the Johnson administration has always had a more interventionist tilt, especially for a Conservative one. Margaret Thatcher's laissez-faire, free-market philosophy still looms large in the Conservative Party and the administrations led by David Cameron from 2010 to 2016 had a strong economically liberal flavour. The Johnson government, on the other hand, owes its large Parliamentary majority to its declared intent to 'level up' - i.e. address the regional economic disparities between the South East of England and everywhere else. The Brexit Deal included an agreement that the UK would restrict its own subsidies via a State Aid regime (under consultation at the moment), but there is clearly optionality for greater intervention if Ministers so choose.
COVID-19 forced the government to intervene in the economy in unprecedented ways, from its "furlough" Job Retention scheme to effectively nationalising the rail industry. That forms part of the new interventionism and will no doubt have a long tail, even if much of it is eased after the crisis has passed. But this government was always planning to do more than its predecessors. Now that the vaccines are rolling out and a Brexit deal has been signed, Ministers are thinking about how to flex those interventionist muscles.
2. ESG becomes regulatory standard
In November, the UK will host the UN's climate conference, known as COP26. Ahead of that, Ministers are scrambling to deliver an unusually large number of policy decisions and strategic documents under the meta-policy known as Net Zero. The corporate world must move quickly to keep up to date with profound changes, not least in the investment community. Whereas ESG has been growing in relevance for at least a decade, there has been a noticeable shift among politicians and prudential supervisors, not least the Bank of England. The UK has adopted the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and plans to implement them across the economy by 2025.
Further such measures can be expected in finance and most other sectors, raising reporting requirements so that ESG moves from an indeterminate question of brand and investor relations, to a compliance necessity. Expect more to come.
3. National security and crime prevention as a new layer of corporate policy
As Helmsley Partners noted in December, a Bill is passing through Parliament that would give Ministers major new powers to review foreign takeovers of British companies and assets. The National Security & Investment (NSI) Bill forms a new layer of merger control, introducing national security concerns to a policy area in which anti-trust was the UK's main preoccupation. It effectively mimics the USA's Committee on Foreign Investment in the United States (CFIUS), which ramped up under the Trump administration, especially with regard to China. Britain is taking a more aggressive line on China than others, something that appears to be winning it diplomatic capital in Washington DC, with Huawei most obviously in the firing line.
It isn't just a diplomatic play though: the UK recognises the growing security relevance of digital technologies and IP, as well as the employment of 'hybrid warfare' by China and Russia. Whilst the political focus of the Bill may be China, it will also encompass key technology classes such as microchips. US firm NVIDIA's acquisition of ARM, one of the UK's biggest technology successes, attracted political attention but may have benefitted from a lack of Ministerial bandwidth.
In addition to the NSI Bill, the Treasury also plans to create a new power that could block firms from listing on British stock exchanges. Its Economic Crime Plan is intended to reduce the influence of unfriendly regimes around the world, but it raises a new risk for any firm planning an IPO in London.
British Ministers are keenly aware that the pandemic has contributed to a vast capital raising, particularly in the private equity community, and that British assets are seen as good value due to the devaluation effects of four years of Brexit uncertainty. There is every chance that they will use more measures, including powers in the NSI Bill to scrutinise transactions more closely, and potentially take action. Investors and corporates operating from outside of the UK, or those considering a market entry, should pay particular attention to this new layer of merger control.
4. A newly active trade policy
Leaving the EU gives the UK the chance to formulate its own trade relations through Free Trade Agreements and plurilateral coalitions. The latter have been pursued with gusto by the energetic Trade Secretary Liz Truss, although most of the dozens of deals she has struck over the past year have been based on the EU's pre-existing deals. I.e. she has confirmed the 'status quo ante Brexit' with countries like Japan, Israel and Singapore. The former - plurilateral coalitions - are also an important feature, with the UK notably applying for membership of the CPTPP.
This outreach work also comes with a caveat: an active trade policy includes the need to exercise 'trade remedies'. That is, the government must act when it sees unfair practices such as dumping, usually through retaliatory tariffs. A new Trade Remedies Authority will lead this work, but there is also an important political angle. When Britain was in the EU, its trade policies were farmed off to Brussels. Now it has responsibility for them, Members of Parliament are actively seeking to influence them based on humanitarian issues such as China's actions in Xinjiang.
There is also still significant bad blood between the EU and UK - the EU's rhetoric and actions on vaccines, including accidentally triggering Article 16 of the Norther Ireland Protocol, is Exhibit A. There are multiple options for 'trade remedies' from both sides in the Brexit deal, meaning that even unrelated sectors might find themselves dragged into disputes over fish, cars or environmental regulations.
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