The Brexit Committee has published redacted industry sector reports providing a snapshot of industry sectors and the implications of current EU legislation, for example on accountants and auditors and possible approaches to trade agreements which could offer continued access to EU markets, but no financial impact details
The publication follows a heated evidence session earlier this month with the Secretary of State for Brexit, David Davies, when he appeared before the Committee on Exiting the European Union, chaired by Hilary Benn.
At the committee hearing, Davies admitted that the government had not prepared detailed financial impact assessments of the effect of Brexit on key industries and sectors, as they do for other major risk factors or significant changes to legislation.
Until the government publishes detailed impact reports, the Committee has decided to go ahead and publish redacted reports, which withhold details on the actual impact on sectors, including the accounting and audit profession.
Despite efforts to get more transparency around the economic impact of Brexit, the Committee confirmed that the reports have been published ‘but with the Sector Views sections redacted’.
When pressed on what was meant by sector view and the absence of any costed analysis of the impact of Brexit, Davis told MPs at the Brexit committee hearing on 6 December: ‘The first thing is that I have not used phrases like “impact assessment”, except to say that we do not have one. That is not my phrase. “Sectoral analysis” was used for a real reason: it is the analysis of what the sector looks like.’
He added: ‘The real problem for an impact assessment on the financial sector is the sheer range of potential outcomes, and the extent to which the industry itself will respond to, let us say, a requirement to put euro clearing inside the eurozone and so on. We are talking about things evolving over time… the City is not a single entity; it may be a single organism, but it is not a single entity.’
As a result the Committee has published 39 reports on different industry sectors, which include sectoral analyses undertaken by the government and were provided to the Committee on 27 November. These have been redacted to remove the sector views, although it is not clear how much information these provide in terms of the impact of Brexit on particular sectors, although they do include the views of stakeholders in particular professions and industry sectors.
Davis informed the Committee on 19 December that ‘there is no specific material in the sections of the documents that the Committee has indicated it intends to publish that I would wish not to be made public on the grounds that it was commercially, market or negotiation sensitive'.
However, he drew the Committee's attention to a small number of corrections or revisions that should be made to the statistics in the reports.
The 17-page Professional and Business Services Sector Report covers audit and accounting; business services; professional services; and legal services, and accounts for 11% - £186bn – of the UK economy’s gross value added (GVA) and 13% of employment with 4.6m working in the sector.
The sector includes the Big Four accounting firms – PwC, Deloitte, EY and KPMG with combined fee income of £10.69bn in 2016 – and five of the largest 15 Global 100 law firms, based on number of lawyers in 2016/2017, who all have their main base of operations in the UK.
The majority of these professional services companies are based in London and are integral to the City of London and main financial markets. Birmingham, Manchester and Edinburgh also has PBS presence.
The report highlights the closely interdependent relationship between professional services and the financial services sector, stating that 14% (£39bn) of accounting and legal services’ work is generated from financial services.
Professional business services also account for £66bn worth of exports in 2016, 27% of total UK services exports, up from £40bn in 2007. However, the report shows that this market is not heavily reliant on EU, with 36% of exports to the EU in 2016, 27% to the US and the balance – 37% - to the rest of the world.
Major EU partners include the Netherlands, Ireland, Germany and France (between £2bn and £4bn UK exports to each).
Accounting and audit directive
The report also sets out primary EU legislation which affects the accounting and audit profession including the EU Accounting Directive, International Accounting Standards Regulation and Non-Financial Reporting Directive, and EU Audit Regulation and Directive (ARD), which have been transposed into UK law through the Companies Act 2006 and subsequent statutory instruments.
On accounting standards, the paper notes ‘in the UK these standards are increasingly aligned with international norms beyond the EU’, with for example new UK GAAP written to reflect International Financial Reporting Standards (IFRS). For listed companies, use of IFRS in the UK currently follows EU-endorsed IFRS standards so a new endorsement process would need to be agreed.
The ARD, effective since June 2016, provides for some free movement of EU auditors with provision for aptitude tests or adaptation periods by member state authorities to enable mutual recognition of qualifications. It also makes some provision for the audit of non-EU businesses that are listed on UK capital markets.
The government confirms in the report that ‘this framework has developed over time with the objective of protecting investors. The EU framework now recognises that a different approach is needed in respect of UK and other EU firms auditing overseas’.
Due to the complexity of the audit market, national jurisdiction and local regulatory oversight, and differences in national qualifications there is limited cross-border supply of audit services. The report says: ‘Cross-border supply of audit services is quite rare because of the significant economic regulatory concerns and the resulting controls in most countries, which restrict supply’.
The report sets out some options on how various levels of trade agreement would affect the professional and business services sector, including how the EU-Canada Comprehensive Economic and Trade Agreement (CETA) works for services.
The report states: ‘CETA is one of the most ambitious FTAs (free trade agreements) the EU has agreed for trade in services.
‘For example, it contains provisions on the temporary cross-border provision of services, including extending the time individual service suppliers or professionals can stay in either the EU or Canada from six to 12 months.’
But there are limitations on the extent of cross-border services which would impact UK firms if this approach was taken.
‘In CETA, the degree of market access varies between Canada and different Member States and parties are required to specify where market access is restricted in certain ways.’
CETA also sets out guidelines for regulators and professional bodies to negotiate mutual recognition agreements.
The report ends on page 17 with the full ‘Sector Views’ section redacted. It states: ‘This information was provided by the Government to the Committee, but the Committee has decided not to publish this section.’
Committee chair Hilary Benn MP said: ‘We have sought to clarify with the Secretary of State whether there is any specific material in the documents provided that he would prefer the Committee not to publish on the grounds that it is commercially, market or negotiation-sensitive information.
‘In light of his response, the Committee has decided to publish this material provided to us by the Department.’
The sector reports cover aerospace, agriculture, asset management, automotive, aviation, broadcasting, chemicals, construction, creative industries, defence, electricity market, electronics and machinery, environmental services, fintech, fisheries, gambling, gas market, higher education, insurance and pensions, life sciences, maritime and ports, medical services and social care, nuclear, oil and fossil fuel production, payment services, post, professional and business services, rail, real estate, retail, banking, road haulage and transport, space, steel and commodities, ICT and digital, telecoms, tourism and wholesale markets.
Report by Sara White
The 39 sector reports, Department for Exiting the European Union Sectoral Analyses inquiry – publications, are available here
Transcript of David Davis evidence session before House of Commons Brexit committe, Exiting the European Union Committee Oral evidence: Department for Exiting the European Union Sectoral Analyses, HC 653