Case study: Large UK financial services organisation
Chief internal auditor
Like many other financial services organisations, the company operates globally with a particularly large customer base in the UK, US and in Asia. As a consequence, the company has limited exposure to the negative trading effects of Brexit. It has, however, established a subsidiary in another EU country to support its European clients after 29 March 2019. Although the impact of Brexit is a risk, the organisation prepares for and models many significant economic and business stress scenarios as part of its normal business operations.
Due to the ongoing negotiations between the UK and the EU, the uncertain outcome has the potential, among other things, to create additional asset price volatility impacting certain businesses within the organisation. Although the impact of Brexit is a risk, the financial market impact of wider geo-political events continue to be a focus for the organisation’s risk outlook, such as ongoing political tensions between the United States and China and their tit-for-tat trade war, and the imposition of sanctions on Russia by the EU and the US.
In the event of a no-deal outcome, the biggest impact the business foresees is the additional potential volatility in financial markets and any potential secondary impact of an economic slow-down. A potential slow-down in the UK economy would affect investment values and the risk of credit defaults. One of the key short-term effects of Brexit uncertainty has been exchange rate fluctuation between Sterling and other major currencies which have had both a positive and negative impact on the organisation’s financial results as businesses outside the UK have performed well due to the lower value of Sterling.
EU staff
One area that the business is focussing on is its European staff operating in the UK. As a large financial services firm, it employs many EU nationals in technical and senior roles. Its HR department has identified the individuals that might be impacted by potential restrictions to free movement of labour and its impact on the workforce and its operating model. The key priority has been to provide early assurance on their right to work in the UK and give them appropriate support in making applications for visas or Settled Status in case of a no-deal Brexit.
Scenario planning
Like most other organisations the business has undertaken scenario planning by giving considerable thought to the practical implications a hard or soft Brexit will have. It found, however, that most scenarios will not have a significant impact on its business model due to its limited exposure to the negative effects of Brexit. The organisation employs a large number of financial experts who conduct analysis on different global events which allowed the organisation to map out the different scenarios in great detail. In addition, the organisation sought expert third party advice that provided different perspectives and practical suggestions that would have otherwise perhaps not been considered by the organisation. It also engages in regular discussions with government and regulators who are keen to understand the organisation’s planning and thinking and the effects Brexit has on the wider UK financial services infrastructure.
Internal audit
Preparing for the UK’s departure from the EU is considered a key business priority and as such the organisation set up an internal Brexit working group. The working group is run by the second line of defence’s risk function and meets frequently to ensure that information is shared across the firm. The internal audit function has a seat at the table which allows it to challenge assumptions, whether these have changed over time and if they are still relevant. Examples of challenge included the assessment of third party downstream and upstream supply chain risk. Other functions attending the working group are senior management, representations of group divisions, and first and second line functions like compliance, HR and legal.
Sitting on the working group also gives the internal audit function clear oversight and understanding of the impact and processes around setting up, for example, new entities in other EU countries, and the consequential impact of this for the internal audit function itself in terms of the provision of audit resources for the newly set up subsidiaries and complying with national regulatory requirements.
Internal audit considered Brexit as any other change programme but recognises that political and economic developments require the organisation to be more agile. Some issues around a future relationship between the UK and the EU have become clearer, while other issues remain unresolved. The internal audit function used its role to assess the robustness of the first and second lines’ underlying assumptions, whether these are still relevant and, finally, to evaluate the effectiveness of the measures that were implemented to mitigate the risks.
