The persistent risk of a no-deal Brexit (and associated “cliff edges”) and the uncertainty that was present throughout the lengthy process of the UK’s withdrawal from the EU created significant challenges for all types of businesses in planning their response to the UK’s exit. In the case of banks it meant that many of them had little choice but to focus primarily on ensuring that they could continue to serve their customers. They did this by implementing tactical solutions which mirrored current “as-is” operating models. Whilst a necessary approach at the time, it resulted in inefficiencies, often exacerbated by the effects of COVID-19 (e.g. delays to people moves and competing organisational and operational priorities). In many cases, UK entities have been left with higher cost/income ratios, whilst the new or expanded EU entities, with their emerging operating models, are seeking paths to develop viable business models and achieve sustainable profitability.

Almost a year into the post-Brexit landscape, many banks are moving on from these initial solutions, forming a more mature strategic view for their post-Brexit operating models. These views recognise the requirement for longer‑term strategic change to realise growth ambitions, that the change will be driven by both business needs as well as regulation, and will vary between EU, UK and Rest of World (RoW) banks. Strategic and operational agility will be key to the design; fostering the ability to flex operating models to support both business needs and ambitions of the organisation.

We have identified three key areas of challenge across the industry resulting from the bifurcation of business post-Brexit – and the associated considerations the banks affected by them should take into account when developing their strategic views.

1.   Redefining the Customer Proposition

With a previously centralised business now split across multiple legal entities, each with its own customer proposition (the combination of clients, products/services and channels utilised), banks will now need to revise business models and in parallel redesign their supporting operating model to enable delivery against strategic objectives.

Strategic considerations for firms:

  • Business Model: Has a target post-Brexit business model, separating clients and related coverage models, been implemented in order to serve the EU27 and RoW client base that was typically previously served from the UK? 
  • Alignment with strategic objectives: Have customer propositions been defined for each legal entity and aligned to strategic objectives across the UK/EU? 
  • Regulatory drivers: To what extent will the commercial and regulatory environment drive broader shifts in global footprints?

2.   Duplication of processes 

The separation (and, in some cases, fragmentation) of UK and EU business has led to a significant increase in the cost base across banks' European operations, with no corresponding increase in revenues. Limited Brexit contingency planning windows made it challenging to evaluate critically whether 1) processes inherited were “fit for purpose” for the EU entity and/or 2) whether these processes were as efficient as they could have been in the first place. The proliferation of duplicate processes and controls provides opportunities for banks to leverage shared service functions more effectively across multiple locations.

Strategic considerations for firms: 

  • Enhance process efficiency: Which back and middle office processes have been replicated across multiple entities and are these now at a critical mass to benefit from automation, outsourcing or the deployment of a shared delivery model? 
  • Building a robust controls environment: With the increased level of controls required across multiple legal entities, is there a comprehensive inventory of controls, catering for nuances between markets and jurisdictions and adequate review systems in place to monitor risks across locations?
  • Refine FMI venue strategies: Do the additional operational and compliance obligations and costs arising from maintaining multiple memberships across UK and EU FMIs potentially outweigh the incremental revenue from offering clients the flexibility and optionality? 

3.   Technology Strategy 

The long-term uncertainty presented through the Brexit process post Referendum (June 2016) up until Exit date (Dec 2020) meant a need to balance tactical and strategic change whilst ensuring minimal disruption to their client service. The introduction of new, fully funded EU entities which progressively have to manage more risk on their own balance sheet coupled with industry-wide restructuring was always going to present complex and wide-ranging IT solution and IT delivery challenges within compressed timelines.

Strategic considerations for firms:

  • Rationalization and Sustainability: Is the technology stack replicated/duplicated across multiple legal entities? What are the technology synergies and how can they be transformed to serve both the strategic business and technology changes? Are you on track to achieve the carbon footprint targets you have committed to stakeholder groups you serve whist achieving sustainable profitability? 
  • Cost Transformation: In line with your post‑Brexit strategy (UK, Europe, RoW), is your holistic technology landscape the “right” solution? Is the firm spending money in the right places and getting the right value from it? 
  • Delivery: How can strategic and operational agility be achieved from the outset? Does it have a robust lean portfolio/programme management, Lean Budgeting and Agile Change Delivery framework? How can the organisation pivot from siloed projects to continuous delivery of client centric products and services with seamless integration with cross-functional multidisciplinary teams?

A “Trilemma” 

Rather than see profit margins continuously eroded due to an increased cost base, banks with unsustainable cost/income ratios can benefit from re-evaluating their operating models with a focus on efficiency and strengthening their controls environment in order to positions themselves for future growth.

Almost a year on, and with the volatility and uncertainty caused by the COVID-19 pandemic well below their peak, the time is ripe for banks to kick off these assessments to ensure their operating models not only support but also enable the realisation of their long-term strategic objectives. Overall, they will need to strike the right balance between the current drivers of change, including monitoring the impact of regulatory developments, on their business models and strategy, and investing in EU regulatory relationships - all while managing both their customers and shareholders.

Dealing with these competing drivers: improved client experience; improved regulator confidence; and improved shareholder confidence - a "trilemma" - will be critical in shaping banks’ future strategy across the UK, Europe and the RoW.