National Audit Office Warns of Brexit Customs IT Train Wreck….Nine Months After Naked Capitalism

The morning when Theresa May is about to unveil the first installment of her Great Repeal Bill, the press is reporting on full bore alarms from the National Audit Office about a Brexit disaster in the making: a sure to be failed Customs systems upgrade that will tie UK ports in knots.

Richard Smith flagged the Independent’s account:

The UK’s spending watchdog has warned the Government’s post-Brexit IT system for customs is heading for a “horror show” that could risk £34bn of public income.

In a scathing assessment, the National Audit Office said the computer system might not be ready by the time Britain leaves the EU, potentially plunging the UK’s ports into chaos.

The £157m system is due to be completed just two months before Brexit in March 2019, but the NAO says delays common to new IT would cause massive disruption.

In unusually tough language, auditor general Sir Amyas Morse said ministers were only beginning to understand the momentous task of Brexit and that without further resources would find that “at the first tap, this falls apart like a chocolate orange”…

Publishing his report on the Customs Declaration Service, Sir Amyas said the IT system to record declarations on imports and exports threatened to become “a horror show”….

Among risks outlined in the NAO’s report is the possibility that Britain’s final deal with the EU might require features in the IT system not yet anticipated by its designers – requiring last minute changes and causing more delays.

Recall that during Obamacare, the reason the rollout was such a disaster was specs being changed six months before the launch date. Lambert was first to recognize the significance of that and correctly predict an IT disaster. And mind you, that was in the context of a presumably largely settled development plan.

Based on a Financial Times story last November that didn’t get the attention it merited, we similarly predicted that the Customs rollout would be a mess and Brexit would only compound the magnitude of the damage in Another Huge Brexit Spanner in the Works: UK Faces Customs Train Wreck With Need for IT Upgrade:

As the preceding discussion shows, if UK loses access to the single market, that means tariffs. And for US readers, the UK is now on this path with its plan for a “hard Brexit”. Theresa May and her Brexit boosters have committed themselves to restricting immigration. The EU has insisted from Merkel on down, from the very day the referendum results were in that if the UK wanted to continue to have access to the single market, it had to accept the “four freedoms,” which includes movement of EU nationals in and out of the UK and vice versa.

What has escaped the notice of many observers is that “tariffs” for manufactured goods means that the charges are levied based on the country of origin of the constituent parts. This means a very elaborate customs declaration and tariff computation for goods of real complexity. And yes, there are customs inspections too (I assume on a sampling basis; readers can clue me in).

The amount of extra hassle constitutes a non-tariff trade barrier in and of itself. And that over time will encourage manufacturers to simplify their supply chains. Auto-makers, for instance, will find it less attractive to send parts into the UK for further assembly to be re-exported to Europe; they’ll presumably over time restructure production so as to have manufacture for the rump EU market in the EU, and have parts made in the UK mainly to be included in any final assembly there.

While that is bad enough, a looming problem is far worse. All this border documentation is managed by computer systems. The UK’s present system for handling non-EU-related trade is almost 25 years old and was set for replacement. The new system, called CDS for Customs Declaration System, to be ready by 2018 and to have the capacity to handle 100 million transactions,. At double the current level of 50 million, that would have seemed to be ample headroom.

Reading between the lines of the Financial Time story, there seems to be some doubt as to whether the original spec could have been pulled off in time. But now with Brexit, the project suddenly has a major spec change: it has to handle 350 million transactions.

And what the story does not mention, but seems likely to be the case, is that there are tons of other spec changes that have yet to be identified and documented related to EU and UK tariffs on specific goods. And if the system tracks things like port of embarkation and disembarkation, more data fields need to be added for all the EU ports and air cargo locations. And of course, the Euro currency data field needs to go in too.

In addition, since the negotiations will be in progress, the levels, and potentially even some of the categories are likely to be in flux. Given that olives are a very important export good for the EU, how will olives be treated versus olive oil versus products made from olives, like olive paste? Will green olives be treated differently than ripe ones? How all this sorts out affects the coding…

As Richard Smith said by phone, “Even if the UK government had a full team of top-drawer developers, crackerjack managers, a completed project specification, and enough budget, this wold be daunting to complete by 2018. And the reason most big IT projects founder or fail utterly is that the project parameters almost never stay static. They wind up changing as the developers turn over rocks and the client has a further think about what it needs.”

Needless to say, UK industrialists are fretting. From the Financial Times:

Industry is seriously alarmed by the administrative test of applying customs checks and separate tariffs to EU trade. Noting the danger of “major disruption at the border”, the paper to the joint committee argued it was “difficult to see” how CDS or Chief would cope by 2019 with “any substantial changes to what we do now”.

Desmond Hiscock, director-general of the UK Association for International Trade, said there was growing frustration among his members over the uncertainties and risks. “The existing system will be not be able to cope and there is not much confidence that the untested and still incomplete replacement, CDS, will fare much better.”…

Listing a range of additional administrative requirements, uncertainty over duties, databases, security checks, listings and rules of origin procedures, Mr Hiscock said his members had “a very real fear HM Revenue & Customs have neither the infrastructure nor the trained personnel to cope”.

And there do not appear to be good kludges. From the same article:

The most effective workarounds would require EU countries to establish a separate, streamlined customs system for UK trade. But most EU countries will be loath to invest in a huge overhaul of systems; EU officials expect Britain to be treated like any other non-EU country outside the customs union.

The only sort of good news is that because a replacement trade deal is very unlikely to be concluded two years after the UK pulls the Article 50 lever, the developers will have more time. But that really isn’t a solution, since much of the coding will depend on having final specifications, and a good deal will be in play as talks are underway.

So the UK continues to lumber towards a cliff with no intent of turning back. This can’t and won’t end well. Perhaps someone will devise a way to retreat, but too many influential people seem to think that’s politically dangerous, and perhaps more important, the press barons haven’t changed their tune. The flip side is America is demonstrating how well a full bore media campaign can succeed in moving public opinion. If Fleet Street were to come around, a political rethink might become possible, but if not, UK citizens should expect they’ll need to assume the brace position in 2019.

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61 comments

  1. visitor

    Perhaps someone will devise a way to retreat

    I have been convinced right from the initial bumbling steps after the Brexit vote that the retreat will take the following form:

    At the end of the negotiation period, in April 2019, the government will present the exit package to the British electorate. It will be an incomplete hack where negotiations will have progressed, unacceptable, leonine EU-imposed conditions where the UK was incapable of getting its act together, and a big void where discussions did not even take place.

    This will be declared to be the absolute best that can be achieved — and no doubt will left out that it is a terrible deal (but after all it is not the Conservatives’ fault: uncompromising EU! Shifty Germans! Envious French! Unsupportive Labour!) The government will then leave the choice of accepting the exit conditions — and then having the UK economy crash and burn — or, if they are rejected, then interpreting this decision as a final refusal to exit the EU.

    There will be a vote, and seeing the catastrophe, the package will be rejected, to the great satisfaction of all major players:

    1) the City and UK economic interests were for remain anyway;

    2) other countries (within and outside Europe) will heave a sigh of relief at not having to enter long-winded negotiations to set up special trade and legal relations with the UK;

    3) the EU will have vengefully taught the fundamental lesson it wants others who could be seduced by an EU-exit to learn: nobody leaves EU institutions. Ever.

    The UK, after much drama and theatricals, will thus eventually remain in the EU.

    1. vlade

      April 2019 is way too late. EU has to agree to the package, which takes time, so the negotiated package (if any) has to be in front of the EU parliament no later than late 2018.

      Chances are, the crash will be visible in coming at least for a few months – but if anything takes EU attention in early 2019, it’s going to be like watching an automated train running on the rails towards a cliff and no chance of stopping it.

      What it will mean practically is that the companies will retrench and/or start moving in panic from late 2018 unless there’s a realistic deal on the horizon.

      UK was unlucky that the predicted recession didn’t hit immediately after the vote (although I never thought it likely, these things take time – my only immediate economic prediction of 10% drop in GBP on the day after came to fruition), which instilled a false sense of security to which the public, politicians and businesses are waking up only now.

      1. Clive

        I agree broadly with visitor’s assessment of how things will pan out. But I think you are right as well that the precise timings are a movable feast. It could all start to unravel (Brexit, that is) next week. Or like visitor conjectured, in a year or two.

        1. visitor

          I suspect it will take place later than earlier, because the politicians in charge will not want to give the impression to have broken and capitulated that fast.

    2. fajensen

      I don’t think there is a mechanism for stopping “Article 50” except by the unanimous approval from all the EU member states (representatives) by voting. As a minimum price, they will want all the special concessions that the UK has negotiated over the years revoked.

      Having lived in Britain for 10 years, I think the British will take whatever the terrible deal is out of pride and to spite those imposing French/Germans. The British are simply “wired” for persisting and resiting. Especially when presented with overwhelming pressure from a superior enemy that is being smug about it. The British are not “quitters” in the face of adversity, it is one of the things that motivates them and gives a common purpose*. They can suck all that bad stuff right up and take it! This is their identity, what a Proper Brit does!!

      It would be yet another huge mistake from the conservatives if their “plan” is failing to negotiate properly and then betting on the terrible result being rejected. That is just not gonna happen.

      *) Also why services, like car hire, must generally suck and be shoddily presented by ruffians from porter-cabins smelling of kerosene heaters, queuing will always be created around systems procured to eliminate it, terrible instant coffee is served, anything banking, and so on, all this represent common causes for people and topics for conversation :).

      1. Colonel Smithers

        Thank you, FAJ.

        You are right.

        Just one question. What’s a proper Brit? Are the German and Greek family living at Buck House proper Brits? Their Spanish rellies, well if you call Felipe Spanish, are in town today. Brenda met Stavros when she went on holiday to Corfu, a right Shirley Valentine! Felipe’s mum is Stavros’ first cousin. :-)

        1. Eustache de Saint Pierre

          Fajensen, thanks for your inside outsider view.

          Bloody minded as my Father would say & just out of interest…where did you spend your ten years ? The reason I ask is that I have noticed variations in Britishness on my work travels as with the very obvious Yorkshire/South differences – further North, much more akin with Lowland Scots & in Liverpool ( Scousers ) remind me of Dubliners, perhaps due to the city having been the gateway into the industrial North West & Midlands for a large number fleeing the famine.

          As I have said before the stupidity of hurling insults on these people by hissy fit Remainers, would only result in a return Agincourt salute.

          1. Eustache de Saint Pierre

            Colonel Smithers.

            I am not sure that there has ever been a true English Monarch – perhaps the Tudors were the first Brits before there was such a thing, Owen being the most successful servant in history ?

            1. Anonymous2

              The House of Wessex?

              I think they were anglo-saxons who I suppose count as the ancestors of the English

              1. Eustache de Saint Pierre

                Yes you are correct AEthelstan being the first when England briefly became a country at the beginning of the 10th century, then it was Game of Thrones between Viking & Anglo-Saxon kings until the Bastard turned up.

                Thanks for putting me right – I did not think that far back, but a lot depends on what you define as English, as some today believe that the Welsh are the true English….nothing is simple & according to DNA, modern Brits are very Irish.

                1. Oregoncharles

                  (pedantry from America)
                  No, the Welsh are the true Britons (the rest live in France). The English are the Germanic Angles, etc. The Scots seem to be a different mixture – IIRC, the Highlanders migrated over from Ireland, while the Lowlands are more germanic.

                  “Very Irish”: could that be the original Celtic population showing through? Language and culture can change without the underlying population changing dramatically. All ancient history, of course, but you brought it up.

                2. Anonymous2

                  Yes in my day a lot of people’s English history started with 1066. I guess it was nice and dramatic and clean-cut, things, as you say, being a bit messy before then. Plus of course some of the aristos’ titles started then (best forget the dispossessed natives).

                  1. Anonymous2

                    On the origin of the Scots, my DNA test supports the thesis that my ancestors were previously Norwegians. There seem to have been a number of us probably came over as Vikings and concentrated around Caithness in the far north and Orkney and Shetland. I can confirm what you say about the Highlanders being largely related to the Irish – haplogroup R1B IIRC.

            2. Colonel Smithers

              Thank you, Eustache.

              Wasn’t Owen Tudor, also the name of a great racehorse, married to a French princess.

              1. Eustache de Saint Pierre

                You left me intrigued, so I had to look him up – yes he married Henry V’s widow Catherine of Valois for whom he had previously laid table. Quite a lot of legends around him, but it seems as though he was quite the lad, from Wiki :

                “The fact that little is known about Tudor’s early life and that it has instead become largely mythologized is attributed to his family’s part in the Glyndŵr Rising. At various times it has been said that he was the bastard son of an alehouse keeper, that his father was a fugitive murderer, that he fought at Agincourt, that he was keeper of Queen Catherine’s household or wardrobe, that he was an esquire of Henry V, and that his relationship with Catherine began when he fell into the queen’s lap while dancing or caught the queen’s eye when swimming “.

          2. fajensen

            I lived around Abingdon, Oxfordshire. We had a lot of “northern” contractors who were all retrained coal miners to different professional levels. Technicians, Engineers, Electricians, practical people who could get things done – something I really, truly, miss in my present occupation amongst failed intellectuals and worry-warts who overthink everything and are afraid of every mistake they might make if they actually made a decision.

            I was quite impressed with the availability of the Open University at the time, in Denmark one could not re-train at the degree-level for a different career unless one gave up working and embraced poverty again (In Denmark today, the useless government that we have has gone and banned 2’nd educations, so, now one cannot even do that).

            1. Eustache de Saint Pierre

              A beautiful part of the country – I remember there was training & other possibilities for miners & even what I think were called community enterprise programs which set people to work on cleaning up the battered industrial environment.

              The latter not being a real substitute for real lasting work, but it was at least an effort which gave especially youngsters some training & work experience. Hopefully I am incorrect, but nowadays TPTB do not bother at all with such things.

      2. visitor

        I don’t think there is a mechanism for stopping “Article 50” except by the unanimous approval from all the EU member states (representatives) by voting.

        I do not worry about that. If the powers that be must concoct some contorted interpretation of the Lisbon treaty, or invent some legal practice to get the article-50 process out of the way, they will suddenly prove to be very flexible and creative.

        The only issue is if some Germans appeal to their own constitutional court — as was done repeatedly in the past regarding the ECB. Then things might get hairy.

        As a minimum price, they will want all the special concessions that the UK has negotiated over the years revoked.

        I agree, the UK will pay a hefty price, no matter what. It is however quite possible that the EU will throw it a small bone in the area of migration control to sweeten the raw deal for the British populace.

        1. Colonel Smithers

          Thank you, Visitor. Your post chimes what was suggested at an event I attended yesterday and have summarised below.

        2. PlutoniumKun

          I don’t doubt you are right that if the EU really wanted to stop Article 50, they’d find a way to do it (just as supposedly it was illegal for May to call an early election). But if even one EU member feels that Brexit is to their advantage – say, for example, Macron deciding that Paris could become a major financial centre if Brexit was really chaotic – it might become surprisingly difficult for anyone to find that way.

          1. JL

            I agree entirely, PK. If the EU powers wanted to stop Article 50 at that late date, they could. But why would they? The UK has been making obstacles, not friends, and the rest of the EU would prefer they’re out, particularly if they get to dictate the leaving terms.
            Put another way, what’s the upside for the rest of the EU of calling off Brexit?

        3. Yves Smith Post author

          I don’t regard the German Constitutional Court as a big issue. Its rulings have carefully avoided challenging the ECB. It seems to be very aware of power and institutional dynamics and isn’t going to upset apple carts.

          1. vlade

            GCC is a non issue here. Retracting A50 has no impact on anything in Germany as it would just keep status quo, and whether A50 can or can’t be retracted is not a question of any German law.

            Which is why I say that the situation is somewhat different from Greece where ECB was pulling the strings, which could/did create new national obligations, which could have (and were) sent to GCC.

            But that doesn’t mean UK is in a much better situation than Greece.

    3. Terry Flynn

      I think that either one of the main political parties will exploit the mayhem (excuse the pun) to get a large mandate in a new general election when it hits the fan and try to keep us out when Brexit actually happens.

      Or, more likely (and agreeing with you) that a load of bluster will ensue and we’ll stay in minus all the concessions we got over the years. I think the latter is more likely because the tabloids will feel forced to follow an angry readership who care less about the IT implications and more about something that hits them directly and very visibly in terms of holidays – e.g. suddenly finding they’re in an enormous 2 hour queue at customs at Ibiza airport whilst EU citizens continue to sail through. Bread and circuses – ironically they are probably more likely to accept a bunch of things disappearing from the shelves at ASDA due to supply disruptions and pin the blame on those ‘perfidious Europeans’ but mess with their circuses like their 2 weeks in Spain and no more cheap roaming with their phones and suddenly the EU won’t be seen to be so awful.

    4. PlutoniumKun

      I would agree that the scenario you’ve set out is maybe the ‘best’ possible one, and could happen, however, it would be so thoroughly humiliating for whoever has to make the decision (presumably, a Tory PM after they’ve quietly dispatched May to a padded cell somewhere) that things would have to get really bad to persuade them to pull the trigger on this option. The problem for the Remainers is that after crying wolf over the economy so loudly over the vote, no amount of terrible predictions will change peoples minds – only a genuine crisis that hits millions in their pockets will do that. So it would I think take a sterling crisis, a property market/bank crisis, or a mass exodus of jobs I think to do that. I’m not sure that will necessarily happen in time – it may be that the economy will float on quite happily up to 2019.

      I think there is one scenario that might allow a face-saving climbdown. There is still some ambiguity over whether Holyrood has a veto over the Repeal Bill. If the Conservatives had any sense they would engineer a ‘constitutional crisis’ over this and so back out of Brexit as a way of ‘saving the Union’. Even Brexiteers might be persuaded that having this as a Plan B of dragging out the process might be sensible. Unfortunately, so far, common sense is something they’ve proven to lack.

      1. visitor

        it may be that the economy will float on quite happily up to 2019.

        My guess is that by the early 2018, after German, Austrian, Czech, possibly Italian, legislative elections, when all new EU governments are in place and start seriously dealing with the Brexit business, UK corporations will finalize their assessment of the situation and decide what to do — with a view of implementing their own measures to safeguard their interests in the next short 12 months.

        If May or other Tory buffoons are still in place by the end of 2017 and continue with their inept handling of the matter, the probability is high that there will be a series of concerted announcements by firms rushing to the exit doors — and suddenly many (City, headquarters, and possibly critical factory) jobs will be relocated en masse, the real estate market will therefore crash, and the pound will finally plunge.

        By early 2019, the situation will look, and perhaps already be, dire, and the scenario I sketched will take place.

        I think there is one scenario that might allow a face-saving climbdown.

        The “constitutional crisis” you allude to would be a shrewd move, but it depends on the EU itself accepting the British excuse and not playing brinkmanship. After all, other countries could just state “So you have an internal constitutional problem? How interesting. Well come back to the negotiation table when you’ve solved it. Remember the deadline: April 2019. Oh, you no longer want to exit? Nice. But you know, things are no longer the same. Here is what you will have to do to stay with us..”

        Whatever path is taken, the result will always be humiliating for the politicians in charge and the British in general, because the UK will be made to pay a price for daring to reject the EU.

        1. PlutoniumKun

          I think in the scenario you set out a lot depends on whether there is a ‘rush’ or whether its a ‘drip-drip’ of job loss. It could well be that some major players would engineer a rush to try to bring the government to its senses. But they must also be well aware that something like that could get out of hand and cause enormous damage. A 2018 sterling crisis matched up with failing banks caused by a property/car loan crash (not, imo, an unlikely occurance) could make Brexit even worse than it has to be. But if its ‘drip drip’, then the UK polity could end up like the frog in a pan – dead before it even realises its on the menu.

          I think you are right about Europes attitude. I get the impression that the major players have moved on – they consider Brexit now to be a technocratic matter and are focusing on other issues. So far as Merkel is concerned, the centre of Europe has moved east, and thats all there is to it. Even if it would seem to be economically pragmatic to give the UK a face saving way out, I doubt Merkel/Macron etc., would be willing to expend any political energy to help out. I don’t think they want to actively punish the UK, its more that they are aware that forging a concensus to help the UK would be very difficult (there is bound to be a few countries with an axe to grind), so they aren’t willing to do the work.

          1. visitor

            My assumption of a “rush” instead of a “drip-drip” was based on the condition that “May or other Tory buffoons are still in place by the end of 2017 and continue with their inept handling of the matter”.

            In that case, it will dawn on major firms and economic sectors that a whole year has been wasted by an unprepared government, and that it is too late to avoid the Brexit being a titanic wreck. Hence, they will take drastic measures with urgency — “let us decamp quickly before it gets really bad”.

            On the other hand, if a somewhat competent government replaces the current one, the collapse may be replaced by a constant, low-key drain.

            Your remark that “the centre of Europe has moved east” is important. That evolution will inevitably determine the EU priorities in the coming decade. British politicians have not realized this shift, still enthralled by the hypertrophied role of the City — and I doubt that the French have understood it as well.

      2. vlade

        The economy is tanking already, and the real wages are dropping due to the inflation running >2% due to the sterling collapse (sterling crisis? There already sort of was one, right after the referendum when it tanked over 13% over one week- from 1.49EUR to 1.29USD, most of it on the first day).

        BoE is between a rock and a hard place, as it may be forced to start raising the rates anytime now – depending on what stupid remark some politician may make on a world stage, that could trigger another 5-10% drop in sterling.

        That would be a deadly coctail, where BoE would be deciding whether to kill the real incomes by raising mortgage rates, or raising the other living costs (via imports), not to mention jobs going.

        I’d say a face-saving climbdown would be a ref #2, which at the moment it looks like Remain would win.

      3. Darn

        There is no Holyrood veto, because the UK Parliament is sovereign. Under the Sewel convention it will “normally” only legislate on devolved matters with Holyrood’s consent, but that is custom and not law, as the Supreme Court stated in the Brexit case.

    5. TimH

      The UK changed it’s pension rules a very few years ago, and now allows those 55 and older to pull the money out of their private pension plans. It’s called a uncrystallised funds pension lump sum (UFPLS) for those who care to look it up.

      I’d be interested if that is causing people to cash up and move the money out of the pound before Brexit and potential devaluation and/or money flight controls.

  2. David May

    Britain continues its inexorable slide towards an economy made up entirely of estate agents, curry houses, pound shops, nail bars and escort services. Rule Britannia, Britannia’s ruled by Daves.

    1. Colonel Smithers

      Thank you, David.

      Sometimes, just to wind it up a bit and even though I am not a Tory, I say that Britain has never been the same since the Tory Party was taken over by estate agents (now more numerous than army personnel), from estate owners, and second hand car salesmen, from the owners of Rolls Royces and Bentleys, and grimace, as if to say yuck, like Edward Fox in the Never Say Never Again scene when watching Sean Connery Glasgow kiss some baddy.

      1. blennylips

        Once again, PKD nailed it: The War with the Fnools
        Dick said of the story:

        Well, once again we are invaded. And, humiliatingly, by a lifeform which is absurd. My colleague Tim Powers once said that Martians could invade us simply by putting on funny hats, and we’d never notice. It’s a sort of low-budget invasion. I guess we’re at the point where we can be amused by the idea of Earth being invaded. (And this is when they really zap you.)

  3. Kk

    The Somme taught us a lot, General Haig was a genius, Dunkirk was a massive victory, Aden taught us a lot, the Gulf wars were a massive victory, Helmand taught us a lot, Syria is a great victory……..

    1. Colonel Smithers

      Thank you, KK.

      My father served a quarter of a century in the Royal Air Force, retiring just after Gulf War 1. He served in Aden, the Falklands, Gulf War 1 and Northern Ireland. The British public has no idea of how the Falklands were nearly lost and how Iraq and Afghanistan were defeats. Without US help and a compliant MSM, the armchair warriors would have been toast and perhaps the UK could have faced up to the reality of its precarious position.

      Many current and former service personnel think nuclear weapons are a waste of money and that money would be better spent on conventional weaponry, but Trident allows the UK to stand tall alongside France, two bald men that have no need for such a comb. There is not a cat in hell’s chance of France having nuclear weapons and the UK not having any. This is similar to the thinking that spooked Italy, Portugal and Spain into the Euro.

      1. PlutoniumKun

        Its an interesting thought, but it does seem that its good for a countries soul to lose a war completely. Those countries which have been colonised or have been thoroughly defeated in the recent past seem to have a more rational and cold eyed view of their place in the world and so are less prone to hubris abroad.

        The great problem I think for both the US and the UK is that while they’ve been defeated lots of times (when was the last unambiguous US military victory? Grenada?), its never been in circumstances that really hurt – all the defeats have been spun as moral victories (even, unbelievably, the Vietnam War), and so has never caused a real reckoning domestically.

        1. Anonymous2

          Yes . My uncle was a Catholic priest and a very saintly, good, admirable man. One of his favourite quotes was ‘It is good, Lord, that you have humiliated me’.

          It is harsh but true that, unless we occasionally experience humiliation, we become puffed up with pride, and that of course leads to hubris,

  4. Colonel Smithers

    Thank you, Yves.

    Your post is timely and allows me to give a read-out from a discussion about Brexit and FinReg over lunch in the City yesterday. Nicolas Veron of the Bruegel and Peterson Institutes opened the batting and was assisted by the Institute of International Finance’s David Schraa and a FinReg partner from PWC.

    Veron thought there was no way the UK could escape EU jurisdiction if it wants access to the single market, but the form of jurisdiction can be finessed under existing rules and bilateral agreements between regulators, so bypassing politicians. The Financial Conduct Authority’s Andrew Bailey, a former Bank of England deputy governor, spoke about that recently, too.

    The European Securities and Markets Authority is too underresourced and immature to be able to handle the task of supervising the activities that will transfer from London. Therefore, other EU institutions will have to assist. That could lead to a rationalisation of EU supervisory authorities. Veron added that the European Banking Authority would be better located in Frankfurt and the Medicines Agency in Strasbourg, so close to Basel and allowing the European Parliament to stay in Brussels permanently.

    Veron reported how Brussels is continually surprised by how little preparation the UK is doing. The UK’s climb down over what is negotiated first, the divorce or the new arrangements, showed that the UK has no cards to play and needs time. Veron thought that Barnier would want to avoid the cliff edge of a hard Brexit and give firms a 3 – 5 year transition.

    Brussels was surprised by the UK general election result, just as it was by the referendum result. There is a sense that Brexit may not happen. The floor, a broad range of City opinion, thought that firms have until the end of the year before they switch on the hard Brexit contingency. Out of about 60 attendees, only 3 reckoned the UK would stay in the single market.

    A representative of a well known Far Eastern tech giant said that it was not just Brexit that was deterring investment in the UK, but the cost of opening in London and the cost of living for staff who will have to transfer from home and others recruited to work in London.

    Veron drew attention to a letter from the British former Commission official Jonathan Faull to the FT a couple of days ago, detailing how, under current rules, the issue of free movement could be fudged to the satisfaction of parties.

    France is pushing hard for Euro clearing to take place in the EU, France’s / the EU’s version of “taking back control”, and wooing City firms to relocate. Events are taking place in Paris today and tomorrow as part of that process.

    The forum ended on a pessimistic note. It was felt that political bloody mindedness would prevent an accommodation. At best 10% of jobs would be lost, but some felt two or three times that number could go. It was felt that it would take the City a decade to recover from the shock. It dawned on attendees that the City ought to have avoided isolating itself from its UK hinterland.

    It was felt that the City would, at best and after a while, become like Amsterdam now. Apart from one person, there was no appetite for the UK to become a low regulation and low tax haven. An American City veteran felt that English law, language, time zone, expertise, new technology and funding solutions, and diversity were advantages that can be made to work, but most attendees felt they were not sufficient and the UK would get squeezed between the US, EU and Asia.

    Depressingly, there was just one journalist in attendance, a young lady from Politico. That was not a surprise as the UK MSM had an orgasm about Trump yesterday and this morning, even the BBC World Service’s science bulletin. It appears that the UK MSM thinks Brexit is a nothingburger.

    1. Redlife2017

      Colonel Smithers – thanks for that update. I agree that it’s almost impossible to find much on Brexit and when I do (from either a general perspective or even City-perspective) you end up hearing from rah-rah idiots who think throwing open our markets to brutal competition (from the likes of the US) would be teh awesome. They forget (don’t care?) what happened to Mexico with NAFTA.

      I’ve noted to others in the City that we will lose tens of thousands of jobs just due to Euroclearing alone and I get crickets. People figure that their large house in the countryside with the attendant servants will be safe and secure. But quite a few people live on the edge. Huge bonuses, but no savings. They spend on remodelling their homes or big holidays or expensive tech. They have huge mortgages. This will not end well…

      1. Colonel Smithers

        Thank you, Redlife2017. If ever you want to attend such events, please feel free to ask Yves for my e-mail address.

    2. PlutoniumKun

      Thanks for that great overview. I get the impression that most financial institutions are hedging their bets by establishing nominal ‘European offices’ such as Barclays are doing in Dublin (a fairly small, very upmarket office) without making any commitment to moving more staff. There certainly isn’t a rush to build new offices in Dublin, which leads me to think that the market isn’t anticipating a major shift. Every spare bit of land in the city is now been fought over for hotels and student housing.

      I do get the impression though that the French are going all in for a grab of what they can get from Brexit. Macron seems determined to make Paris the financial capital. I wonder if there is much going on behind the scenes with car plants (mostly French owned already) and Airbus component plants. I would not be surprised if the French are already well advanced in preparing for an exodus. Politically of course, this means they would have no vested interest in making life easy for the UK in any negotiations.

      Incidentally, I’ve no idea if this is connected with Brexit or other matters, but a well known and very well connected Tory banker is selling up his rather magnificent pile in Ireland. I doubt it will go for the money asked (its too far from any airport), but the house and estate is quite incredible, so I’m sure there are a few rich folks sniffing around it. Its very close to Coolmore Stud, and there are satellite studs around therer, so I’m sure a few Kuwaiti or Qatari racing fans will be having a look.

      1. Colonel Smithers

        Thank you, PK.

        The distance from the airport would not put me off. It’s a beautiful part of the world.

        I worked on the initial rebuild of Barclays in Dublin from 2014-6 and have stayed friends with Irish former colleagues.

        Geoff Magan is from a long line of Irish bankers and bankers of Irish descent, including Sir Denis Mahon.

    3. Oregoncharles

      “The European Securities and Markets Authority is too underresourced and immature to be able to handle the task of supervising the activities that will transfer from London.”

      Wow. If I was an EU citizen, my hair would be standing on end, if I had any. Isn’t that a potential disaster at least on par with the UK’s customs systems? Not that I understand how those systems work, but doesn’t that give the UK pretty serious leverage? We know what happens when financial systems escape regulation: 2008 happens. The EZ is only now starting to recover.

      And also: “France is pushing hard for Euro clearing to take place in the EU,” – and little wonder. It made no sense for that to happen outside the EZ; taking it outside the EU would be begging for serious trouble. But how hard is it to make the switch? We’ve been reading about IT projects; isn’t this another enormous one? What’s it worth to the EU for London to cooperate on that project, which is not in London’s financial interest? (OTOH, making London no longer a “financial center” that wags the dog is probably in Britain’s interest, once the debris stops falling.)

      If investment is being discouraged by the price of RE in London, why would other countries want a deluge of giant banks?

      Quite a can of worms, Colonel. Thanks.

  5. dk

    ‘Chocolate orange’ Brexit warning is overdone, says minister

    https://www.theguardian.com/politics/2017/jul/13/chocolate-orange-brexit-warning-is-overdone-says-minister

    But [Steve Baker, an undersecretary in the Department for Exiting the EU] added: “I think it is overdone language. What I’m seeing every day in the department is civil servants working extremely hard under strong political direction from ministers to deliver the plans that we need to make sure that our exit from the EU is smooth and orderly and successful in whatever circumstances we face.”

    I’m sure all the hard working civil servants are eager for that strong political direction, addressing and solving those pesky “circumstances”. Especially the technical ones!

    1. Colonel Smithers

      Thank you, DK.

      Please don’t confuse Baker, who is MP for the constituency next to mine, with technical issues. A colleague and I had to meet him at the House of Commons in 2011 and explain why Sterling should not be pegged to the gold standard. Still, it was nice to chillax by the river and have a laugh at someone who aspired to become a minister.

      When I caught up with dad soon after, we wondered how the guy became a Royal Air Force officer.

      1. Clive

        Kit Malthouse, who is my MP said in an interview last week (link here, but you really, really don’t want to listen to it, I only include it as a source citation) told viewers that “customs was all electronic now, so there’ll be no problems leaving the Customs Union as everything will work just fine as we already handle non EU imports and exports and there’s not much paperwork done manually” (I’m paraphrasing a little, but that was the gist).

        So, that’s alright then…

        You know that old saying “what happens when an unstoppable force meets an immovable object?”. Well, for politicians when they try to pontificate their way around IT and operational aspects of government, I always find myself asking “what happens when abject cluelessness meets intractable constraints?”. We’re all about to find out !

        1. Andy Blatch

          “not much paperwork done manually”

          That is true but then pretty much the same as saying the invention of the typewriter meant no more writing. He is obviously completely ignorant of how we do Customs entries, we just don’t handwrite them anymore (I go back to when we did, there is essentially no change apart from typing it into a computer screen).

          At least half of our LHR Import department are clearance staff, on our surface side which is a bigger department there are only 3…I think it will need about 20. So I note the UK association of International Trade is worried about a lack of trained HMRC people, they don’t do the entries, it is Freight Forwarders who do and we don’t have enough trained staff. It isn’t something you can teach quickly, it takes years. The US requires Customs Brokers to be licenced and I hear that only around 15% of people pass the test first time (easier to become a lawyer). Customs entries are a bit of an art form.

        2. Synoia

          If the system was in place and working, the increase in volume from 50 million transactions to 350 million transactions per year would break it. Noting scale by a factor of 7 (and I suspect tha fact of 7 is really a factor of 10, because estimates are generally optimistic.

          I believe the UK Customs IT group is in Southend in Essex. Southend is not a bastion of high tech, with a copious supply of contractors.

          That is, it is a a ‘B’ team. The ‘A’ team works in FinTech in or around the City, where there is an abundance of money.

        3. Colonel Smithers

          Thank you, Clive. All I can say is clucking bell about your representative and the cluelessness.

    2. Synoia

      What I’m seeing every day in the department is civil servants working extremely hard under strong political direction from ministers to deliver the plans

      That is the only thing he could say.

      Implementing the plans is another set of tasks. Probably ones that are much larger in scope than are imagined.

  6. Colonel Smithers

    Not unrelated and perhaps occasion for another thread, for which I apologise to Yves and the team. It’s something that my parents and I talk about. I was born in September 1970, a few years after my parents arrived from Mauritius. I often ask them when the rot set in or they observed the rot setting in. The pair reckon that with the passing of the generation who had served in WW2 and the arrival of the Thatcherite wide boys (and girls) in the 1980s. The road to Brexit can be traced to the 1980s in their opinion. I can’t recall the 1970s, but can sort of agree as I became more conscious of these things in the 1980s.

    1. Anonymous2

      I am inclined to agree with your parents Colonel. I started following UK politics in the 1960s. The old school Conservatives I remember from then had all been through the Second World War. I may be wrong but I had the impression there were a lot of ex-officers on the Tory backbenches in the 1960s and 1970s. You got the sense that many of them were determined never to let there be another major European war. Also, having, I assume, been taught to take care of their men in the armed forces, they gave the impression of having a modicum of compassion for the ‘other ranks’ in society. A lot were landowners (‘knights of the shires’ who were replaced, as I recall some one once describing it, by ‘knights of the garage forecourts’) who had a degree of ‘noblesse oblige’ towards their tenants etc.

      There was undoubtedly a change of mood in the 1980s. Thatcher certainly transformed the Tory mentality, perhaps in part as she became more hostile to Europe as time went by. She made it respectable for Tories to be sceptical about the European project in a way that it really was not before. Enoch Powell was the only prominent Tory Eurosceptic in the 1970s and he had already discredited himself with his ‘rivers of blood’ speech. Ironically he went off to be a Unionist MP in Northern Ireland once the English Tories had had enough of him.

      1. PlutoniumKun

        I recall a long time ago reading a history that described the Thatcher government as essentially a class revolutionary one – the lower middle classes siezing power from the working class and the upper classes. Thatcher of course loathed ‘wet’ aristo Tories as much as she hated the working classes and middle class liberals. Whatever you say about the older generation of posh Tories, they did have a sense of noblesse oblige – this was replaced with genuine class hatred in the 1980’s.

        I think its true that most countries have a generational shift from a revolutionary/or war generation to a more opportunist one, leading to moral decay. In Ireland, many older people sigh over what were called ‘the men in the mohair suits’ in the 1970’s, a generation of shart suited spiv politicians (led by Charles Haughey) who took over from an older generation of pols who might have been incompetent and occasionally venal, but who were usually motivated by a genuine patriotism forged in early national struggles. You can see the same with the passing of the WWII generation in the US. I wonder about China and what will happen when the spoilt princelings and property billionaires take over from the older generation who remember the Red Guards and the Cultural Revolution. I doubt it will be pretty.

        1. Colonel Smithers

          Thank you, PK. That was certainly the case in Mauritius, not just generational, but ethno-religious, too.

  7. d

    i suspect that if they dont have a method to manage trade they will end up with a lot less trade, companies will move out of the country, and only import the end products. so you wont see any auto parts being exported to the EU, just to import autos into the UK. one they probably dont have auto parts plants, so nothing to export and converting auto plants into parts plants isnt really all that practical. so they will just close the plants down, and strictly import the autos. now we always (in the US and else where) hear that major government IT project just means disaster. but for us in the private sector, we see the same thing. all major projects tend to be that way. they are usually under funded for what they are trying to do, dont have the knowledge to do what they are tying to do (business rules tended to be in the software, and not even the user remember that they are there), and then there is the over estimate of the power of some new technology (aka IT fad). so given the hard exit, dont expect the Brits to be in really good shape, for a few decades,

  8. SA

    Production schedules will be thrown off, foodstuffs may rot, there will be shortages of consumer goods, trade financing will become difficult, legal venue will be unclear. Container shipments will have to be broken down to assess individual goods. It’s not simply a matter of an IT system; existing supply chains–and existing shipping methods–will be replaced with less efficient ones. It’s a catastrophe in the making.

  9. ChrisPacific

    Big government IT projects like this can be delivered successfully, but they are challenging and require good lines of communication and a project sponsor that is willing to tell ministers things that they don’t want to hear. A minister who is willing to listen to reasons and details and doesn’t just brush them off with a regal “Make it so!” is also required (this is the point on which Obamacare fell down, although I suspect there were also issues on the first point as well).

    IT systems take time to build and can’t change direction on a dime. They are also really good at highlighting gaps, fuzziness and ambiguity in the business rules, because they need everything specified down to the smallest detail in order to function properly. The interaction between the business rules or regulations and the ongoing build is continuous and complex, and good communication is crucial so that (for example) government isn’t making regulations that are contradictory or internally inconsistent. That means not just talking regularly but having the necessary people in place to be able to translate between low-level technical issues to business implications and changes, and vice versa. You can get away with leaving things fuzzy at the start to some extent, but unless you are constantly and systematically adding detail and narrowing in on the final specification, you will end up with cost overruns, delays or quality problems (and very often all three, as in the case of Obamacare).

    All of that is true even if you have a single sponsor on the business side with broad authority to approve changes. In this case, the specifications will be determined via the outcome of a negotiation between the UK and the member countries of the EU. That means that opportunities to effect change will be limited and the turnaround time will be long. Simply arranging things so that the negotiations don’t torpedo the IT project, or vice versa, is going to be challenging. And this will need to be done not just for the customs replacement, but every IT project connected with regulatory or compliance changes resulting from Brexit – and there will be many, across practically all sectors. Just setting up an oversight structure for all of this that allows information to flow efficiently and problems or questions to be escalated appropriately is likely to be very challenging.

    The most worrying thing is that if May had even a basic grasp of this, she would have had the pedal to the metal the moment Article 50 was triggered, if not before. She does not seem to have figured out yet that she is desperately short of time, or what the consequences will be if she squanders it.

  10. d

    hm, so will the Brits be able to fly to Europe? and how will they deal with travelers? or the planes?

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