It’s been a turbulent couple of weeks following the UK’s momentous vote to leave the European Union – and nowhere has ‘Brexit’ caused more shock and uncertainty than in the FinTech & RegTech communities, of which 80% voted to remain, according to an Innovate Finance poll. In this uncertain environment, the industry is racing to understand the implications of Brexit going forward, particularly regarding the issues of capital, market access, talent, and continuing regulatory compliance.
Last week, we joined several UK FinTech leaders at a town hall hosted by Innovate Finance, where community members worked to shed some light on what lies ahead. The prevailing sentiment was one of cautious optimism—albeit it tinged with disappointment. Dan Hanson, an economist at Bloomberg, said that while there will be a material slowing of growth over the coming months, a prolonged downturn is unlikely. He praised the Bank of England’s swift action to shore up economic stability after the leave vote and predicted that the Bank will implement easing policy in order to boost growth. Although the Bank voted at its July 15th meeting to maintain interest rates at 0.5%, the consensus is that stronger action will be taken next month.
Several of the event’s speakers noted that the UK’s FinTech industry is well-placed to weather the Brexit storm because its most important strengths are not inherently tied to the EU. The CEO of Tech City UK, Gerard Grech, said that even after Brexit, talent will look favourably to London and the rest of the UK due to its “critical mass of expertise in technology and critical mass of capital”. The UK currently attracts the second highest amount of venture capital per capita after the US, Grech noted—and he argued that this is unlikely to change, even despite the “unknowns”.
REGULATION & COMPLIANCE: A TALE OF HOPE AND UNCERTAINTY
Lawrence Wintermeyer, Innovate Finance’s CEO, pointed to the UK’s financial regulator as a real comparative differentiator for the UK’s FinTech industry. The FCA’s “engage rather than enforce approach” has positioned the UK as the leading global FinTech hub, he said.
The FCA itself had a say, too. Christopher Woolard, Director of Strategy and Competition, assured attendees that the regulator would double down on its commitment to supporting the success of the FinTech industry. Following the leave vote, the FCA’s twin priorities will be promoting competition and innovation, Woolard said. Project Innovate will continue to provide direct support to FinTech entrants, helping to make the regulatory process as frictionless as possible. The FCA will also focus on regulatory innovation. Woolard lauded the early success of the FCA’s FinTech bridge scheme, under which lateral agreements have been signed with foreign governments (currently Australia and Singapore) to vastly simplify the process for FinTech firms looking to expand between markets.
In terms of regulatory compliance, the overall impact is likely to be quite limited. Legislatively-speaking, attendees were reminded that all regulations remain in place – whether derived from a UK or an EU source. And, although Brexit could result in UK and EU rules becoming less congruent if the two blocs implement international standards with differing approaches, it is unlikely that too much will change in this regard. As one speaker noted, it is important to for the UK to retain and implement EU legislation to ensure equivalency with the EU market.
Moreover, wider international rules and standards limit any opportunity for the UK to deregulate, especially in the heavily controlled arena of financial crime. Regarding sanctions, the UK is still bound by UN sanctions resolutions regardless of the EU relationship, and it might in any case choose to follow the EU’s lead on sanctions. Similarly, the UK is still a member of the FATF, and it has committed to effectively implementing the body’s AML/CTF rules. This limits the scope for change, although it is possible that the UK’s approach could diverge in some areas (the definition and treatment of PEPs, for example); practically, this means that multi-jurisdictional businesses will need to think about more flexible compliance systems.
Some of the UK’s own laws, such as the Bribery Act of 2010, are already stricter than those demanded by international standards – so it’s unlikely that the UK will see any significant changes in regard to Anti-Bribery & Corruption regulation. The UK might lose access to EU corruption data sharing, but given the global trend toward increased information sharing this doesn’t look likely.
What do FinTech and RegTech need?
Industry leaders were clear that the future strength of UK financial tech scene is strongly dependent on a favourable deal being reached with the EU and on sufficient government support for the industry following Britain’s exit. As Mike Laven, the CEO of disruptive payments processor Currencycloud, noted, the vote forces UK FinTech to switch “from playing offence to playing defence”. Given this uncertainty, the first priority for most speakers was retaining the UK’s access to the single market. This and maintaining ‘passporting’ are seen as essential to maintaining the UK’s competitive edge. Market access is also especially important for securing talented workers from EU member states.
Attracting investment and liquidity is also crucial. The European Investment Fund currently provides the UK with £9bn in venture capital – 37% of the total amount. Wintermeyer argued that the UK government must step in to replace this lost investment, as a squeeze on investment and liquidity for early-stage firms could be deadly.