Wed. Jul 17th, 2019

Planet Compliance

Innovation & Regulation in Finance

The Brexit clock is ticking – What FinTechs and RegTechs need to do now

8 min read

Time is running out

On Friday, Theresa May, the British prime minister, managed to convince her cabinet to reach an agreement on how to approach the final Brexit talks. She didn’t get to enjoy the outcome for long as she and the plan immediately drew fire from the opposition and members of her own party and cabinet as well. This latest crisis culminated when the Brexit minister stepped down last night as a result of the compromise and the foreign secretary following suit today.

Time is running out for the British government and the European Union to agree on a way forward and to avoid that the UK crashes out of the EU, as the Irish prime minister recently put. It comes on the back of warnings from a group of major European companies like BP, BMW, Nestle, and Vodafone that they may cut investment without more clarity over the terms of Britain’s EU exit.

The concerns about the lack of progress in the Brexit discussions and the overall preparations of the financial sector also prompted the European Banking Authority (EBA) to issue a warning. Despite the potential departure of the UK from the EU in less than 9 months away, the watchdog has found an apparent lack of preparation by financial institutions for this event and made clear “firms cannot take for granted that they continue to operate as at present nor can they rely on as yet unrealised political agreements or public policy interventions” He added “Risks, capacity and legal implications must be examined and addressed”, according to Chairperson of the EBA Andrea Enria. It is not the first time that the EBA and the other European Supervisory Authorities (ESAs) highlighted warned against the Brexit risk. In April, the ESAs recommend EU financial institutions and their counterparties, as well as investors and retail consumers, to consider timely mitigation actions to prepare for the UK’s withdrawal from the EU – including possible relocations and actions to address contract continuity risks.

The grim reality

The latest warning is somewhat surprising as the large majority of companies seems to be very pessimistic about Brexit. A recent Deloitte survey showed that a record 75 percent of major British were downbeat when asked about their expectations. They envisage weak investment and waning expectations for sales and that most firms had adopted a defensive financial strategy. Banks and other City firms are losing faith in the government’s ability to deliver their preferred deal with the EU and the Brexit-triggered flight from the City of London is very much underway, wrote Politico recently.

Despite this realisation the EBA is not satisfied with the preparedness of the financial sector and urges national regulators in its Opinion to ensure that financial institutions take practical steps now to prepare for the possibility of a withdrawal of the UK from the EU with no ratified Withdrawal Agreement in place, and no transition period.

The delay in the preparations at large financial institutions might be based on the hope that the parties could still thrash out a deal, but they have been moving staff to other European locations for a while. European capitals have been courting companies based in the UK to relocate for quite some time.

Why FinTech and RegTech Brexit are different

The story is slightly different for smaller organisations like FinTech and RegTech firms that do not have the resources and are not in the position to move their operations across the channel overnight. If, for instance, no deal is reached and the UK were to loose its passporting rights, firms would have to apply for a regulatory authorisation in one of the other EU countries. If a firm does not have already have any operations in another EU member state, it basically needs to start fresh though most national regulators and ESMA try to be supportive. In practical terms the impact on business is massive though as a UK based FinTech like a British crowdfunding platform will not be able to accept businesses and investors from other EU member states for its UK arm, nor will it be able to tap its existing client base in the UK for new or already existing operations in the EU after Brexit.

What FinTech and RegTech firms should do now

There is still time and hope left that a deal might be struck that preserves the best possible solution for all, but in order to be prepared and limit the risks from Brexit, both FinTech and RegTech firms – despite their different situation – should focus on a number of points:

Stay on top of liquidity

Make sure you manage liquidity well. This go sense for start-ups and smaller firms even in normal times, but in the Brexit environment with lots of uncertainty this is an important aspect that decides about the survival of a company as additional funds may be hard to come by in the current climate.

Communication is key – Part 1

Communication is key, especially with regard to your customer relationships. Strong customer relationships are crucial in tough times and if they stick with you now, it will go a long way. Pay extra attention on aspects like product suitability, in particular as market conditions change.

Communication is key – Part 2

Communication is key, especially with the authorities that oversee your activities and that make the rules. The different national and EU regulators have dedicated information and services for everyone with an interest in Brexit. For FinTechs vital and for RegTechs a potential gold mine. For example, the UK’s FCA has outlined its role in preparing for Brexit; the German regulator BaFin has provided answers to FAQs; the Banque de France has focused on common challenges and answers beyond Brexit; and ESMA has published sector-specific principles on relocations of entities, activities and functions from the United Kingdom. The regulator try to help as much as they can and it helps staying in touch with the authority that is responsible for the oversight of your activities even if they might not have all the answers themselves either.

Communication is key – Part 3

Communication is key, so make sure you keep people informed. Make sure that all stakeholders, staff, investors, your clients or service providers get the information they need. This might be challenging times, but everyone knows it, so no need to sweep something under the carpet.

Consider long-term consequences

No one knows what the relationship between the EU and the United Kingdom will look like after Brexit, nor do we can predict exactly it’s consequences for the FinTech sector, so it’s too early to draw the curtain on London and the UK. Having said that, if your product or service is heavily reliant on access to markets in the European Union, it might be worth considering your options if you haven’t done so already. If the UK doesn’t manage to retain access to the EU single market, could you relocate to another FinTech hub and what would the consequences be? No need to panic, but always hope for the best and be prepared for the worst.

Continue to stay compliant

EU legislation continues to be applicable. Either directly or through its implementation into national law until the ties are really separated, so keep working on compliance with existing regulation and prepare for upcoming rules. And lastly…

Every challenge is also an opportunity

Every challenge is also an opportunity and that is particularly true in this case for RegTech firms and here is why: In none of the possible scenarios for life after Brexit is it likely that existing EU regulations will be repealed right away. Instead, large regulatory initiatives that only recently have been or are in the process of being implemented, i.e. MiFID II, PSD2, GDPR and the revision of the Money Laundering Directive, have cost the British regulators and the financial institutions they oversee a lot of time and money. So if only for that reason they might not throw everything out of the window straight away. But it is also rather probable that the future relationship between the EU and the UK will mean for the latter that it will have to follow a regime of regulatory equivalence. For RegTech firms that could mean rather more regulation and as such more work and opportunities than less and systems that can provide solutions that cover the variations should be in a strong position.



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