Brexit, the future of FinTech in Europe and what firms need to do now

The UK has decided to leave the European Union, which is likely to lead to a long period of uncertainty. Immediately markets and the pound have taken a hit, and the turbulences are likely to continue for a while. The prime minister has announced he is going to step down and the fight for succession is already in full swing, but other parties and politicians struggle with the fallout as well. For the EU, too, this will mean changes and not only the replacing of a British EU commissioner; the fear is that Brexit will only be the first domino, nationalists in other countries call for similar referendums, Italian banks may find themselves in another crisis that plays into the cards of the opposition, but the EU in itself is likely to have to decide on what it wants to represent and what the future shall hold for Europe. The defeat of the Remain campaign is also a defeat for European politicians, both in Brussels and other European capitals, but so too for its people.

The consequences for FinTech in the UK

It is also a setback for London as Europe’s unofficial FinTech headquarter. London has risen to one of the best spots in the world (if not THE best as some might say) for financial technology and innovation. The UK government had shown financial support and plenty of private money was available; the city already is one of the biggest financial centres worldwide together with the wide range ancillary services it offers; UK regulators aim to be innovation friendly, promoting regulatory sandboxes for FinTechs to test their products in real scenarios; the taxes are lower compared to other European capitals; the city thrives on talent from all over Europe and the world; thanks to its EU membership it has direct access to one of the biggest markets in the world and benefits from its passporting regime that basically means that.

As it looks this is all going to change, directly or indirectly. The funding situation will change dramatically: it’s not clear whether things will pan out as the Brexiteers have claimed over the long term, but if the initial events after the vote like the backtrack on the NHS pledge is an indication that finances might actually not be as rosy as indicated by the Leave camp, the government will need to tighten its belt. As to the near future, markets and the pound have seen substantial losses and the Bank of England has assured the markets that it has set aside £250 billion of additional funds to prop up the financial system if necessary. That’s money that is earmarked and not going to go anywhere else for now, like FinTechs or SMEs.

The UK’s regulators, the FCA and the Bank of England will try to remain as supportive of FinTech as is reasonable, but they will have their hands full preparing for a regulatory framework for the time after the actual Brexit.

It is possible that all EU nationals that are already live in the UK become permanent residents and London will seek to make sure that highly educated professionals are still allowed to work in the City as it highly depends on foreign expertise, but it will become more difficult and possibly less attractive, leading to a drain in talent and know-how.

The Chancellor of the Exchequer, George Osborne, had promised tax cuts for the next year in his 2016 Budget, but that is likely to be on the chopping block, now, as the government will probably need more money, not less.

Once the political battle for succession is fought, the new government will have to decide on what relationship it wants with the EU and try to negotiate favourable terms on this basis. Responses from European leaders have ranged from anger to disappointment to rationality, but the message seems clear that the UK can’t expect any of the perks of the European Union like access to its single market without signing up to the obligations the Leave campaign has promised to abolish.

So, the consequences for FinTech companies in the UK are likely to be negative. Does that mean that everyone will move across the Channel? Probably not. We will see people moving to Frankfurt and Paris, some to other countries, but none of them is likely to generate the same buzz as London for different reasons. It might also have a general negative impact on innovation as jobs and ideas might simply not materialise given the lack of an ecosystem like the pre-Brexit London.

As absurd as it sounds in these circumstances, but the European Union and EU regulation in particular will need to play an important part in order to secure the future of innovation in Europe for FinTechs in general. For FinTech startups it will simply be too costly in terms of time and money to ensure compliance in each member state of the EU, but for many business models it will only make sense if they can reach the entire EU single market, which accounts for 500 million consumer and 21 million SMEs. The EU passporting regime for financial instruments and services we already mentioned above has played an important role in the establishing of London as one of the leading financial hubs of the world. It has allowed firms located in the UK to provide cross-border services without having to open branches in the other member states or to go through 28 different authorisation processes with national regulators and in their respective languages. EU regulation must provide a framework that both promotes business and protects consumers in a reasonable fashion without being overly restrictive and burdensome.

What should FinTechs do?

In any case, the most substantial changes are not going to happen for some time, but it is crucial to steer the ship through the first waves of this storm. Therefore, it’s critical no to loose a couple of things out of sight:

Make sure you manage liquidity well – even in normal times this is an important aspect that decides about the survival of a company, but with market volatility to remain high for a while and additional funds, if needed, may be hard to come by.

Focus on customers – strong customer relationships are key 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.

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.

Stay compliant – EU legislation continues to be applicable (see our post here) 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 like the new Market Abuse Regulation. The FCA has already warned firms that during a time of turmoil in markets, it will be especially vigilant for market abuse and expects the highest standards of conduct.

Consider long-term consequences – it’s too early to draw the curtain on London and the UK, but if your product or service is heavily reliant on access to markets in the European Union, it might be worth considering your options. 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.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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