The impact of Brexit on fintech in the UK

Potential for growth – market access and investment

As with many other sectors post-Brexit, a significant factor in the uncertainty of UK fintech's future lies in the yet-unknown fate of the EU Single Market (or its future equivalent) once the UK’s departure is negotiated. Whatever the terms agreed, we are likely to see a substantial change to the way in which UK businesses interact with other EU member states, both in their capacity to operate within those states and in their ability to attract external investment.

In the context of fintech (and indeed financial services as a whole), a likely consequence of Brexit will be changes to the cross-jurisdictional validity of UK authorisations in other member states. Under EU single market rules, many UK-authorised firms are capable of ‘passporting’ their UK authorisation to continue providing regulated financial services within other member states. This ‘passporting' has not only enabled UK-established financial services businesses to expand their business through regulated activities overseas, but has also provided non-EU financial services businesses (for example, firms from the U.S. or Australia) with an attractive base from which they can ‘bridge’ their operations, once regulated in the UK, into the rest of the EU.

In the absence of specific agreements as part of the UK's negotiated exit from the EU, we could see the end of a transferable, multi-jurisdictional, authorisation ‘passport’ out of the UK. The potential impact this could have on fintech in the UK is two-fold:

• Market access – UK fintech companies' ability to scale may suffer, with ease of access to EU markets restricted. Without the ‘passport’, fintechs may need to seek authorisation in each target EU member state. That would make EU market access more expensive and administratively onerous than is currently the case and may well be an issue for undercapitalised fintech start-ups.
• Investment – a knock-on effect of this limited market access could be the decline in investment into UK fintech companies, who, unable expand to other countries without attaining multiple authorisations, may become less attractive ventures for would-be stakeholders. Consequently, the UK’s fintech sector and the surge of startups choosing the UK as their primary headquarters, could be tempted to move to other jurisdictions to develop their offerings where financial backing is less uncertain.

With the attractive benefit of a seamless link into the EU’s market taken away, and, in its place, the less welcome prospect of separate compliance resources for its UK and EU operations, investors and fintech companies alike may look to Berlin or Dublin to find a home for their companies or investments, while maintaining the benefits of time zones, common language and diverse workforces that have underpinned the growth of the fintech sector in the UK.

A loss of revenue from UK fintechs as well as financial 'incumbents’ becoming more inclined to acquire or merge with tech companies outside of the UK could lead to loss of potential investment over the coming years.

Human resources and skilled labour – the free movement of people

In addition to the potential impact on external investment, another key factor governing the success or failure of UK’s fintechs post-Brexit will be their ability to continue harnessing talent in technological expertise from EU countries and beyond.

UK fintechs employ the services of developers from countries all over the EU, and the growth of the sector is reliant on continuing to attract the best skilled labour for those businesses, be that from the UK or abroad. To impose limitations on the free movement of workers into the UK following Brexit may therefore be to put the UK’s fintech sector at a disadvantage, as it becomes more administratively complicated and expensive to employ foreign talent. As suggested, this could in turn become a motive for fintech companies to turn their backs on the UK in favour of alternative EU fintech centres.

Impact on UK financial services (as a whole)

The effects of Brexit, and its impact on fintech, are unlikely to be felt by the technology side of the industry in isolation. Indeed, it is arguable that the effects on financial services generally will be of greater significance.

The potential negative effects outlined above may impact the entire financial services industry, and the UK’s competitiveness as a leading financial services jurisdiction could be weakened. The inability to passport regulatory authorisation from the UK into other EU member states, as well as being outside the EU single-market, may cause global banks based in London to reduce or even withdraw their UK presence, as it becomes a less commercially valuable European base.

Further, should Fintech companies leave the UK, in search of single-market access and, ultimately, investment, the innovative and progressive mould of the UK’s financial services that has been building up could fall away.

Brexit’s impact still unknown, but on a brighter note…

It is however worth noting that the attraction of passporting regulatory authorisation from the UK into the EU is not the UK’s only asset in drawing top companies in the financial services and fintech world. The FCA and the Bank of England are, as regulators go, innovative and progressive, for example, through 'Project Innovate', the 'Regulatory Sandbox', (allowing companies to trial their new products without the burden of gaining full authorisation first, while retaining customer protection) and the Bank of England’s work on cryptocurrencies and distributed ledger technology.

Looking at the bigger picture (and seeking some silver lining), it is important to note that the UK fintech scene has established its position as a market leader, and may well continue to manage and grow this reputation by accessing non-EU markets before any of the potential impacts discussed above actually materialise in light of Brexit. It may well be that, freed from some of the more burdensome aspects of pan-European regulation, the UK fintech may be enabled by liberalisation and could develop a competitive advantage.

All of this remains to be seen, but what we do know is that UK fintech is good at converting an opportunity when it sees it.

This article was co-authored by Adrian Shedden and Daniel Hogg.