As a result of Boris Johnson’s efforts, the U.K. Parliament will be suspended in September. Prorogation being enforced just nine weeks before the scheduled Brexit deadline - regardless of what BoJo says - would reduce the time that the anti-no-deal Brexit coalition has to pass laws that would support a delay in the exit from the European Union on October 31st.
This decision is controversial. As well as preventing MPs from doing their job, the suspension would prevent FinTech startups across the U.K. from securely developing and flourishing. For those that rely on investment from other European countries, Johnson’s move could also have a significant impact on U.K. FinTech’s being able to secure long term funding due to prolonged uncertainty.
For an industry that is currently thriving due to substantial investment, FinTech firms across the U.K. may be forced to rethink how to secure future funding, especially those based outside of London and those that import, export or rely on talent from the European Union. A no-deal Brexit would lead to unwanted uncertainty with the lack of official agreement, significantly changing passport rights possibly overnight. Without a deal, FinTech’s in the EEA would no longer be able to do business with other companies in the area, which would, in turn, result in those organizations increasingly working with international customers.
Three questions in particular now troubling many:
- Will the UK now become less attractive as a talent pool for young entrepreneurs?
- Will start-ups’ access to capital be jeopardized?
- What access will UK FinTech companies have to the single market once Brexit is completed?
Some research has shown the negative effects that Brexit raised among financial services organizations within the U.K. For example, a report from TheCityUK underlines a significant decrease in the required tech talents in the FinTech sector and a report from NewFinancial stresses that FinTech businesses are moving from the U.K. to the E.U. in preparation for Brexit. At the same time, one of the Big Four auditors, KPMG, shows a significant portion of the 55% increase in funding of UK FinTech’s since 2015. There is no consensus among experts that companies currently settled in Britain will leave the country due to Brexit, as some of them believe separating from the EU will actually attract more FinTech businesses to the U.K.
Under current EU rules, U.K.-based financial institutions can operate throughout the union with a domestic banking license. That is likely to change if and when the U.K. leaves the EU, making it more difficult for FinTech companies and other tech/finance institutions to transmit payments across borders with minimal friction. In order to avoid any potential issues, FinTech firms and other outside financial institutions are proactively applying for licenses in other EU countries to allow for continued operations across all markets in any Brexit scenario - including U.K. banks. UK Companies' ability to scale may suffer when the ease of access to EU markets is restricted. Without the passport, FinTech’s may need to seek authorization in each of the states where they wish to operate, making market access more expensive and heavily administrative. At the point of Brexit, the UK will become a “third country” for the purposes of EU law (i.e. it will no longer have the rights or obligations of an EU Member State). Third countries are not subject to the application of EU law, or the jurisdiction of the EU institutions, such as the Court of Justice of the European Union, the European Commission, and the European Parliament. As a result, UK-based FinTech’s will face a changing legal environment as a result of Brexit.
WIRED interviewed Christophe Rieche, CEO and co-founder of iwoca (a credit platform for small businesses that offers loans of up to £100,000 and has around 10,000 customers), and he expressed his concerns about Brexit: - Today we cover all regions we are operating in – UK, Germany, Poland, Spain – from our London headquarters. This is possible because London offers deep pools of talent for native speakers across all levels of seniority and functions from developers, marketers, account managers to credit analysts. If we cannot hire people easily from these regions in London we will have to relocate some or all of our operations. Limiting the pool of talent will make it harder to find stars that enable us to become a global champion. In addition, Forbes talked with Evgeny Shadchnev, CEO of Makers, a software Bootcamp that works closely with many leading FinTech firms to supply software coding talent, and he says that a no-deal Brexit would send the wrong message to talent considering a move to the U.K. If we are going to continue to compete in the digital economy and remain a global leader in FinTech - we have to ensure that there's a steady pipeline of skilled workers available to support the growth of this important sector. Much of skilled talent fueling FinTech's success has come from Europe - so a no-deal could send the wrong message to the continent that we are not open for business and talent is welcome.
In terms of funding, uncertainty during the negotiation process will make this access even harder. We are relying on international investors to fund the growth of our business, today, nearly all of our equity funding comes from continental Europe, says Christophe Rieche. Another effect of limited market access would be the decline of foreign investment into the FinTech community, who without investment is not able to expand to other countries and without international expansion, they may become less attractive for investors and other stakeholders. Consequently, the UK’s FinTech sector and the surge of start-ups 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 easy access to the EU market taken away and separate compliance for UK and EU operations, investors and FinTech companies may look at places like Berlin or Dublin for their HQ because of time zone benefits, common languages, and a diverse workforce. A loss of revenue from UK FinTech's as well as financial ‘incumbents’ becoming more inclined to acquire or merge with tech companies outside of the UK could lead to a potential loss of an investment over the coming years.
There are several countries now following the UK’s lead to reduce regulatory restraints and increase innovation in their countries. This is particularly coming from countries we wouldn’t necessarily associate immediately with FinTech. Lithuania, for example, is set to establish a new regulatory regime to ease the way for FinTech start-ups and is working with the FCA to ensure businesses that the UK regulator has approved get fast-track approval from the Lithuanian authorities. London-run Revolut and Contis have already secured passport rights. The impact on regulation is likely to be felt less severely for iwoca than others because it involves credit. Europe is a patchwork of local regulations when it comes to credit, therefore there is probably no immediate impact from Brexit. Elsewhere, changes to regulation at a European level could make it harder for businesses based in London to compete with those headquartered in EU countries. If companies domiciled in the UK don't have the same access to the single market in the future, it will be harder to build global champions. Uncertainty is not always bad news, however. Brexit could introduce many opportunities for financial startups, particularly those focusing on regulation technology, or "RegTech". It’s a huge opportunity for us,” Diana Paredes, CEO and founder of Suade tells WIRED. Suade takes the complexity out of regulatory compliance for banks by helping institutions compare their operations to regulations and manage changes to adhere to those regulations. The uncertainty Brexit is predicted to cause will mean financial institutions looking to become compliant with changing regulations will need Suade more than ever. And, as technology can adapt quickly to changes in rules, it will become invaluable when regulatory changes are put into place. That said, Paredes doesn't believe Brexit should be taken lightly from the point of view of a business headquartered in London, like hers. She also urges businesses like hers to try to maximize opportunities to lobby for positive changes. We will have to keep a close look out over the next few months, Paredes concludes.
Max Yakubowski from Cointelegraph asked 5 experts from the London FinTech Week about Brexit and No-deal outcomes:
London is the FinTech capital of Europe, only lagging behind China and the U.S. in terms of global placement. The strength of the U.K.’s position is built on three key factors: U.K. financial services, the nature of U.K. customers and the U.K. regulatory environment. Investors put more money into U.K. FinTech than any other European country in 2018. FinTech thrives in London, for the financial sector is uniquely located alongside a booming technology sector — something uncharacteristic of Silicon Valley, Route 128 or Wall Street. This provides an overlap of local financial and tech-savvy talent. It also houses attractive investment incentives such as the Seed Enterprise Investment Scheme, which provides initial income tax relief of 50% on start-up investments up to £100,000. In combination with a diverse talent pool, active government support for foreign investment, and regulators progressively leveling the playing field between FinTech entrants and incumbent institutions. The U.K. is a global FinTech leader and will remain so, Brexit notwithstanding.
It is hard to predict the precise direction FinTech businesses in the U.K. will take after Brexit. Like all parts of the financial services sector, the outcome will depend on the type of Brexit the U.K. sees. However, the impact on FinTech is especially hard to predict because its success depends on a number of policy areas, each of which will see different Brexit impacts. For example, the U.K. has stimulated the FinTech sector through a regulatory regime that facilitates innovation and this could see an acceleration after Brexit if the U.K. does not seek convergence with the EU regulatory landscape. On the other hand, attracting the international ‘tech talent’ that has been vital to London’s FinTech success could be harder after Brexit. This depends on the immigration rules that are put in place by the U.K. after Brexit. If FinTech businesses in the U.K. can’t access international individuals working in areas such as machine learning, artificial intelligence, and blockchain as easily after Brexit, this could cause a contraction in the sector because currently, up to a fifth of the skills used by the FinTech sector in the U.K. have come from the EU. It will take time to develop the domestic skills pipelines to replace these individuals post-Brexit and some firms may leave the U.K. for the EU rather than wait.
The U.K. looks set to leave the EU without a deal, with the ensuing uncertainty and hit to the economy threatening to make it a less attractive place to do business for many companies. Leaving the single market without a trade deal will also severely affect the U.K.’s position as a gateway to Europe, with cities such as Paris making plans to usurp this role from London once it loses preferential access to European markets. Given the importance of financial services to the U.K. economy and the effort the country has already put into encouraging FinTech start-up and retention, the U.K.’s new government will likely want to do whatever it can to ensure this continues. This will be crucial for the economy after Brexit, and also for the survival of both the government and the Conservative Party. In the short term, established companies may try to weather the storm and we may see a slowdown in investment or start-ups until the future becomes a little clearer. In the long-run, the U.K. is likely to go to great lengths to encourage such companies to come to the U.K. and stay. It will need to if it wants to survive the economic fallout of Brexit.
If we take No-Deal Brexit as the most likely outcome, we can expect a significant downturn for the U.K. FinTech market. For one, U.K. firms may lose access to EU financial markets if the U.K. chooses to deregulate its financial rules, because the EU may no longer deem them to be equivalent. Even if this would not happen immediately, the mere possibility will be enough to spook many investors. Additionally, should the pound crash as a result of No-Deal Brexit, we can expect many financial actors (i.e., U.K. FinTech's clientele) to simply leave the U.K. (as has already been taking place). The financial institutions that do stay behind (like banks) would be under too much strain to meaningfully spend on FinTech innovation. All this, mixed with weaker recruitment opportunities, less access to funding and technology (because of new import barriers), means that the U.K.'s status as an attractive destination for FinTech startups will be severely harmed. The loss of access to EU financial markets could not be compensated by a trade deal with the U.S. (or any other nation for that matter), especially because there is no reason why the U.S. would agree to deregulate its own financial market to facilitate the access of U.K. firms. Because of the economic downturn caused by No-Deal Brexit, the U.K. would not have any leverage to ask for any preferential treatment: A trade deal with the U.S. would, therefore, be on U.S. terms. The best thing that could happen for the U.K. FinTech industry (other than the cancellation of Brexit), would be for Brexit to take place under the Withdrawal Agreement. In short, this would increase the likelihood for the status quo for the U.K. financial industry to be conserved, even if the inevitable harm to the U.K. economy caused by Brexit does cause some disruptions.
We have seen that despite the chaos surrounding Brexit, British FinTech’s are doing better than ever. There are three major factors in this success: access to highly-qualified international talent, the presence of financial institutions and the connections with overseas funds. If the divorce were to affect any of these, there’s a significant chance the U.K. would lose its lead in the FinTech scene. I also believe that hard or No-Deal Brexit will have negative effects on the FinTech scene and the overall startup ecosystem. Having rated over 2,600 early-stage startups, we know the quality of the team has the biggest impact on growth potential. So if Brexit were to diminish the talent pool, it could definitely stunt the development of budding FinTech’s and therefore reduce their attractiveness to investors. Also, if Brexit were to push corporations to relocate (as JPMorgan and others have already done) we expect several FinTech’s will follow — especially B2B and B2B2C startups that distribute their products through corporations. Nevertheless, the U.K. remains the most welcoming country for FinTech’s in terms of the regulatory framework, so regardless of how Brexit unfolds, it will maintain a certain competitive edge over its EU neighbors. But for how long?
In short, while Brexit has given FinTech companies and the broader investment community pause for thought, progress has continued since the referendum. There will be uncertainty in Europe whilst negotiations develop in the years to come but FinTech will see continued support from the regulator to encourage innovation and even if the London see the loss of investment and talent from the European region, this can be compensated by other territories, such as Asia, coming to the UK. London will still remain a global capital of FinTech, but we might see its growth compared to other regions slow down.