A House of Lords committee in the UK has published a report on Brexit and financial services urging the government to secure a transitional period early in negotiations to avoid the risk of fintech firms shifting operations out of the UK as uncertainty after the vote to leave the European Union stacks up.
The UK financial sector currently employs some 1.1 million people, with around 60,000 EU nationals and 100,000 non-EU nationals. It constitutes around 7 per cent of UK GDP.
“The danger is that, in the absence of clarity, firms will restructure or relocate on the basis of a ‘worst case’ scenario. We call for an early commitment from both sides in the negotiation that there will be a transition period,” the committee writes.
In the UK, Brexit-based uncertainty is especially acute for the fintech sector, which faces losing access to the EU’s financial passporting mechanism which allows companies to sell financial products across the region without needing to gain regulatory authorization in every country.
London-based startup GoCardless recently told us its contingency plan for if Brexit nixes passporting would be to set up a subsidiary in the European Union and become regulated there — to retain access to the mechanism.
Far larger fintech firms are already firming up similar plans to shift operations to the EU.
The Lords committee assessed equivalence provisions for passporting in EU legislation — as an alternative option for UK fintech firms — but describe these as “patchy, unreliable and vulnerable to political influence”. They also warn the EU is proposing to tighten equivalence provisions, saying this highlights “the unpredictability of such a regime”.
“We conclude that, if the current passporting regime is not maintained, the government should seek a deal to bolster the current equivalence arrangements for thirdcountry access, to cover gaps in the regime and to ensure the continuation of equivalence decisions as financial services regulation develops,” the committee adds.
According to the committee, the extent of UK fintech firms’ current reliance on passporting is unclear, as is the degree to which equivalence provisions might provide a substitute, so it urges the sector to work with the government to help it have the fullest picture possible going into negotiations with the EU.
It also warns that strength of the UK’s fintech ecosystem could be flipped into a commensurate weakness by the negative network effects of Brexit.
“The UK currently benefits from the co-location and interconnection of firms providing a range of financial and professional services: a change to the business conditions for one of those services could affect many others,” it writes.
The committee suggests that any exodus of fintech companies from London might be more likely to benefit the next most developed global financial services hub, New York, rather than flow into less developed European centers — suggesting short term relocations might go over the pond, rather than over the channel. Although some UK-based fintech companies are clearly already looking to establish footholds in the EU.
“If the UK ecosystem cannot be replicated in the EU, which is not a realistic prospect according to the evidence we heard, we conclude that it would not be in the EU’s economic interest for services to be provided less efficiently, or in New York instead of London,” it writes.
The committee cites euro-denominated clearing as an example of financial services that could be repatriated to the EU as a result of Brexit. Although here again its view is that replicating these services elsewhere in the EU might be difficult — which it adds “gives us some hope that a deal might be reached that would be in the mutual economic interest of both the UK and the EU”.
The UK chancellor announced some measures to support the UK fintech sector in his Autumn Statement last month, with £500,000 per year for fintech startups to come from the Department of International Trade, and an annual ‘State of UK fintech’ report planned, along with a network of regional fintech envoys.
It also intends to modernise its guidance on electronic ID verification with the aim of supporting technology for accessing financial services. But there were no guarantees over the wider uncertainties of what will be Brexit’s looming impact on UK fintech.