Adrian Shedden, head of the Fintech team at independent UK law firm Burges Salmon LLP, looks ahead to the potential opportunities that Brexit may present and also the likely changes to the existing regulatory landscape.
Not quite the regulatory overhaul feared
Most firm’s biggest fear is the loss of the right to ‘passport’ services throughout the EU from their base in the UK. Firms should take comfort from the fact that whether or not they will be able to continue to access EU markets will depend on the UK’s regulatory regime being ruled as equivalent to that of the EU. Given that much of the UK financial services regime currently is the EU regime, this makes it very unlikely that an equivalency decision will not be made. This may be subject to change over time when the UK seeks to invoke its newly found power to legislate under its own prerogative. But in a financial services context, there will always be a good degree of pressure from the industry to retain equivalence and, therefore, the status quo as far as ‘passporting’ is concerned.
To take this one step further, a number of the EU directives and regulations that apply to the UK have their origins in commitments made by the UK as part of institutions quite separate to the EU. For example, the fourth money laundering directive, which describes the regime for countering money laundering and terrorist financing, came into being as a result of recommendations made by the Financial Action Task Force (of which the UK is a member separately from the EU). In addition, the European Markets and Infrastructure Regulation (EMIR) is the EU’s incarnation of the G20 commitment of September 2012 to make the financial industry safer and more secure against market turbulence. Any replacement UK regime will still need to give effect to such commitments. In short, subject to the outcomes of negotiations in some key areas, the UK regulatory regime is likely to remain much the same – at least in the near future – which is good for market certainty and for business more generally.
An opportunity for change
From a regulatory perspective, the ability of the UK to decide its own fate is likely to be positive moving forward. The Financial Conduct Authority (FCA) will no longer be a de facto regulatory gateway for the many entities established in the UK that seek to benefit from the UK’s sensible and transparent regulatory policies whilst also having access to the single market. Instead, the FCA will be forced to compete in the marketplace against other regulators offering EU access, including the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and the Central Bank of Ireland, and will need to act accordingly to prove to firms that it should still be their first choice regulatory authority. This can only improve the experience for regulated firms.
There hasn’t been sufficient time for people to consider a totally blank canvas on which appropriate, UK-specific laws and regulations could be drafted. So the near to medium-term could prove an ideal time for firms to consider which current rules seem particularly onerous/unworkable and could be replaced (i.e. you need to get lobbying) or removed entirely in a world where those rules no longer need to apply as a given. Some initial thoughts on this emerging from the financial services world include the potential for some of the MiFID II requirements on pre- and post-trade reporting and transparency, but the options are potentially limitless in that regard.
Despite the general environment of uncertainty, or perhaps even because of it, investment continues to be made into the UK Fintech sector both from private and public purses.
In the recent Autumn Statement, the Chancellor confirmed that the Department for International Trade will provide £500,000 a year for Fintech specialists – most will agree that this isn’t the most inspiring news, but with some austerity measures on the horizon, at least Fintech is still on the radar. Furthermore, the press is awash with stories of Fintech start-ups being acquired by overseas private investors as a result of the recent volatility in sterling. Whilst one would hope that investment of this kind would be sustainable regardless of the general economic environment, this latest round of investment is a show of some confidence in the future of the UK Fintech market. The opportunity is there for that market to build on this confidence.
The devil is in the detail
Whilst we believe there are a number of potential opportunities for UK Fintechs in the post-Brexit environment, the devil will, as ever, be in the detail and the longer it takes to resolve that detail, the longer that uncertainty will prevail. The optimist hopes that the UK’s competitive advantage in the Fintech sector will hang on until the uncertainty has resolved itself.