Brexit and fintech: an inventory in the spring



It has been four months since the Brexit trade agreement between the United Kingdom and the European Union entered into force. The deal, like other free trade agreements, does little to support exports of financial services from the UK to the internal market. As a result, financial services providers, including those in financial technology, have adapted to various trade relations with the EU in the spring while also managing the ongoing COVID-19 restrictions.

Notably, UK financial services have lost their automatic rights to serve EU customers from their UK base, making use of the so-called passport rights that UK companies had when they were a Member State. The passport has been replaced by equivalence decisions. However, this is not a fair replacement. Equivalence is a unilateral decision by the EU in the financial field, where it recognizes that the UK’s regulatory framework is equivalent to its own. These decisions can be revoked with 30 days’ notice and do not affect the entire financial services industry. For example, the provision and deposit of retail banks is not subject to equivalence decisions.

So far, the UK has only been given equivalence in two areas considered as issues of financial system stability. As a result, UK financial services are currently active and have less access to the EU market than some of their main competitors, including the United States and Singapore.

Related: Fintech in the UK after Brexit

Several financial institutions have responded by moving parts of their businesses to other European financial centers, including Paris, Frankfurt, Amsterdam and Dublin. According to the latest estimates, more than 440 financial institutions have taken such steps, involving about 7,500 jobs outside the UK.

In addition to examining the implications of Brexit for existing financial services business models, it is equally important to consider the opportunities for future growth that currently exist for UK finance. Indeed, the political discourse surrounding Brexit has created many of the opportunities for the UK in terms of ‘taking back control’.

The UK and digital finance

During the 2020 Brexit trade talks, it was not clear what the UK would choose to use its newly acquired regulatory sovereignty. However, early indications have surfaced since the deal. Clearly, fintech and digital finance, along with green finance, is an area the UK wants to prioritize for development to shape the business that has been lost to the EU. In the case of fintech, this clearly fits with a broader government interest in technology-driven economic growth.

Given the importance attached to digital finance, this has been one of the areas that has received the most political support and policy announcements since the trade agreement came into effect. For example, a UK listing led by former EU financial services commissioner Jonathan Hill sought to respond to UK tech companies increasingly choosing New York as their primary listing location.

The listing review also stated that the innovative approach to fintech regulation through the Financial Conduct Authority or FCA’s regulatory sandbox enabled faster and regulatory change. As fintech represents one of the “growth sectors of the future” where the UK “is already a leader in Europe”, further development needs to take place after Brexit. In early April, FCA Chancellor Rishi Sunak responded by announcing a new FCA “scale box” during Fintech Week to support the growth of fintech, based on the success of UK regulatory sandboxes.

Related: The FCA ban on crypto derivatives in the UK could push private investors to riskier grounds

Following the broader policy interest in fintech, the ‘Kalifa Review of UK Fintech’ was also published this spring. This seeks to capitalize on the UK’s fintech leadership and makes recommendations on, among other things, capital and skills requirements for the industry.

However, these assessments also point to challenges and uncertainty, as well as opportunities for British fintech after Brexit. One of the most notable areas in this regard is the appeal of highly skilled international talent to work in fintech in the UK. The implications of Brexit for this, in terms of both international migration and shorter forms of international business travel, are currently unknown as business travel has largely been shut down due to COVID-19 restrictions.

UK financial centers outside of London

Given the widespread concern about the technical skills emanating from the UK education system, examining how the new Global Talent visa works in practice will be important in assessing post-Brexit labor markets for UK fintech. Likewise, in terms of shorter forms of business travel, as the pandemic’s travel restrictions ease, more will become known about how Brexit and COVID-19 have changed the financial services business travel landscape.

It is also important to examine the implications of Brexit for fintech, not only within but also outside London, especially given the government’s focus on “building back better” by leveling regional economic growth after Brexit.

Here too there are opportunities and challenges for fintech. The Kalifa Review identified ten clusters of UK fintech businesses that “have the most potential to grow and develop”, including Edinburgh and Glasgow, Manchester and Leeds, and the North East of England. Such a focus appears to be paying off as Goldman Sachs announced the opening of a major technology center in Birmingham earlier in April. However, maintaining the attractiveness of these locations, especially in terms of costs, will be important as other locations within Europe, such as Poland and Portugal, are increasingly seeking to develop their own cost-competitive financial clusters.

Similar to London’s history as a financial hub, the UK’s fintech sector has shown significant regenerative capabilities, adapting its focus to the political and economic landscape of which it is a part. It is clear that there is strong political support for the industry in Britain after Brexit, and the industry itself will have to respond accordingly as more details emerge on the UK’s financial services priorities post-Brexit .

The views, thoughts and opinions expressed here are solely of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Sarah Hall is a Senior Fellow at The UK in a Changing Europe and Professor of Economic Geography at the University of Nottingham’s Faculty of Social Sciences. She is the author of Global Finance (Sage, 2017). She is currently researching the impact of Brexit on British financial services.

The views expressed are those of the author only and do not necessarily reflect the views of the University of Nottingham or its affiliates.