With Article 50 set to be triggered imminently, the process of Britain leaving the EU is finally about to begin, with all that entails. Theresa May has set out plans for a Brexit that looks on the harder side of “hard”, worrying bankers and entrepreneurs alike.
While fintech firms don’t welcome the prospect of regulatory uncertainty, we certainly do love a challenge.
Passporting was a hot topic throughout the referendum campaign, and research from Oliver Wyman and a House of Lords report predicted an exodus of fintech talent and losses of £20bn if passporting rights were lost. This is because UK-based businesses (some 5,500 of them, according the Financial Conduct Authority (FCA)) use passporting to sell their services within the European Economic Area, and Britain’s exit from the Single Market would leave their passports void.
Nevertheless, for fintech entrepreneurs, the future is still bright. The UK houses over half of the emergent fintechs firms in Europe. It is a popular destination for fintech companies seeking to establish global authority, and there’s no reason Brexit should slow this trend. Exciting growth areas such as virtual currencies, blockchain and P2P lending are not covered by EU directives and will go unaffected by the loss of passporting.
While equity-based crowdfunding and investment platforms will feel the loss of passporting, there is still reason to be optimistic. A future-proofed “equivalence” model is the ultimate Plan B, and could provide a blueprint for London fintech trading globally, not just in Europe.
Equivalence allows third-country access to EU markets, provided the home country’s existing regulatory system is perceived to be sufficiently similar. Given the FCA’s role in defining best practice in international fintech regulation, equivalence represents an opportunity to strengthen this status, incentivising the FCA to stay on top of its game.
There is strong precedent of equivalence being a useful solution. EU trade deals with countries including Switzerland, Bermuda and Brazil use this model, at least in part.
Equivalence does entail a degree of risk, but entrepreneurs tend to be more open to risk than financial institutions. At just 30 days notice, any equivalence agreement can be revoked, leaving it subject to fluctuating political relationships. Furthermore, even if, as the the Prime Minister claims, all EU law will be fast converted into British law, not all EU legislation currently accepts the equivalence principle. Notably, there is little or no provision for primary insurance or commercial banking.
But the City of London, which moves a lot more slowly than rapidly growing fintechs, is optimistic that an improved equivalence model can be devised. Analyst Andrew Coombs referred to this upgraded model as “equivalence-plus”, in which a wider range of services can be sold between broadly “equivalent” economies.
May’s cold reception in Davos earlier this year caused frissons of concern that EU-UK relations would be damaged in the coming years. Yet she is right that Britain isn’t leaving Europe, we are just leaving the EU. Removing the UK’s role as the capital of European financial services would be mutually destructive, and a pragmatic solution for financial services will win out.
In any case, the debate presents a useful opportunity to step back and assess international opportunities for UK fintech beyond Europe. As a firm that was global from day one, Prodigy Finance has leveraged the enabling power of fintech to give the most talented people an MBA education. Disruption of financial services is apparent across the western world, and now is the time to scale-up, expand, and shift focus to emerging markets.
Half of China’s population are online, amounting to 700m people (equivalent to the population of the European Union), with 92 per cent of those people accessing the internet from smartphones. Approximately 80 per cent of the African continent is unbanked, with exciting opportunities in South Africa, Nigeria and Egypt. India is set to follow in China’s footsteps, and the demonetisation project of Narendra Modi will accelerate opportunities for fintech innovation.
Equivalence-plus would provide the market access that scale-ups need, and it’s a more replicable and adaptable framework than passporting. Once the legislative gaps are plugged, there is a shared incentive for the UK and EU to adopt equivalence in its improved form.
Upcoming European elections, including in the Netherlands yesterday, mean that negotiating this won’t be easy, but equivalence-plus could mean access to the reliable EU market while increasing opportunities with dynamic emerging markets.