Brexit: a body blow for UK fintech?

Infographic: e-commerce between the UK and the EU

With less than one day to the UK referendum on whether to remain in the European Union, debate on the potential impact of Brexit is intensifying. While some of the recent campaigning directed at voters appears designed to provoke a knee-jerk reaction, businesses and industry bodies are taking a more considered, analytical view.
Analysis released by HM Treasury shows that the UK would be significantly poorer if it left the EU; 15 years after an exit from the EU, UK households would face an annual drop in GDP of between £2,600 to £5,200. The same document also highlights the potential reduction in tax receipts, with losses of between £20 billion and £45 billion, depending on the UK’s status in relationship to the EU. And a recent report by PricewaterhouseCoopers , commissioned by the CBI, estimates that Brexit could potentially cost the UK economy £100bn and lead to 950,000 job losses: all figures that show the fall-out from a ‘Leave’ vote could be devastating to UK-based businesses.

The fintech companies which have made their home in London are among those calculating which way to jump if the ‘Leave’ campaign gets its way. The UK capital’s reputation as the fintech hub of Europe is well-established, but Brexit could enable cities such as Luxembourg, Berlin and Stockholm to entice a significant share of the city’s up-and-coming financial and intellectual resources out of the country.

Location, location, location

Location is a key issue for many fintechs; a favourable regulatory environment and strongly-voiced political support for the sector has enabled businesses such as Crowdcube to flourish in the UK. However, Brexit might force many of these companies to reconsider their position: seven out of 10 London-based fintechs interviewed by Reuters said they might move their headquarters, while all of them stated that the upcoming referendum was a serious concern for their businesses. The challenge of moving is far bigger than finding new premises, packing up offices and covering the costs of relocation. Business relationships have to be re-established in the new location, and in many instances – for example, in the case of banking relationships – this can take considerable time.
A UK fintech, particularly one involved in payments, may be the company of choice for key customers precisely because it is a UK company, and subject to proven regulation. A move to a new location, together with the need to adapt to different regulatory requirements, and potential loss of access to key markets could negatively affect customer confidence, making it essential for fintechs to identify how such factors would impact their business.

A major risk to FDI

It’s not just fintechs that are edgy about the upcoming referendum; it’s making investors nervous too. While EY’s 2015 survey on the attractiveness of the UK as an investment destination has investors ranking the UK highly as an investment destination of choice, it also highlights the potential threat that Brexit poses. 72% of those interviewed cited access to the European single market as important to the UK’s attractiveness – and 31% stated that they would either freeze or reduce their investment until the outcome of the vote is known. With fintech being a favoured investment sector, and many businesses relying heavily on investment funds to get off the ground, there’s a significant potential knock-on effect to the UK fintech sector, and the UK economy overall.

Multiple possibilities, multiple challenges

The lack of investor confidence illustrates one of the major issues: simply, no-one can predict exactly what form a post-Brexit UK might take. Consequently, companies are having to make contingency plans on the basis of three scenarios: the UK becoming an EFTA member, with similar status to Norway; the UK opting out of EFTA membership, but negotiating a deal which provides full reciprocal rights for financial services; and finally, the UK having standalone, or third-country, status. While there is currently no firm indication of what the preferred option might be in terms of a ‘Leave’ vote, what is clear is that the regulatory changes a Brexit would bring pose huge challenges to businesses and financial institutions.
The Norway model is the least complex option; the UK would have to remain fully compliant with EU legislation, meaning that current regulation and timelines for adoption of new legislation would remain in force. The other two models raise a number of issues. One of the arguments often cited by the ‘Leave’ campaign is that an exit from the EU would reduce the financial and administrative burden of complying with EU legislation that is often seen as meddling in all aspects of citizens’ ordinary lives or implemented across the EU in a non-harmonised fashion. There is no question that businesses and institutions feel the impact of having to comply with legislation in a single market that in fact can often be fragmented: the latest Anti-Money Laundering Directive (2015/849/EC, “4MLD”) serves as simply one example here. The scope afforded to individual regulatory authorities in terms of transposing 4MLD into local law will mean a fractured approach to adopting certain key regulatory provisions incorporating KYC exemptions, technical standards and risk assessments. In working at the boundaries of traditional technologies and financial services, many fintechs might welcome more proportionate, definitive and agile regulation, and the freedom from having to comply with a multitude of rules across markets.
However, a Brexit is no guarantee of a simplified regulatory landscape. To ensure continued trade and economic stability, the UK would, in the case of third-country status, have to ensure that regulatory requirements were equal to the EU in stringency and enforceability.

EU membership: an access-all-areas pass

Fintechs and payment services companies based in the UK enjoy many advantages when it comes to accessing EU markets. As an EU member state, the UK is subject to SEPA regulation, even though it is not a member of the Eurozone; the harmonised payment processing market which SEPA supports has eased the cost and complexity of doing cross-border business with other EU member states. While the UK is required to implement the SEPA Regulation (EC 260/2012) designed to simplify and standardise euro bank transfers by the end of October 2016, the effects of this would come into question in the case of a Brexit; again, the resulting changes would depend on the exit model finally chosen. The “passporting” regime which affords payment services companies the right to offer their products and services throughout the EU is also under threat; again, the loss of access to markets may force companies to move to other member states in order to continue business, or to abandon clients. While this may not be a problem for large multi-national companies, the impact on smaller organisations could be considerable.

The debate around the upcoming referendum confirms John F. Kennedy’s statement that “the one unchangeable certainty is that nothing is unchangeable or certain”.