By Svea Miesch, Research and Policy Manager in association with Burness Paull
The UK is the leading global hub for FinTech, according to an analysis from consulting firm EY comparing seven FinTech ecosystems across the world. The growth is mainly driven by London-based companies but clusters are also developing in Glasgow and Edinburgh, benefiting from the strong financial services (FS) sector in Scotland. This sector is largely regulated on EU level and will therefore be impacted by Brexit which will have ramifications for FinTech businesses in Scotland. We spoke to one of our member companies, law firm Burness Paull, to find out which changes we can expect for Scotland’s FinTech environment when the UK leaves the European Union.
Importance of passporting rights
British banks and other financial services companies owe their success partially to the ability to trade in all EU countries without having to register separately in each country, guaranteed through the EU passporting rights. These rights are linked to the UK’s membership in the EU single market. The majority of FinTech companies are operating only in the UK and therefore do not rely directly on passporting. However, FinTech businesses often work in partnership with banks and will therefore be indirectly affected. The loss of passporting would also make future expansion to other European countries more difficult for UK FinTech firms.
How to continue trading in the EU?
So how could UK banks and financial services firms continue to trade easily in the EU? One option will be to establish part of the business in an EU country. This would need to be “a significant presence”, said Callum Sinclair, partner and head of technology at Burness Paull. It is not yet clear what defines such a significant presence in detail but Callum suggested that some may interpret this as headquarters having to be moved. Such moves will be regulatorily complex, costly and risk to undermine Scotland’s strong financial services sector on which FinTech companies rely.
Another option would be to obtain an equivalence status from the European Commission, confirming that British and EU financial services regulations are compatible. This option has also been mentioned in the UK Government’s Brexit white paper. However, “equivalence status can be withdrawn at 30 days notice, so it is unlikely to give sufficient security to financial institutions”, Callum Sinclair advised. The UK Government would also have to mirror all new EU financial services regulations to protect the equivalence status.
If Scotland should be able to remain part of the European single market, as proposed in the Scottish Government’s Brexit proposal, banks with a significant presence in Scotland would retain passporting rights.
Impact on Scottish FinTech companies
Even though the regulatory environment for financial services and FinTech will not change until 2019 when Brexit will come into effect, Brexit has already an impact. KPMG reported in November 2016 that uncertainty around the exit from European Union has led to a downturn in venture capital investment in British FinTech companies, whilst investment continued to grow in Germany. KPMG is expecting more confidence of VC investors in 2017 though, “as the immediate ramifications associated with Brexit ease”. (p. 10 of KPMG’s Pulse of Fintech – Q3 2016).
The UK Government wants to negotiate “the freest possible trade in financial services between the UK and EU Member States” as part of its future trade agreement with the EU (p. 42 of Brexit white paper). ScotlandIS will continue to lobby on Scottish and UK level to make sure that the interest of FinTech companies and the wider digital technologies industry are taken into account during these negotiations.
FinTech SMEs might just be the right partners for banks that need to find innovative and agile solutions to the challenges Brexit will bring. Callum Sinclair from Burness Paull believes that “with its emerging tech hubs and highly experienced resource pool, the Scottish financial services sector is well placed to tackle these challenges.” The fintech accelerator that has been announced this week by Entrepreneurial Spark and Royal Bank of Scotland is the newest addition to Scotland’s fintech landscape and aims to facilitate such innovation partnerships.
I would like to thank our member company Burness Paull, especially Callum Sinclair, for their expert advice on this topic.
This briefing is an overview of specific issues in relation to Brexit only and does not constitute legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.
If you have any comments or suggestions for other topics, please get in touch with me at svea.miesch@scotlandis.com . For more specific questions on this topic, please contact Callum Sinclair at Callum.Sinclair@burnesspaull.com.