Anyone working in the City of London will surely remember where they were and what they felt the morning of Friday June 24. As it became apparent that the Brexit camp had prevailed in the referendum a wave of shock and disbelief engulfed the City.
The Brexit campaign was practically drunk with the joy of triumph. But it wasn’t long before Boris Johnson, Liam Fox and David Davis grew sober. There was a wide gulf between their campaign rhetoric and the realities of how Brexit would actually be achieved.
Prime Minister Theresa May wasn’t a Brexit supporter. She promised to make Brexit a success and she put these three Brexit campaigners in key cabinet positions. Delivering a successful Brexit is a challenge Brexit campaigners will find difficult to live up to. There are far more questions than answers about just what Brexit means how it will be achieved and what the real costs, benefits and implications for the British economy will be.
The political implications were obvious immediately. Scotland, also home to a thriving finance community, had voted against Breixt and insisted that it should be allowed to remain even if the rest of Britain left. The EU has allocated nearly € 1 billion in structural funding for Scotland.
A similar feeling echoed in Northern Island. More than a quarter of a century has passed since the Good Friday peace accords were signed and the EU has played a significant role in the re-development of the region. Between 2008 and 2013 EU programmes provided nearly € 3.5 billion, with a further €3.5 billion planned through 2020.
It’s no wonder the referendum result sent a chill down the spines of many in the UK’s financial services industry and the rapidly growing FinTech sector. Figures presented in recent report by Grant Thornton a multinational advisory and consulting firm are indeed sobering.
- More than 2 million UK jobs are in the financial services sector, two thirds of which are outside the City of London.
- The sector is the UK’s largest taxpayer, accounting for £66 billion of tax payments.
- The sector is the UK’s largest exporter, accounting for £18.5 billion of trade surplus.
Two months later, the shock, disbelief and emotion has given way to the practical task of managing business in light of the ever changing reality of what Brexit means. I’m grateful to my colleagues from LinkedIn who gave me their insights for this article.
Broadly speaking we can divide finance into three sectors – Large Multinational Financial Institutions (i.e. the big banks), Small and Medium Sized Financial Services Providers (i.e. hedge funds, money managers, investment consultants, insurance agents), and FinTech – the startup and emerging companies.
Unsurprisingly the impact varies firstly on whether businesses are regulated or not-regulated. Much of FinTech is not regulated. These companies provide applications, software and services to the financial services sector. Having said this, many of their clients are regulated, so whatever impacts the customers impacts this group of companies. If anything, Brexit is likley to create more opportunities in FinTech rather than fewer.
“Regulation is probably the single biggest issue,” commented Shane Brett, founder of FinTech startup Gecko Governance. Mr. Brett founded an Irish company that provides automated record keeping solutions for compliance purposes. His phone has been ringing more often since the Brexit vote.
Financial services firms benefit from the EU passporting regime which streamlines the process of cross border business and harmonises the EU compliance and regulatory framework. Brexit is potential a big changer.
Many firms are wondering if their passport rights might be reduced or eliminated. Some have already taken the step of establishing presence in Ireland, France or Germany and applying to be regulated. The German Financial Services regulator has even set up a department to handle enquiry from potential new firm and to provide information and assistance to German firms that might be affected by Brext, having passported into the UK.
The Crowdfunding, Peer to Peer and Angel funding syndicates see Brexit as potentially a major issue for their plans to expand outside the UK. Goncalo de Vasconcelos, CEO of Syndicate Room, said “Passporting is going to be the key. If passporting from the UK is no longer an option, many FinTech companies that operate throughout the EU (such as SyndicateRoom) will have no other option but to establish their business elsewhere (Ireland, Dublin or where tech is cheap such as Portugal, Poland, etc). It’s too early for any company to do anything and not much will happen in the next fiew months, but it is bound to be some action when there is a clearer picture of what is going to happen regarding passporting.”
Trading and back office operations may also have issues to deal with. Nearly half the world’s foreign exchange operations are conducted out of the UK. Faced with potentially a loss of passporting rights or increased difficulty getting work permits, major banks and trading operations might well think about spreading their operations away from the UK. Berlin, Paris and Dublin are spoken of as potential destinations. Doing so may mean they will face two regulatory regimes rather than one.
Many firms are taking a wait and see attitude. It appears the UK won’t have a plan for managing the Brex process before early 2017. Even after that it will take time to negotiate the terms and even after that there is likely to be a transition period. David Gyori, CEO of Banking Reports, which provides financial services training and research publications to the FinTech sector, calls Brexit an “Uncertainty Event,” meaning that there are far more questions rather than answers that it really is difficult if not impossible to plan a strategy.
Still, he sees incoming firms and startups already thinking about setting up shop anywhere in the EU except for the UK. “Genuinely UK FinTechs are dynamically looking for a stable EU hub, while obviously keeping most of their assets in London,” he said. He points to Ireland, Luxembourg, Holland, Germany and Cyprus as the major destinations.
“My advice to businesses is to think about the future of the EU instead of thinking and focusing on Brexit and make strategic decisions based on their vision and future scenarios of the entire EU as a strategic-unit,” he added.
Financial services companies are concerned about where they can get the most talent and retain that talent. Anything that makes moving into the UK harder or getting an EU passport more difficult encourages companies to locate outside the UK, according to David Jimenez Marles, a Berlin-based digital banking specialist.
He sees the Brexit vote as a source of uncertainty, especially for the firms that located in the UK. He cites “many challenges to resolve for companies with just a few years old that opened offices in UK (mostly in London) to have access to an incredible market (capital, human, premises, visionary regulator and EU access).”
One of the biggest attractions to the UK has been the Financial Conduct Authority, which is seen by many as a market-friendly, transparent regulator. Most business with the FCA is done on-line, they accept scanned documents. They have dedicated call centers where representatives guide firms through a slew of publications about how the FCA expects compliance and interprets legislation. The FCA views the financial community as a client and stakeholder and frequently consults with the finance sector on a range of topics. Few regulators in the EU are as open, transparent and engaging as the FCA.
The need for expensive and time consuming bureaucracy is reduced. In contrast to much of continental Europe the FCA and most UK government entities don’t require documents with multiple stamps and notaries and super-legalised translations.
Another attraction to the UK is the infrastructure and network that support and is engaged in financial services. Fabio La Franca, a consultant and advisor specialising in FinTech says that he notices more people worried about the uncertainty but few doing much one way or the other. Still, he concedes, at the margin, a few deals were either postphoned or cancelled after the Brexit vote.
Brexit or no Brexit, the UK, London in particular, is home to a large, vibrant community of FinTech startups and financial services firms. Many of these startups develop data models and analytical tools for the financial services industry, particularly banks and hedge funds. Being in London is strategic for them because they are close to their clients.
Paolo Malaguti runs a financial data analytics firm called Credit-Vision. Like many is he concerned Brexit will force some firms to relocate, but he also believes FinTech is a permanent part of the UK landscape and that’s not about to change anytime soon.
“Today, I was at Thomson Reuters’ new state-of-the-art data lab – in Canary Wharf,” he said, “and a two minutes’ walk from our offices at Level39. Two major international banks we are working with also have their innovation labs a short walk away from us, not to mention those in our very same building. When not walking distance, a short tube ride takes us to all our clients, whether banks in the City or asset managers in Mayfair.”
Mr. Malaguti has noticed the concerns about Brexit and the difficulties it adds to an already challenging fundraising environment. He’s seen several firms, especially those who are regulated, looking at alternatives outside the UK. He’s also noticed a change in the attitude startup and early stage companies have about capital raising.
“Perhaps the most significant change in attitude is pushing organic growth further before tapping external capital given tough fundraising environment,” he said.
Despite the uncertainty, the pessimism and the challenges it causes, Mr. Malaguti sees little changing for FinTech anytime soon.
“With the exception of – perhaps – New York, there simply isn’t any other city that offers an even remotely comparable degree of access to decision makers at many of the world’s leading financial institutions and such a strong appetite for innovation in financial services as London. Crucially, no credible contender is on the horizon. When it comes to innovation in financial data, London is the centre, the rest is periphery. London’s status as capital of Fintech data is unlikely to change anytime soon,” he stressed.
Personally speaking, I wouldn’t count on the EU-UK passporting regime continuing after Brexit. That’s not the end of the world and it doesn’t mean the finance center in London evaporates. More likley it means more FinTech and financial services firms with a foot print in the UK as well as a presence within the EU. The good news is there is plenty of time to prepare.
Michael Sonenshine is CEO of Symfonie Capital LLC. He manages the Symfonie P2P Lending Fund, Symfonie Angel Venture Fund and the SymCredit Peer to Peer Lending platform. Symfonie’s affiliates and subsidiaries are regulated in the US, UK and Czech Republic.