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Written by Philip Salter is founder of The Entrepreneurs Network.
While the UK’s popular press obsesses over the color of post-Brexit Britain’s personal passports, our fintech entrepreneurs are worrying about the EU passporting system for banks and financial services companies.
The EU passporting system lets firms authorized in any EU or EEA state to trade freely in any other with minimal additional authorization. There are nine different passports, based on the single EU rulebook for financial services. Firms based outside the EU and the EEA can’t get passports and face significant barriers.
“These passports are the basis of the single market in financial services and are used to enable a steady flow of trade in financial services across the EU. Many banks and financial services businesses in the UK have based their business models on the rights conferred by EU legislation to ‘passport’ their services across the EU and the EEA. They are especially important for the UK, which is the largest exporter of financial services inside the single market, exporting over £20bn of services to customers in the rest of the EU in 2014 and helping provide hundreds of billions of euros in finance.”
In a recent survey of its members, the Payments Association found that 88 per cent of its members think that passporting rights are important or very important to their current businesses, while over 91 per cent think passporting is important or very important to the UK’s fintech sector and its continued growth. Tony Craddock, Director General of the Payments Association thinks Brexit “reduces the chances London will remain as a Europe-leading fintech centre.” Ultimately, “no amount of leading edge technology will prevent isolationism from damaging trade.” However, Craddock thinks that in time London will become the leading fintech centre for the rest of the world. Its Project International Trade, which is endorsed and supported by the Foreign Secretary and the Department for International Trade, is setting out to build corridors between the UK and non-EU regions such as Latin America, EEC, Africa and Asia Pacific.
Alpesh Patel, co-founder of Soldo, a multi-user spending account for businesses and families, has already started looking at expanding into a new territory, though he hasn’t set up an office yet. Ultimately, he thinks “the ability of technology alone to overcome political obstacles such as Brexit and other isolationist policies become too onerous.”
Anthony Christodoulou, founder of Robo-Investing, isn’t resigned to isolationism. “Political obstacles may well confront all countries in re-negotiation but isolationism or protectionism does not have to be consequential to a new relationship with the EU”, he says. “The Financial Conduct Authority (FCA) does in many respects hold the gold standard in regulation. Within wealth management our approach to fees, transparency and distribution is arguably the most liberal and progressive in Europe” he adds. “This, along with new similarly aligned forthcoming European directives, should facilitate renegotiations as well forge new relationships with service providers and the investment community across the world. I would be concerned if the May Government had commented in a ‘Britain First’ tone but they did not and for the time-being I will trust them to try to deliver on ‘Global Britain’ policy. Whether our Government continues to hold this view or other EU politicians prevent or obstruct this path is unknown and of course a key risk.”
Jesse Shemen of Octopus Labs think Brexit is already having an impact, with “start-ups and investors not as aggressive as they were in the past. Capital, customers, and talent, three primary focuses for startups, are all in jeopardy.” However, he thinks London will remain a top city for startups: “The breadth of the economy and workforce and the deep financial markets won’t disappear overnight.” Shemen thinks the government needs to start “doubling down on venture and growth stage capital, committing to favorable trade agreements, and granting relevant visas to EU workers in the UK is a good start. People need reassurance and they will just carry on.”
If Britain doesn’t get a special deal, our fintech companies will have to look outward to markets beyond the EU or move business to an EEA country – or most likely do both. As the Payments Association’s report states: “This could see the flight of some or part of the 5,500 licensed companies abroad and have a significantly negative impact on the UK economy.” Craddock thinks that “in time,
the business that is being done with these markets, with the support of a global passporting structure that is not just in the EU, will become more important than the business that is being done with the EU.”