Out-Law / Your Daily Need-To-Know

This is part of Out-Law's series of news and insights from Pinsent Masons lawyers and other experts on the impact of the UK's EU referendum. Sign up to receive our Brexit updates by email. 

The UK is set to vote on whether the country should remain a member of the EU on 23 June this year. The result of the vote, and the decisions taken in the aftermath, could have a significant bearing on some of the UK's fintech industry.

As it stands fintech investment in the UK and globally is growing. London in particular is at the centre of a boom in the development of innovative new financial technology businesses, products and services.

London's position as a leading hub for fintech is in part due to the supportive role played by the regulator in encouraging innovation and the use of digital technologies. This was recognised in a recent study by EY on behalf of the UK Treasury which said that businesses appreciate the "simplicity, transparency and industry-led approach" of the UK regulatory regime. The report labelled the UK's regulatory regime as "a global gold standard" for its progressiveness in relation to fintech.

The Financial Conduct Authority (FCA) has certainly been an active supporter of new fintech businesses and fintech products and services developed by established firms. Through its Project Innovate it has already set up an active Innovation Hub, has a dedicated unit to support bank start-ups in collaboration with the Prudential Regulation Authority (PRA), and has further plans for a new regulatory sandbox and to support the use of technology in enabling regulatory compliance. A new robo advice hub may also follow.

The FCA's approach is viewed favourably in comparison to that taken by regulators in other financial centres around the world, and it is now contributing to world-first partnerships with other regulators, such as the one agreed with the Australian Securities and Investments Commission to support fintech businesses  to reduce regulatory uncertainty and time to market.

But one of the reasons that fintech is flourishing in the UK is because London, in its capacity as a major financial services sector, serves as a gateway for UK and non-UK financial services businesses into the rest of the European market.   

Financial firms can take advantage of the EU passporting rules to enter other European markets more easily. Passporting is where the licensing of business operations by a regulator in one country is recognised by regulators in other countries. It is facilitated through pan-EU single market initiatives.

The road to negotiating the UK continuing to benefit from this system of mutual recognition if it was no longer a member of the EU is uncertain. The passporting regime extends to the European Economic Area (EEA), which incorporates the 28 EU countries as well as Norway, Iceland and Liechtenstein. Whether the UK would join the EEA in the event of exiting the EU is as yet unclear but may be unlikely given the constraints EEA membership could place on the UK's ability to follow its own path and shape its own regulatory future. EFTA has also been suggested as an option but in that case the UK government would still need to negotiate to preserve the status quo in terms of passporting.  

If it transpires that becoming authorised in the UK does not open up access to other European markets as easily, post-EU exit the attractiveness of the UK as a place for fintech investment and fintech businesses to base themselves and grow will be adversely affected.   

A weakening in London's position as a gateway into the rest of Europe will open the door to rival destinations for some, be it places like Dublin or Luxembourg which are already technology hubs and have friendly tax regimes, or Germany which has an emerging fintech scene of its own. Some fintech companies have already expressed their view that London's position as a hub for fintech would be under threat if the UK votes to leave the EU. Some of the customers to whom, or in connection with whom, many fintechs sell, namely investments banks, see passporting as key to the location of their operations.      

In addition, in the aftermath of a vote to leave the EU there might be new pressures on FCA resources. The FCA would face significant work in reformulating its regulatory handbook to account for the changed position on sovereignty and any new changes in policy adopted by the UK government.  

In the months and years immediately following the vote and in the lead up to the official exiting of the EU by the UK it could therefore prove more difficult for the FCA to commit as much of its resources to supporting fintech as it might like.

However, it is often suggested that an EU exit might also present opportunities for the UK to adopt a lighter touch regulatory regime for financial services than which applies in the EU. But the extent to which in reality the UK would take this approach is questionable. The UK has at times challenged the EU's regulatory regime through the EU courts but as the UK engages with international bodies like the Financial Stability Board and other global standard setters in financial services, how free will it be to go it alone in any significant respect from its position as the world's fifth largest economy? As international standards in financial services converge, how far from EU standards will the UK be in able to advance?

UK financial services policy makers could not operate in a vacuum. Their approach would need to accord with international trends, standards and best practices. Fintechs in the UK would want to know that in complying with UK regulations their procedures and policies would not be out of keeping with other regulatory requirements elsewhere, including in the EU. Yet there would be no obligation for the EU to follow the UK's approach to regulation if the UK were to become a standard-bearer for developments in fintech regulation.

In a post-exit scenario, the fintech sector will want the UK government to ensure that the regulatory environment it proposes promotes international connectedness.

Luke Scanlon is a financial technology specialist at Pinsent Masons, the law firm behind Out-Law.com

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