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BREXIT: Fintechs should push for short-term regulatory stability but encourage future changes to support innovation, say experts

Out-Law Analysis | 05 Jul 2016 | 10:02 am | 3 min. read

FOCUS: Financial technology companies should push for 'business as usual' regulation in the short term and be optimistic about the approach UK regulators will take to support innovation further into the future in light of the UK's vote to leave the EU.

This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.

Financial Conduct Authority chairman John Griffith-Jones has recommended that firms set out their vision for the best way forward for UK financial services and the economy more generally in an industry strategy following the referendum result.

It is an opportunity for UK-based fintechs to lobby the government and regulators to maintain regulations in line with EU rules in the short term to allow for a period of practical equivalence between the two legal and regulatory frameworks that will exist when the UK formally exits the EU.

Such an approach would establish a stable regulatory environment to continue business as usual, as far as is possible, and avoid double regulation of firms. It would help retain the attractiveness of London as a base for European and international financial services operations.

In the longer term Brexit offers the UK the freedom to adopt business-friendly approaches to regulation to support innovative new products, services and business models, and build on existing initiatives the FCA has already developed to facilitate the rise of fintech.

The UK could also position itself as a leader, working alongside countries such as Singapore, Australia and the US to influence the EU's strategic direction in relation to financial regulatory matters. This could include, for example, taking the lead on developing a global system of 'passporting' that makes it easier for fintechs to expand into international markets from their base in the UK.

The FCA has already developed strong ties with sister regulators in non-EU markets, such as Singapore and Australia, on fintech authorisations as it expands its Project Innovate initiative in both its scope and ambition.

One longer term opportunity might be for UK legislators and regulators to cherry-pick which EU regulation to apply in the UK and to develop different interpretations and approaches to issues from EU counterparts that might help support greater digitisation and innovation in financial services.

For example, cloud computing: at the moment EU laws require financial firms to ensure effective access to data for auditing purposes, including physical access to premises, when outsourcing services. This serves as a barrier to the adoption of cloud services by financial firms as data hosted by cloud providers is often stored on servers based overseas in multiple locations.

The FCA published draft guidance on the use of cloud computing by financial firms last autumn. It said at the time that cloud customers must ensure that they, their auditor and the FCA have "effective access" to its data as well as the cloud provider's "business premises", although it explained physical access rights may not be necessary for all business premises and that a regulator's visit to cloud providers' premises "can be qualified so that it only takes place if the regulator deems it necessary and required".

The FCA has still to issue its final guidance. In future, with UK acting independently from the EU, it could support remote access audit rights for cloud use, cutting the cost and complexities involved in adopting cloud services.

The future for fintech in post-Brexit UK

The UK, with London as its financial capital, will remain an attractive place for fintechs to develop their business in future.

KPMG and CB Insights reported earlier this year that fintech companies in the UK raised $962 million in venture capital (VC) funding deals in 2015, up from $409m in 2014. The UK market for VC fintech investments dwarfed Germany's, where VC deals raised $193m for fintech companies last year. The research represented increasing global confidence in the UK as a fintech hub with opportunities for innovators and investors.

Brexit has created short-term uncertainty but, whilst it may not be the result the fintech community wanted from the referendum, the UK remains well-placed to serve the interests of fintech companies and investors. 

London will continue to be a major business hub for global trade and boast expertise in financial services unrivalled elsewhere in Europe and perhaps the world.

The UK also already has a deserved reputation as a financial centre with a regulator that supports innovation and the digitisation of financial services by both incumbents and new entrants to the market.

The FCA is at the forefront of fintech initiatives, including supporting the development of automated advice tools, the use of technologies that help firms meet regulatory obligations, and the testing of innovative products, services and business models in a lighter-touch regulatory 'sandbox' environment. The UK government is also backing the development of open APIs in banking in an initiative that goes beyond the ambitions of the EU's new Payment Services Directive (PSD2) in opening up the payments market to increased competition and innovation.

These are solid foundations for a post-Brexit UK to build on. Together with the opportunities for global passporting and smarter regulation, there should continue to be fertile ground in the UK for fintechs to establish themselves and expand.

Yvonne Dunn and Luke Scanlon are experts in financial services and technology at Pinsent Masons, the law firm behind Out-Law.com.