Rachel Kent, Partner, Head of Financial Institutions Group at Hogan Lovells, shared some thoughts on the BREXIT impact on the UK fintechs.
How do you evaluate the impact of Brexit on UK fintechs? What steps should be done to protect the financial innovation sector in the UK, and to force fintech talent pool development?
Passporting (i.e. the ability of fintech companies to obtain a single authorisation to access the remaining 27 EU jurisdictions) drives capital and cost efficiencies. Without it, UK-based fintech companies engaged in regulated activities will have to set up a subsidiary in the EU, obtain a new local licence, and transfer business to that entity. In the absence of any other agreement, passporting will be lost on Brexit. This is likely to have an increased impact on later stage fintechs as they begin to want to expand into new markets. Of course, not all fintech companies need to be regulated. (Many regtech companies, for example, are unregulated. They are likely, however, to want to provide services to regulated entities and will therefore need to continue to have in mind EU rules on delegation and outsourcing, as those will govern any arrangements with EU Financial Institutions.)
Please tell us more about the creation of a blueprint for a financial services free trade agreement post-Brexit, and how it will help to decrease some potential negative consequences for fintechs…
At Hogan Lovells, we have been working with the International Regulatory Strategy Group “IRSG” (co-sponsored by the City of London Corporation and the CityUK) to come up with a proposal which minimises the impact of the loss of passporting. The UK Government have adopted our proposal, as confirmed in the recent speeches by both Theresa May and Philip Hammond. The proposal is for a financial services chapter of a free trade agreement. Other chapters could apply to other regulated sectors with similar issues. More specifically, the proposal enables mutual access to each other’s markets based on a single home state authorisation. If Mutual Access is granted, this will be on the basis of regulatory alignment. In appropriate circumstances, such as the mutual adoption of global standards, such an alignment could result in the laws remaining largely the same. In other circumstances, it may be that ‘Outcomes’ are agreed and, provided that those are implemented, the detailed implementation may differ. Many in the industry place a value on cost efficiencies gained from alignment and there seems little, if any, call for a so-called bonfire of regulation.
Continued collaboration between supervisors will also be especially necessary for those firms with larger branches in host countries. We have also proposed an independent dispute resolution mechanism which protects the red lines of both parties. This mechanism would leave interpretation of EU and UK law to the respective court systems, and would not require either territory to amend their laws. Their remit would be instead restricted to determining whether alignment was maintained.
What can help the UK to continue as the global fintech capital?
Financial innovation will remain critical if the UK is to continue as the global fintech capital. Theoretically remaining aligned with the EU could impact that, but the risk is surely low. The FCA’s groundbreaking Regulatory Sandbox and now their proposed Global Sandbox have both been achieved within the constraints of EU membership. Innovation is never “done” though the UK must keep moving forwards. It is vital that the UK continues to lead from the front in the development of policy relating to fintech. Perhaps the importance of the development of global standards for cryptocurrencies is a good example of why going it alone is unlikely to produce the best results.