By Matthew Dove (Digital Editor)
Nestled amongst talk of machine learning, digital risk management and blockchain feasibility at December’s Fintech Connect, there was one persistent little issue tiptoeing off of every tongue. The 3-tonne elephant in the conference space was, of course, Brexit and its implications for fintech as well as finance more generally.
Mitigating the potentially devastating power of Britain’s exit from the European Union is proving to be quite a challenge. Good job then that Dr Joanna Perkins from the Financial Markets Law Committee (FMLC) was on hand to cast her learned eye over the elephantine problem.
From deeply inauspicious beginnings, Brexit has escalated into a full-scale omnishambles with misleadingly bescribbled battle buses and UKIP bluster making way for the kind of premium parliamentary fudge Farrah’s of Harrogate would be proud of.
Since the postponement of the December 11th vote on Theresa May’s embattled Chequers deal, fear, uncertainty and doubt have trickled down through the fintech ranks and with the March 29th deadline looming ever closer, that’s not good. That’s not good at all…
The water surrounding Brexit has become so muddied of late that even the robotic Chancellor has started to malfunction. In October, when pressed on the urgent need to address the technological challenges of a frictionless Irish border post-Brexit (which at time of going to press remains a woefully neglected issue), Phil “The Spreadsheet” Hammond appeared to panic before proffering vaguely;
“There is technology becoming available (…) I don’t claim to be an expert on it but the most obvious technology is blockchain.”
Whilst such succinct and emotive oration surely ranks alongside Dr King’s “I don’t claim to be an expert on dreams” speech, at this stage, we need more than broad brush strokes and incoherent techno waffle (thanks though, Phil. Good effort!).
So, what specifics do the next couple of months hold for fintech’s development and regulation?
Over to Dr Perkins for a slightly more focussed approach…
Speaking to an uncharacteristically full, and notably attentive, room for such events, Dr Perkins framed the question as a “movable feast” in her opening remarks, and one which could yield a plethora of outcomes. In the talk that followed, she essayed six key areas of Brexit impact risk;
1. Policy divergence
As a leading member state, the UK is used to being in pole position regards incoming regulation, as outlined by Dr Perkins;
“What would normally happen, as happened in the case of bank resolutions and banking ring fences, is that the UK would develop its own model for European law and try to sell it to Europe.”
By the end of March this year though, the UK will not only be out of the driving seat, it won’t even be allowed in the car. According to Dr Perkins, the UK will have little to no influence over continental developments in emerging areas of fintech like cryptocurrency.
“Even if the FCA in collaboration with the Bank of England and HM government were to develop a comprehensive model of regulation for crypto assets, they would probably not be able to, as things stand, sell it to Europe.”
Policy-wise, the implications are clear. Whilst Brexit promises less interference in UK affairs from Europe, it almost guarantees that new British approaches to fintech will remain as just that, British approaches. Furthermore, should the UK remain under the withdrawal agreement for the next two years, it faces the prospect of having to “domesticate any regime which is developed and implemented in Europe” without recourse.
2. Heightened uncertainty
If well-established sticking points like the customs union or the Irish border continue to perplex, then it’s no surprise that the issuance of ICOs etc. is causing headaches.
Dr Perkins was quick to cite that under the EU’s legal umbrella, fledging innovations like cryptocurrency and decentralised clearing services, as well as extant investment and payment initiatives, are already subject to shifting legal sands without adding the upheaval of the UK’s exodus to the mix. She described the intricacies of existing fintech legislation as being in a state of “ongoing uncertainty which is really only determinable on a product by product basis” before adding that;
“These questions are already complicated enough without Brexit. When you add to all that questions about the processes by which the UK domesticates EU law in the process of withdrawal and whether the UK will need adequacy and equivalence standards, in Europe, for market access, then the questions become that much harder.”
3. Regulatory collaboration
Few will have failed to notice that the information age has brought with it a truly global economy and a tech industry which can oft times be accused of paying mere lip service to the rules of nation states it considers largely redundant. It could even be argued that the rise of an inordinately wealthy digital jet-set was one of the factors which fostered the chagrin of Brexiteers in the first place.
Nonetheless, Brexit will do little to stem the tech tide and, according to Dr Perkins, it will only serve to put the UK out of step with an increasingly frictionless Europe. She pointed out that “a lot of models for financial services regulation in the EU depend on establishing regulatory colleges” which in turn rely heavily on seamless international collaboration.
The emergence of cryptocurrency was once again cited as a contentious sector where Fortress Britannia might find itself hopelessly isolated, especially if the new asset class becomes as economically significant as many suspect it will;
“Crypto assets are, by definition, a soft-border business in that they’re borderless and it’s very likely that, as players come to dominate the market, they will be considered to be systemically important in both regions”
Global banks aren’t hanging around to see whether Theresa May and co. can deliver a satisfactory deal, they’ve already got one foot out the door. Some have begun shifting elements of U.K.-based operations to trading hubs within the EU, and are recruiting additional staff locally.
“Passporting” services between these Sceptred Isles and the Federalist mainland is not going to happen, the EU has made as much plain. Like that similarly leaky vessel, the Mary Rose, May’s vision of a “bold and ambitious free-trade agreement” – where the UK’s financial elite can “phone it in” from Cheapside – barely made it out of Portsmouth harbour before unceremoniously sinking.
It was left to Dr Perkins therefore, to confirm the long-held suspicion that banks and fintechs will most likely have to join the queue with all the other services hoping to find a European market;
“Many fintech providers are also the providers of established financial services which clearly fall within the regulatory perimeter and require authorisation.”
Gaining EU authorisation is by no means a swift process either and a lengthy wait could prove fatal for some SMEs and startups as well as being a major inconvenience for the big boys.
“Some financial services firms will inevitably consider relocating and applying for authorisation, which some people don’t know is an up to two-year process and so there’s a difficulty about doing it in a rush to avoid a loss of commission.”
5. Data protection
Cloud storage and data protection could also have regulators reaching for the aspirin in the coming months despite detailed guidelines being issued by both the FCA and the EBA (European Banking Authority). Data protection is proving an especially sticky wicket, as Dr Perkins explained;
“Data protection has been a key focus of the Brexit negotiations and if you look at the withdrawal agreement, and the explanatory notes provided by the government, you’ll be surprised at how much is devoted to data protection issues.
There needs to be a smooth transition and the smooth transfer of some personal data between jurisdictions for both commercial and regulatory reasons, otherwise a lot of activity will grind to a halt.
One of the things that Brexit will throw into sharp relief is the question of whether both regions trust one another’s data protection regimes as a guarantee of sufficient safeguards for the protection of personal data.”
It seems that in the case of truly ubiquitous concepts like data protection, the “regulatory equivalence” everybody keeps on about will need to be a basic requirement and not just an ideal. Whether or not the UK government and the EU are capable of such lofty collaboration remains to be seen, but it’s not looking good, is it?
The Rock of Gibraltar finds itself integral to Brexit negotiations both as a British Overseas Territory and as a conducive spot for fintech innovation, specifically with regards to its relaxed stance on distributed ledger technologies (DLTs) and cryptocurrency trading.
“As well as being a prospective fintech hub, Gibraltar is also in the eye of the Brexit storm”, Dr Perkins asserted, not that that seems to have worried legislators unduly as the protocol referring to the rocky headland in the withdrawal agreement has, “quite a lot of words devoted to it but in the end there’s very little clarity.” Quel surprise!
Perhaps the issue would be better served by allowing a thousand Barbary apes the opportunity to clack away on a thousand typewriters until March 29th to see if they can come up with anything better
Dr Perkins ended her “canter” through the Brexit meadow by offering a modest affirmation, “we should be in no way frightened of regulation in this area because so often in the past it has proven to be a badge of quality for service providers.”
As the UK lumbers ever closer to that fateful cliff edge, carried by the force of its own inertia, one begins to wonder how many badges of regulatory quality it will take to break its fall…