On 24 December 2020, the UK and EU finally concluded the Trade and Cooperation Agreement (TCA). This long-awaited 'deal' sets the course for a new trading relationship between the UK and the EU.
Having parted company with the EU's regulatory frameworks, the UK must now tread a path between preserving access to EU markets and the potential to drive growth in various promising industries, including fintech, beyond the EU.
Brexit presents the possibility of a twin-track regulatory regime, allowing new entrants from outside Europe and UK start-ups some leeway in respect of the weighty regulatory responsibilities faced by financial firms.
The UK's Financial Conduct Authority (FCA) has been leaning towards a lighter touch approach for some time, based on its mandate from government to encourage innovation, and may now be able to act more radically – while remaining mindful of the need to uphold its reputation for high standards.
Attracting and retaining talent and investment
There have been repeated warnings that fear of isolation post-Brexit would prompt a mass exodus of fintech companies from the UK.
However, the opportunity to use the UK as a springboard, before taking on the more onerous regulation imposed by the EU, may actually attract more investment in fintech and cryptocurrency technology the UK.
London in particular remains an incredibly dense concentration of talent, resources and funding – and the fintech ecosystem has spread throughout the UK.
While many firms have moved personnel to EU states and this is a continuing risk to the UK knowledge base, the UK has a history of growth in global markets, despite constant competitive pressure from other financial centres.
It is largely up to UK regulators to ensure that the domestic fintech trajectory is not stifled by overly burdensome regulatory hurdles.
There has been a lot of media coverage about how consumer-facing/B2C fintechs based in the UK are dealing with Brexit.
However, there has been less focus on B2B fintechs – especially those who provide services such as anti-money laundering (AML) and antifraud technology, or application programming interfaces (APIs) to larger financial institutions, including EU-based banks.
The truth is that many B2B fintechs are selling IT solutions, rather than regulated services. These companies will need to carry on demonstrating their solutions are robust enough for EU institutions' regulatory needs.
If they provide cloud or outsourced services, they will need to run their services to meet EU regulatory standards – something B2B fintechs are already required to do.
The potential in the future for a two-track system may make it more complex for these types of businesses to continue to serve both UK and EU customers, however some companies are already selling solutions across Europe and the US. So while extra compliance is a headache, many will certainly be able to cope.
For those businesses that do provide regulated financial services, the picture is slightly different.
The financial services provisions of the TCA are fairly limited. UK-incorporated financial services providers lost EU passporting rights on 1 January 2021 and are subject to unilateral equivalence decisions.
Financial services in the EU are not governed by a single set of regulations (there are 59 areas where equivalence decisions can be issued) and it is therefore not possible for the EU to issue one equivalence decision that would maintain all parties’ current levels of market access.
Operating pursuant to an equivalence regime is very different to benefiting from passporting rights and can be withdrawn unilaterally.
Current EU equivalence regimes differ significantly in their scope, operation and impact. Only a few enable third-country firms to provide services to EU clients and counterparties without an authorisation in the EU (and even then are subject to conditions that are more restrictive than for EU firms benefiting from a passport). Others merely provide more limited accommodations to ease cross-border activity.
For more information on how the TCA will affect business operating in the UK and Europe, please visit Fieldfisher's Brexit Hub.
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