With Article 50 being enacted this week, the fintech industry is considering what the new landscape created by the UK formally announcing its intentions to leave the EU will mean for themselves, their clients, both financial services and SMEs, and the economy.
Stephen Burke – Group Corporate Development Director of asset management software and consultancy specialist Cordium:
We are now on the road to Brexit and a bumpy one it will be. Since the vote we have been urging clients to focus on building flexibility into their business models, although we hope that there will be no insurmountable Brexit problems, and possibly many new opportunities.
The UK Portfolio Management industry is bigger than the next three largest European centres, added together. It has been built up over many decades and has a depth of skills and knowledge. It is our view that it will not be leaving London any day soon. The biggest concern that most firms have is attracting and retaining talented people. While the UK and the EU27 both seem to be committed to doing the right thing it may be some time before this is settled.
Other concerns come down to distribution firms needing to create EU27 funds by setting up new structures in Luxembourg or Ireland or having an EU27 distribution capability (for existing funds). We also hear that some investors based on the Continent are considering setting up in the UK to retain access to the best investments.
Of course there are many opportunities outside the EU and discussions are already underway to develop an additional legal framework to focus on the needs of non-EU customers. The UK Hedge Fund industry overwhelmingly offers Cayman Islands funds so there is an opportunity to develop an additional non-EU AIFM framework.
Cordium has an EU27 AIFM solution available for managers with Irish or Luxembourg funds, and we are looking at how we best support distribution activity post Brexit. We continue to advocate that clients retain as much flexibility as they can in their business to ensure they are optimally positioned post Brexit.
Angus Dent – CEO of peer-to-peer lending firm ArchOver:
Theresa May triggering Article 50 is the start of a serious trial for UK enterprise. With uncertainty comes a decline in investment and the threat of growth halting altogether. Without strong investment, businesses will be unable to keep their heads above water in an unpredictable post-Brexit market.
SMEs will find this an especially daunting period. If investment and lending levels drop following Article 50, tomorrow’s entrepreneurs will remain in the shadows, lacking the cash to drive their businesses and our economy forward.
To offset that we must support our home-grown businesses. We must let them know there’s help available beyond the nervous banking sector. There’s a key role for alternative finance to play in helping SME borrowers maintain healthy cash flow. Through this period of change, peer-to-peer lending platforms can assist even more than before, giving businesses quick access to the funding they need to put themselves in a position of strength.
We must all treat Brexit as an opportunity. SMEs must use quick access to peer-to-peer funds to fire up their businesses – and avoid being dragged down by uncertainty.
Matt Byrne – UK Director of fintech lending firm FastPay:
Jeremy Corbyn recently described the culture of late payments in the UK a ‘scandal’. Whilst delayed payments can heavily affect business growth, there are ways to successfully manage the issue beyond traditional high-street lending products. With the triggering of Article 50, the perceived silver lining of the weak pound incentive for international trade is almost certainly negated by the impact of uncertainty, and this is ultimately what will be at the forefront of the banks’ credit strategy as their antiquated risk models deny performing and high potential businesses the credit they need and deserve. From today, it is more important than ever that SME owners and start-up founders clue up on the full range of financing options available to them to fuel business growth as banks inevitably further tighten lending practices.
Jeremy Cook – Chief Economist at international payments company World First:
Given we do not expect the negotiations to begin in earnest until after the French election has concluded in May, today’s announcement is unlikely to change the current state of UK economic affairs.
The pound remains the acute barometer of Brexit risk. Since the EU referendum sterling has weakened by 12.8% on a trade-weighted basis, which has acutely affected businesses trading overseas, and it is those businesses facing costs in foreign currencies that are hurting the most. World First’s own analysis of cost pressures on businesses in the UK shows that the average firm is facing a 14.2% increase in input costs since the June 23rd vote. Utilities firms have felt the largest price rise in the basket of capital goods used in production at 19.9% whilst at the opposite end of the scale financial services companies have experienced a 6.1% increase in costs over the same period. It is little wonder then that CPI is at its highest since September 2013.
What now for sterling?
Much will depend on the early progress the UK government is able to make against its stated objectives. A negotiation process marred with delay and disappointment will increase market fears of a worsening of trade terms and could see a decline in the pound of another 5-7% through the rest of 2017. If that happens, the pressures on Britain’s SMEs, the backbone of the UK economy, will increase further.
The clock has started and two years of negotiations and ratification begin now. International businesses can easily benefit from the next two years, but there is ample opportunity for the unprotected, uninitiated or the simply unaware to be hurt by the ensuing currency movements.
Jake Moeller – Head Lipper UKI Research at Thomson Reuters Lipper
Since the Brexit vote there has been a marked shift in risk aversion with estimated net flows clearly showing investors moving away from equities and into short-term money market funds. It’s worth noting that both Money Market GBP and Money Market USD have been dominated by institutional funds. Eight of the bottom ten sectors for outflows are in equity classifications. Seven of the most popular sectors have been cash or bond classifications.
It’s difficult to only attribute these flows to a Brexit effect. For example outflows from European equities could be driven party by Brexit but also by other European geopolitical issues. Furthermore, there has been a spike in volatility around the US presidential elections which will have undoubtedly spooked investors globally.
It is likely that the support for UK Gilt funds has been driven by some Brexit uncertainty. With their record low yields, Gilts would not be attractive to income investors with the current extended credit default cycle making credit more attractive.
More generally bond investors will be seeking yield which is reflected in the popularity of funds in the Bond Global High Yield and broad-based shorter duration Bond Euro-Short Term.
We know that UK Commercial Property funds which have seen net outflows of some £1.5 billion have been as a direct result of Brexit but these outflows have now at least steadied with most of the fund suspensions now lifted.
Lee Murphy – Owner of accountancy software Pandle:
Though it may prompt some UK SMES to start thinking about the implications of Brexit on their business, the triggering of Article 50 should be nothing to fear and if I’m honest, I don’t think it will impact small businesses.
We can expect the pound to drop slightly following this news announcement as it will remind investors and businesses that Brexit is coming, however this dip should be just that, a temporary lull which will soon bounce back when buyers snap up the currency at a lower price.
What’s most concerning about the triggering of Article 50 is the impending Brexit – something that no one can prepare for and could be likened to pandora’s box. As research from the FSB has uncovered, a quarter of small businesses that export would be deterred from trading with the EU should tariffs be imposed. This may see some companies relocating to Ireland, or even Scotland should there be a Scottish referendum. Or equally, we could experience a greater level of trade with other markets, the research finding that 49% of SME’s top preference would be the US, followed by Australia (29%) and China (28%). Without knowing the outcome it’s impossible to prepare your business, and there are many important elections coming up in the EU that will impact this Brexit also.