UK leader in fintech, Innovate Finance, surveyed its members after the vote to leave in order to understand how businesses are feeling during this time of uncertainty. Despite programmes such as Project Innovate and the Regulatory Sandbox being put in place, the results of the referendum has dampened attitudes towards the future of fintech in London.
The first draft of the survey results presented that this state of uncertainty gives investors a reason to stop and think and could lead to venture capital appetite also softening until confidence in fintech is re-established. “State-backed risk capital is at risk as we withdraw from European Frameworks such as the European Investment Fund pulling back from supporting aspiring UK Venture Capital funds in the wake of the Brexit vote. The UK government (British Business Bank) may need to step up to help plug this gap,” the report read.
If London’s 500 million fintech customers that reside in the EU are excluded, this will also prevent UK businesses growing into a larger market. Alongside this, plans for the Digital Single Market (DSM) and the Capital Markets Union (CMU) would be halted or diminished. An immediate impact that the leave vote had was many financial institutions considering relocation of operations and employment which could be caused by the loss of financial services passporting, as Innovate Finance explained.
“30% of the UK’s fintech human capital is from the EU and overseas. Fintech human capital has complex skill sets, such as advanced computer science, regulatory understanding and knowledge of capital markets processes, and it is dependent on domain knowledge. EU fintech talent could face Brexit UK VISA barriers and may be tempted to other European hubs, New York or Silicon Valley,” the report read.
On the subject of regulation, the survey highlighted that a Brexit would result in restricted access to the Single European Payments Area (SEPA) and would also mean that firms that need to be regulated under the PSD2 standard could have significant cost impacts. In addition to this, the report explored how API data sharing may become a little difficult and this is where relocation away from the UK could resolve these problems.
Here are some important statistics that the Innovate Finance survey found (results on a scale where 1 is strongly disagree and 5 is strongly agree):
- Access to the EU single market is a critical ongoing success factor for UK fintech – 4.54
- Passporting across EU states via SEPA and MiFID is also a strong success factor – 4.43
- However, the majority of respondents did not have an opinion on whether or not having the ability to negotiate favourable trade deals with EU member states created new opportunities for UK fintech.
- 34.9% agreed that in light of the referendum results, their company is considering relocation, while 9.5% disagree. 23.85 neither agree nor disagree.
Prior to the referendum, an Ernst and Young report has found that fintech helped boost foreign direct investment (FDI) to its highest level since 2006. This was set to increase with the growing demand from foreign investors to enter the UK financial industry, but with investor confidence waning, this could prevent growth. With 94 FDI projects in the UK financial sector generating 8,138 jobs last year, this resulted in the UK representing a third of all European financial services FDI, according to CityAM.
“This is the highest market share in FDI that the UK has seen for a decade, which should cheer the UK financial services industry, the Treasury and the wider business community. Investors are optimistic about the UK’s strong domestic market, our commitment to maintaining an environment where businesses can grow and develop, and our burgeoning fintech industry,” EY UK financial services leader Omar Ali said.
Innovate Finance reflected on how if the Brexit goes ahead, foreign investors would look elsewhere in the EU, unfortunately during a time when US PE/VC investors have become the top investors for UK fintech Series A and subsequent funding rounds. UK fintech companies that have expanded internationally, such as Funding Circle and WorldRemit, could be in trouble as other US based companies could take over.
“The combination of financial expertise of the City of London and expertise in technology is unique to London and the UK and that will not change after Brexit. The ground gained by having an open and collaborative financial regulator will confirm this,” one respondent said.
Another respondent had a more negative perspective on the leave vote. “The UK Government did a great job of empowering the creation of London as a fintech capital, and Brexit stands to ruin that. The most important thing is access to talent. The best thing the UK government can do now is to massively relax the immigration restrictions for anyone who is working in fintech – i.e. add the entire fintech sector to the highly skilled job list or give approved fintech companies special rights around fast-tracking/approving visa applications.”