I guess the UK didn’t listen to Mark Carney, Bank of England governor, when he said that the Brexit would be “the biggest domestic risk to financial stability.” Many have named the 23rd June Independence Day to mark the country’s exit from the European Union and while contingency plans are yet to be officially put in place, Carney reassured the UK that another financial crisis is not imminent. What does this mean for UK fintech?
According to the Guardian, in his speech, Carney insisted that UK banks were stronger that before the crisis in 2008, but the BoE would need to provide a further £250 billion to ensure that cash did not run out during this uncertain time. “We are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the chancellor and I have been in close contact, including through the night and this morning,” Carney stated on the 24th of June.
The sharp fall of the pound was predicted by many, but the 11% decline was shocking and brutal for investors. The Wall Street Journal have described this as “an epic move for a developed-market currency,” and Damian Handzy, Global Head of Risk, StatPro, wrote for bobsguide and explored how this seismic decision has already made and will make an impact on trade.
Handzy’s predictions were correct: “Today’s markets are signalling that a vote to stay would give an immediate pop to the GBP of around 3%, while vote for a Brexit would give an immediate plunge of 11%.” He continued to suggest that over the subsequent four months, the pound would either gain 4% or drop a further 3% to total a loss of 14% against the dollar. Handzy concluded by saying that a leave and remain vote would have had an effect on the global markets.
CNBC is confident that fintech will benefit from the post-Brexit world. Traditionally, foreign exchange has done well in times of volatility and post-2008 crisis, regulations seem to have risk under control and the costs that are usually incurred in these situations. This is aligned with Carney’s attitude but doing business with the UK has just become more expensive.
“Additional winners after today’s UK vote will be the fintech companies that figure out how to develop, implement and manage a distributed ledger technology (DLT) that will quickly reduce counterparty risk, margin requirements, and settlement in the roughly $5 trillion a day FX market. As these technologies come to market, they should be in a position to attract new entrants with lower transaction costs, increased transparency, and ultimately bringing liquidity to the market,” CNBC reported.
An recent Ernst and Young report found that fintech has helped to boost foreign direct investment (FDI) to its highest level since 2006, which was set to increase, but this is uncertain after the results of last week’s referendum. “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,” Omar Ali, EU UK financial services leader said.
EY’s Global Chairman and CEO Mark Weinberger commented on the result of the UK’s referendum and explained that more uncertainty for businesses is imminent. “In a global economy already struggling with slow growth, this may further dampen the outlook. The broader consequences to the EU also remain uncertain at this time. The UK has strong political, economic and financial systems and is well able to deal with short- and longer-term effects of Brexit.”
Rajesh Agrawal, founder and CEO of Xendpay, highlighted prior to the exit from the EU that the free movement of capital would be put at risk and it would be senseless for the UK to be cut off from London’s 500 million customers on the other side of the channel. “Leaving the EU would put the fintech industry – that contributes so greatly to our economy with an annual value of over £20 billion and counting – at great risk at a time when the world flocks to our nation to have a slice of the fintech pie.”
On the other hand, fintech influencer Chris Gledhill, CEO and co-founder of Secco Bank, believed that this decision should be viewed as a second chance. “I believe it is time we started treating a Brexit as an opportunity, not just for UK fintech but for the UK as a whole. It’s like a choice myself and a good few people in the London Fintech scene have made – do you continue working for a large incumbent organisation or quit and join a startup. Well I believe it’s time the UK started acting more like a startup and less like an employee of Europe,” Gledhill said.
Despite increased compliance with regulation, financial institutions that are under pressure from the European Union to incorporate initiatives such as Solvency II will still have to put these standards into place. Charles Portsmouth, Director at insurance adviser Moore Stephens, commented: “the reality is that a wholesale rollback of regulatory pressures originating from the EU is still unlikely. Major European-level initiatives such as Solvency II have already been incorporated into UK law; they are an integral part of the system in the country.”
With warnings of thousands of jobs at stake at large financial institutions such as HSBC and JPMorgan Chase, European banks may also move back across the channel, which could open up the space further for fintech to enter. The Financial Times explained that global banks within the EU have used their right to passport into the other 28 member states, but the Brexit could mean that many of these businesses would also have to leave.
France’s central bank governor, Francois Villeroy de Galhau, suggested that relocation for many banks would be necessary. “If tomorrow Britain is not part of the single market, the City [of London] cannot keep this European passport, and clearing houses cannot be located in London either,” he said according to the FT. Although this is an option, the UK could opt for the “Norwegian option”, where they would become a member of the European Economic Area and would have access to the single market without being an official member of the EU.
Mark Carney’s “promise of fintech” should not be forgotten in light of the Brexit, and the UK should still invite “the wave of innovation sweeping through the world of financial technology [that] promises nothing short of revolution”.