Lynn says that a no-deal scenario, alongside no equivalence arrangements will make innovation and growth in the fintech sector much more difficult, primarily due to the disappearance of passporting agreements where banking licences to operate in the UK can be used in the EU and vice versa.
“What does that mean? It means it’s going to be an absolute pain to expand into Europe,” Lynn says. “If there is no equivalence or no passporting, it means we would have to set up a separate office in Europe with a staffed team for almost no benefit to our business, but just literally so we can get regulated.”
“It’s unbelievably expensive, an absolute nightmare and probably a time delay of about a year for a fintech to do that,” he adds.
The chances of a deal being agreed between the UK and EU look increasingly slim with UK prime minister Boris Johnson and European commission president Ursula von der Leyen agreeing a final deadline for a deal on Sunday, December 13. The Financial Times reported that a UK government official said “very large gaps remain between the two sides”.
The trade deal currently being thrashed out by the UK and EU doesn’t relate to financial services but is likely to signal the level of goodwill in place for equivalence decisions that can be made unilaterally by both parties.
Tej Patel, partner at technology consultancy firm, Capco says it’s “disappointing” that the financial services sector finds itself in this position due to “posturing and political muscle flexing”.
“If you look at the composition of what makes up our [the UK’s] GDP, it’s been disproportionately focused to financial services which is so critical to the UK. The lack of progress on that is very worrying,” Patel says.
The financial services sector makes up around seven percent of UK GDP, according to the latest parliamentary figures from 2019. In comparison, fishing – a huge stumbling block in current Brexit negotiations makes up less than 0.1 percent, according to the ONS.
Agreeing with Lynn, Patel says the failure to produce equivalence agreements will be damaging for both the UK and the EU as it brings more uncertainty to the sector. Patel adds that most financial services firms have already made preparations which assume a no-deal Brexit but is worried about the impact the ongoing discussions will have on the market.
“I know very few firms that would have held out hoping for a deal to have been agreed in time. The majority have gone for a worst-case scenario,” he says.
Nick Mills, general manager EMEA at technology firm, CircleCI agrees that close alignment between the UK and EU going forward will be important to financial services.
In an email, he said: “A key element of a successful deal will be to ensure that any regulations and initiatives, such as Open Banking and PSD2, remain consistent and aligned across the UK and Europe.”
Patel adds that an agreement around equivalence of regulations would be a “massive, massive step in the right direction”, but is fearful of the negotiations current direction of travel.
“The longer the lack of a decision or agreement is made, the more likely you are going to get a really big divergence,” Patel says.
“The longer that goes on, you're just going to see things diverging. Then it becomes very hard to get people to meet back around - not impossible but it just becomes a lot harder.”
Bloomberg reported on November 30 that London “has been thrown to the Lions” due to Brexit and that it is set to lose its reputation as the financial centre of the world in 2021. Mills and Lynn maintain that London has a unique pull in the financial services world, but Patel warns London is in a “grim” situation.
“I would love to share the optimism, and the UK will still retain a strong position, but it just can’t come through this unscathed. I just don’t see that,” Patel says.
He adds that without equivalence agreements in place, it will be much harder for the city to draw talent, for example.
“How’s that [hiring] going to look if you will all of a sudden have to look at work permits and people’s ability to reside… will we have a talent drain?”
Mills agreed that access to talent was important for the future of fintech in London to “ensure the region’s role as a global leader in fintech continues” but was still not convinced that Brexit would displace London as a financial hub.
“London’s unique ability to connect with global markets, already wide adoption of fintech services, and regulatory and legal system to support continued innovation will ensure that London continues to be a key constituent within what I am confident will be a broader and more vibrant UK/European fintech ecosystem,” he added.
Lynn agrees that the “ecosystem” in London is “incredible” meaning that innovation is much easier, adding that London still is a huge pull for talent by virtue of being such a desirable city to live in. He doesn’t believe that places like Frankfurt or Paris are going to be able to rival London in the short-term.
Patel agrees that the shift from London to an EU city won’t happen “overnight”, particularly bearing in mind the wider cultural appeal London has. Longer term however, he is concerned.
“The UK has always been the gold standard flag bearer [in finance]. With Europe potentially not recognising the UK, that will naturally have an impact. How big? I don’t think anyone can be certain.”