It has been four months since the Brexit agreement between the UK and the EU entered into force. The agreement, like other free trade agreements, contributes very little to the export of financial services from the United Kingdom to the internal market. As a result, during the spring, financial services companies, including those in the financial technology sector, have adapted to various trade relations with the EU, while dealing with the current COVID-19 restrictions.
In particular, UK Financial Services lost its automatic rights to serve EU clients from its UK base using the alleged rights of access held by UK companies in a Member State. The passport has been replaced by equivalence decisions. However, this is not a fair alternative. Parity is a unilateral decision taken by the EU in the field of finance, as it recognizes that the UK regulations are similar. These decisions can be withdrawn with 30 days’ notice and do not apply to the entire financial services sector. For example, no decisions are made on equivalence with regard to bank loans and foreclosure.
So far, parity has been given to the UK in only two areas that are considered a matter of systemic financial stability. As a result, UK financial services currently have less access to EU markets than some of their main competitors, including the US and Singapore.
About the topic: Fintech in the UK after Brexit
Many financial institutions have responded by transferring some of their businesses to other European financial centers, including Paris, Frankfurt, Amsterdam and Dublin. According to the latest estimates, more than 440 financial institutions have taken such steps, including around 7,500 jobs in the UK.
In addition to examining the impact of Brexit on current business services for financial services, it is also important to consider future growth opportunities that currently exist for financing in the UK. In fact, the political rhetoric surrounding Brexit has created many opportunities for Britain to “regain control”.
UK and digital economy
During the Brexit negotiations in 2020, it was unclear what the UK would choose to use its new regulatory sovereignty. But after the agreement, the first signs of this appeared. It is clear that fintech and the digital economy, together with the green economy, is an area where the UK seeks to prioritize development to compensate for lost business in the EU. When it comes to fintech, this is clearly in line with the government’s broader interest in technology-driven economic growth.
Reflecting the importance of the digital economy, it has been one of the areas that has received the most political support and political statements since the trade agreement entered into force. For example, a UK listing led by former EU Financial Services Commissioner Jonathan Hill tried to respond to the fact that UK technology companies are increasingly choosing New York as their main listing venue.
The listing review also argued that an innovative approach to regulating fintech through the Financial Conduct Authority or the Financial Conduct Authority (FCA) regulatory protection environment has allowed for faster regulatory changes. As fintech is one of the “growth sectors of the future” and the UK is “truly a leader in Europe”, there is a need for further development after Brexit. In early April, FCA consultant Rishi Sunak responded by announcing at Fintech Week that a new FCA “massive fund” had been created to support the growth of fintech, building on the success of UK regulatory hedge funds.
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This spring, the Kalifa Fintech Review UK was published, reflecting the broader political interest in fintech. This aims to strengthen the UK’s leadership in fintech and provide guidance on, among other things, capital and competence requirements for this sector.
However, these reviews point to areas of concern and uncertainty, as well as opportunities for financial technology in the UK after Brexit. One of the most important areas in this regard is to attract highly qualified international talent to work in the UK’s fintech industry. The effect of Brexit on this in terms of international migration and shorter forms of international commercial travel is currently unknown, as commercial travel is mostly closed due to COVID-19 restrictions.