ScotlandIS, the trade body championing the digital technologies industry in Scotland, has released the latest in its series of Brexit briefings for the IT industry. The briefing focuses on the impact of Brexit on Scotland’s burgeoning FinTech sector and is produced in partnership with leading Scottish law firm Burness Paull, a ScotlandIS member company.
The UK is the leading global hub for FinTech and strong growth clusters are developing in Glasgow and Edinburgh, benefiting from the strong financial services sector in Scotland. This sector is largely regulated on EU level and will therefore be impacted by Brexit, which will have ramifications for FinTech businesses in Scotland.
Svea Miesch, research and policy manager at ScotlandIS, says: “British banks and other financial services companies owe their success partially to the ability to trade in all EU countries without having to register separately in each country, guaranteed through the EU passporting rights. These rights are linked to the UK’s membership in the EU single market.
“The majority of FinTech companies are operating only in the UK and therefore do not rely directly on passporting. However, FinTech businesses often work in partnership with banks and will therefore be indirectly affected. The loss of passporting would also make future expansion to other European countries more difficult for UK FinTech firms.”
Following the UK’s exit from the EU, banks and financial services will look for ways to continue to trade easily in the EU, believes Callum Sinclair, partner and head of technology at Burness Paull.
Sinclair says: “One option will be to establish part of the business in an EU country. This would need to be a ‘significant presence’. It is not yet clear what defines such a significant presence in detail but some may interpret this as having headquarters within the EU. Such moves will be regulatorily complex, costly and risk undermining Scotland’s strong financial services sector on which FinTech companies rely.
He continues: “Another option would be to obtain an equivalence status from the European Commission, confirming that British and EU financial services regulations are compatible. This option has also been mentioned in the UK Government’s Brexit white paper. However, equivalence status can be withdrawn at 30 days notice, so it is unlikely to give sufficient security to financial institutions. The UK Government would also have to mirror all new EU financial services regulations to protect the equivalence status.”
If Scotland can remain part of the European single market, as proposed in the Scottish Government’s Brexit proposal, banks with a significant presence in Scotland would retain passporting rights.
Even though the regulatory environment for financial services and FinTech will not change until 2019 when Brexit will come into effect, Brexit has already an impact.
KPMG reported in November 2016 that uncertainty around the exit from European Union has led to a downturn in venture capital investment in British FinTech companies, whilst investment continued to grow in Germany. KPMG is expecting more confidence of VC investors in 2017 though, “as the immediate ramifications associated with Brexit ease”.*
Miesch says: “The UK Government wants to negotiate “the freest possible trade in financial services between the UK and EU Member States” as part of its future trade agreement with the EU. ScotlandIS will continue to lobby on Scottish and UK level to make sure that the interest of FinTech companies and the wider digital technologies industry are taken into account during these negotiations.”
FinTech SMEs might just be the right partners for banks that need to find innovative and agile solutions to the challenges Brexit will bring.
Sinclair believes that “with its emerging tech hubs and highly experienced resource pool, the Scottish financial services sector is well placed to tackle these challenges. The fintech accelerator that has been announced this week by Entrepreneurial Spark and Royal Bank of Scotland is the newest addition to Scotland’s fintech landscape and aims to facilitate such innovation partnerships.”
Scotland’s digital technologies industry contributes £5 billion in GVA to the economy and some 84,000 people are employed in the sector with start–up incubators such as Rookie Oven in Glasgow and CodeBase in Edinburgh enjoying huge success and growth. According to KPMG’s Tech Monitor, the number of tech sector enterprises in Scotland grew 43.4 per cent between 2010 and 2015, second only to London (54.6 per cent).