While the UK’s popular press obsesses over the color of post-Brexit Britain’s personal passports, our fintech entrepreneurs are worrying about the EU passporting system for banks and financial services companies.
The EU passporting system lets firms authorized in any EU or EEA state to trade freely in any other with minimal additional authorization. There are nine different passports, based on the single EU rulebook for financial services. Firms based outside the EU and the EEA can’t get passports and face significant barriers.
As this British Bankers Association (BBA) briefing states:
“These passports are the basis of the single market in financial services and are used to enable a steady flow of trade in financial services across the EU. Many banks and financial services businesses in the UK have based their business models on the rights conferred by EU legislation to ‘passport’ their services across the EU and the EEA. They are especially important for the UK, which is the largest exporter of financial services inside the single market, exporting over £20bn of services to customers in the rest of the EU in 2014 and helping provide hundreds of billions of euros in finance.”
The impact on fintech could be significant, as an Emerging Payments Association (EPA) report Passport to the Future makes clear: “HM Treasury estimates the UK fintech market employs 60,000 people and is worth £6bn to the UK economy. Fintech is part of the UK’s financial services sector that employs 1.9 million people and contributes 10 per cent of the UK’s GDP. Payments represents over 40 per cent of financial services in revenue terms and in 2016, 40 per cent of all fintech investments were in payments companies, amounting to £10bn globally.”
In a recent survey of its members, the EPA found that 88 per cent of its members think that passporting rights are important or very important to their current businesses, while over 91 per cent think passporting is important or very important to the UK’s fintech sector and its continued growth. Tony Craddock, Director General of the EPA thinks Brexit “reduces the chances London will remain as a Europe-leading fintech centre.” Ultimately, “no amount of leading edge technology will prevent isolationism from damaging trade.” However, Craddock thinks that in time London will become the leading fintech centre for the rest of the world. Its Project International Trade, which is endorsed and supported by the Foreign Secretary and the Department for International Trade, is setting out to build corridors between the UK and non-EU regions such as Latin America, EEC, Africa and Asia Pacific.
Andrea Dunlop, CEO of Acquiring & Card Solutions at Paysafe Group and Deputy Chair of the EPA Advisory Board is lobbying the Government to make financial and card scheme passporting an early priority of the Brexit negotiations: “It can’t be denied that Brexit provides opportunities both in terms of global markets opening up and where there are regulatory regimes the UK can fast track into. Skills shortage scaremongering is not helpful given the massive non-EU talent pool that remains available to us, and the fact the government has already stated it will allow migration where such shortages exist. Energies instead should focus on passporting, which must be addressed early and decisively. An open market and unrestricted passporting is critical to preserving the value of fintech to the UK economy.”
Alpesh Patel, co-founder of Soldo, a multi-user spending account for businesses and families, has already started looking at expanding into a new territory, though he hasn’t set up an office yet. Ultimately, he thinks “the ability of technology alone to overcome political obstacles such as Brexit and other isolationist policies become too onerous.”
Anthony Christodoulou, founder of Robo-Investing, isn’t resigned to isolationism. “Political obstacles may well confront all countries in re-negotiation but isolationism or protectionism does not have to be consequential to a new relationship with the EU”, he says. “The Financial Conduct Authority (FCA) does in many respects hold the gold standard in regulation. Within wealth management our approach to fees, transparency and distribution is arguably the most liberal and progressive in Europe” he adds. “This, along with new similarly aligned forthcoming European directives, should facilitate renegotiations as well forge new relationships with service providers and the investment community across the world. I would be concerned if the May Government had commented in a ‘Britain First’ tone but they did not and for the time-being I will trust them to try to deliver on ‘Global Britain’ policy. Whether our Government continues to hold this view or other EU politicians prevent or obstruct this path is unknown and of course a key risk.”