Fintech startups post Brexit

October, 2016

There has been a lot of concern amongst fintech startups in respect of whether they will be able to access European markets under their existing UK regulatory permits. This article looks at the potential models for Brexit and what the status of financial services would be in each.

Authorised firms within the EU are currently able to “passport” their regulatory authorisation into other EU states with minimal additional obligations. This saves financial services firms from having to apply for authorisation in each member state and allows UK firms border free access to all EU markets based on their UK authorisation. In a worst case scenario, critics of Brexit claims that a “hard” Brexit by the UK could result in the withdrawal of passporting rights with disastrous results for UK fintech. However, the likehood is that no such wholesale withdrawal would occur, at least in the medium term.

In the event that the UK revoked its membership of the EU and made no attempt to negotiate a new deal with the EU, UK financial services businesses would lose automatic guaranteed access to the EEA single market and corrresponding rights of freedom of establishment and movement. However, the EU operates a framework which allows financial services businesses established in jurisdictions outside of the EU (so called “third countries”) to access EU markets. The UK would become a third country for these purposes on Brexit.

Access to EU markets for businesses in third countries is conditional on them satisfying several requirements. These include the business being properly authorised and regulated in their home country, and the regulatory regime (including in relation to anti-money laundering, taxation and financial crime) being equivalent to the EU regulatory regime. Whether or not UK financial services businesses will be able to access the EU market will therefore depend on how closely the UK regime remains to that of the EU. Presumably, at least at first, the regimes would be remarkably similar (assuming the UK government grandfathers existing EU rules into UK law). However, care will need to be taken to ensure that the UK regime does not subsequently change with the effect that it ceases to be equivalent. Additionally, with each new piece of EU legislation governing financial services, there will need to be a negotiation between the UK and EU on how equivalent any UK implementation is and whether therefore UK financial services business should be entitled to automatic passporting going forwards.

For investment businesses, the position could be more straight forward assuming MiFID II (which is made up of the updated Market in Financial Instruments Directive 2014/65/EU and the Markets in Financial Instruments Regulation 600/2014) comes into force as scheduled on 3 January 2018. MiFID II will allow non-EU financial services business to provide services on a cross border basis into the EU once they have registered with ESMA (European Securities and Markets Authority), subject to those services only being provided to wholesale clients and the firm being authorised in its home country to provide the same services. Membership of ESMA is dependant on the rules and regulatory regime of the home country of the financial services business being equivalent to those of the EU. Alternatively, a financial services business in a non-EU state could set up a retail branch in an EU state which is authorised there.

What should fintech startups do to prepare for Brexit?

The most important advice for fintech is to keep updated on the position of the UK government with regards to passporting and, once negotiations start, on the position of the EU negotiators. Above and beyond that, startups involved in investment business should keep a careful eye on the implementation date of MiFID II to ensure that it does not slip further. Currently MiFID II is due to come into force during the two year negotiation period of Brexit. The position of firms carrying on investment business could be materially worse if the timetable for MiFID implementation slips.

A number of fintech business currently only operating in the UK are beginning the process of setting up companies in other EU member states (for example, Ireland) to ensure that they operate in a state remaining within the EU. The rationale is that the EU is unlikely to immediately prevent such passported businesses from operating within the EU and may allow existing entities operating in the EU to continue doing so. For the most risk averse businesses, beginning the process of getting an authorisation in another member state is an expensive but potentially sensible approach.

Buckworths intend to publish further briefings on Brexit and related issues going forwards.

Back to Insights