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5 Brexit outcomes, and their possible impact on fintech

Jul 13, 2016 Sean Albert

Now that the U.K. is likely to invoke Article 50 of the Treaty on European Union, financial services and fintech companies alike are calculating how to navigate an environment of uncertainties.

"A bilateral trade agreement is a possible Brexit outcome."

Once the U.K. officially leaves the EU, it will have to engage new trade negotiations with nations across the world. How these discussions progress depends on how the country chooses to maintain relationships with the EU.

Which relationship will the UK choose?
Global Counsel, a consultancy providing insights into the effects of politics, regulation and public policymaking, released a report outlining five possible Brexit models:

  • The Norwegian approach would entail the U.K. joining the European Economic Area (EEA), thereby enabling it to access the EU market. However, it would have to implement EU standards and regulations, and have no control over its immigration policy.
  • A Turkish-style customs union imagines the U.K. adopting EU product market regulations while failing to complete sector coverage of the customs union. In addition, the U.K. would have to adopt EU external tariffs.
  • The fair trade agreement option would involve establishing an FTA with the EU and its member states, but this means the U.K. and the union would have to compromise on certain standards and regulations.
  • Bilateral accords, much like those between Switzerland and the EU, could dictate how the U.K. accesses the EU's single market with regards to specific sectors.
  • A most favored nation (MFN) strategy that would likely subject the U.K. to the EU's common external tariff, while enabling it to adopt its own regulatory approach.

Which is more likely? Global Counsel maintained that the FTA-based and bilateral agreements are "possible." Given the repercussions of these approaches, how would they impact the fintech space?

The possible effect on fintech jobs and services
First, consider the consequences of establishing an FTA with the EU. This would likely hinder U.K. banks' ability to "passport" their services to the EU member states. TechCrunch contributor Shefali Roy wrote that fintechs may also lose this privilege. For example, companies operating under EU stipulations and providing lending services may be restricted from using nontraditional credit tools developed by U.K. businesses.

Germany may well be the next financial hub of Europe.

What about bilateral accords? The pertinent concern is how the accords will govern U.K. access to specific sectors within the single market. Assuming the EU would impress stringent restrictions on the U.K.'s financial sector, this would severely impede U.K. fintech's ability to develop flexible relationships with EU customers.

Irrespective of either situation, fintech will find a way to adapt. One possibility, according to Roy, is that U.K. fintech startups will apply for regulatory licenses in Ireland, Italy, the Netherands, Germany or Spain. While Germany is a favorite due to its favorable regulatory environment, Ireland would arguably be more accessible to U.K.-based fintech companies, assuming they're already in the process of expanding to this country.

Overall, there may be less concentration of fintech within the U.K., as companies throughout Europe and the rest of the world seek more accessible services and products. Businesses are likely to take the safe route, engaging fintech firms such as MicroBilt, which have demonstrated their ability to navigate uncertain regulatory environments.