The House of Lords, the second chamber of the UK Houses of Parliament, said the country has the opportunity to tailor regulations to foster fintech innovation once it leaves the European Union, but also expressed concern about the potential lack of access to talent and EU funding.
The European Union Committee of the House of Lords said in a report this week, Brexit: the future of financial regulation and supervision, that the UK will have the capacity to exercise greater control over its domestic legislation after leaving the EU and so can tailor the regulatory framework to its own priorities.
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“We conclude that opportunities for varying the regulatory framework where appropriate should be welcomed,” added the report. “There may however be opportunities to tailor the UK’s regime both to reflect our existing markets better, and to reflect those that are developing, for example in areas such as fintech.”
The committee continued that the UK is an international leader in fintech, an area in which the EU is not much involved.
Andrew Bailey, FCA
Andrew Bailey, chief executive of the Financial Conduct Authority, said in the report: “FinTech, interestingly, is very little subject to regulation at the moment, and that is a good thing”.
In 2015 the FCA launched the regulatory sandbox which allows to test new products and services in a controlled environment and reduced the time and cost to reach the market. The sandbox also aims to identify appropriate consumer protection safeguards to build into new products and services, give consumers better access to finance by offering tools such as restricted authorisation, individual guidance, informal steers, waivers and no enforcement action letters.
Rachel Kent, global head of the financial institutions sector group at law firm Hogan Lovells, said in the report that the sandbox, in addition to the Bank of England’s regulatory accelerator, was evidence of the possibility of divergence within the existing regulatory system. “All those things have happened or continue to happen within our existing regime,” she added.
The report warned that there is the potential for EU intervention in the regulation of fintech may result in a more standardised regime across the region which may affect the UK’s current approach, depending on the outcome of decisions taken regarding future market access.
“The UK may also look to develop more innovative regulatory initiatives in order to reflect market strengths, rather than to rectify deficiencies in the existing regulatory framework,” said the committee. “The UK is currently a world leader in fintech, which has been fostered by regulators through projects such as the FCA’s regulatory ‘sandbox’.”
Deloitte highlighted the ‘fintech bridges’ the UK has agreed with Australia, China, Singapore and South Korea, enabling the FCA to refer fintech firms to other regulators and vice versa,
“The UK and EU-27 should consider building a strong ‘fintech bridge’ and co-operation agreement with the EU to ensure that, if something similar to passporting rights do not apply after Brexit, barriers to entry into each other’s jurisdiction remain as low as possible so that innovation and competition are not stifled,” added Deloitte.
The CBI, which represent UK business, emphasised that “the UK should also seek close alignment on policy issues that would impact the development of the fintech industry such as the General Data Protection Regulation (GDPR), which has a material impact on the UK’s position as a leading digital economy”.
Deloitte agreed that If the UK is not permitted to access or retain EU-27 customer personal data under the GDPR, this will pose material challenges for firms that currently serve those customers, or hold data in offshore or shared service centres.
Charlotte Croswell, chief executive of Innovate said in the report that the UK regulator has been very progressive work, but fintech faces global competition for talent. sHExplained that 30% of Innovate Finance’s members were born overseas. She said: “Entrepreneurs have choice of location; there are roles overseas that they can go to, so we have to continue to make the UK a friendly and easy place to do business so that they continue to want to work here.”
Stephen Barclay MP, the City Minister, acknowledged the importance of access to talent.
“The Chancellor announced that the UK Government will be doubling the overall number of tier 1 exceptional talent visas from 1,000 to 2,000 and lifting the tech sector cap within that,” he said. “The Home Office is also committed to looking at establishing sponsoring bodies outside London.”
Witnesses before the committee also warned of the loss of access to the European Investment Bank and the European Investment Fund after Brexit. Croswell said: “About 50% of the EIF fund goes to UK companies ... so we definitely need a replacement source of funding.”
Any loss of EU funding could be partially mitigated by the British Business Bank.
Barclay said the UK government has awarded an extra £2.5bn to the British Business Bank, representing a two-thirds increase. He did not rule out continuing participation in the European Investment Bank said the UK government recognised the importance of funding.
“We are also looking to ensure that either through the EIB or through equivalent funding we maintain what is seen as a key source of finance,” he added.
