The vote in favour of Brexit last year was ill-conceived, argues Tobias Schreyer, co-founder and chief commercial officer at PPRO Group. It will have far-reaching consequences for London as a financial centre, and the impact will extend beyond the major banks to e-money providers, fintechs and consulting firms
Is this the end of London as a financial centre, or will British financial services providers actually retain free access to the EU? Whatever the case, it is by no means just banks which are affected by the chaos of Brexit.
Before the UK’s Brexit referendum, only two things were clear: No-one knew what a Yes vote would mean for the country’s exit from the EU, and, initially, nothing would change. Both things have come to pass, and now that the Brexit dust has settled, we find ourselves in the middle of Brexit chaos.
According to Article 50 of the Treaty on European Union, the withdrawal of a country from the EU must be negotiated within two years of its – in the UK’s case, as yet unannounced – official application to leave.
To clarify: The EU and the UK have two years to define the terms of their future relationship, although it seems unlikely that anyone in Brussels or London seriously believes that a withdrawal on this scale can be pulled off in two years.
It is, however, precisely the results of these negotiations that will determine the actual effects of the Brexit, particularly on banks, fintech companies, cross-border e-commerce, and the payment industry.
London as a financial centre
Very few Britons in the financial industry were genuinely in favour of the UK’s withdrawal from the EU – or, at least, very few would admit it publicly. Free access to the EU is too important. To pour oil on troubled waters, the controversial UK foreign secretary Boris Johnson was forced at the end of July to announce that financial services providers would, of course, be able to continue their business within the EU.
After Brexit, therefore, nothing would change for the financial industry. The minister practically guaranteed financial experts EU passporting rights (the free movement of services within the EU) as a fait accompli in the negotiations.
No-one really wants to rely on such statements; Johnson was probably just looking to gain some breathing space. In London, after all, there are around 700,000 financial sector jobs, and not only in traditional banks.
Although such banks are often cited in discussions of Brexit consequences, they are not the only players on London’s considerable financial stage. While many non-European banks have their main headquarters in London and benefit from EU access, founding a new branch in the EU should be no problem for such industry giants. Each year, the UK exports around €24bn worth of financial services to other EU countries, and, in addition to banks, the financial industry comprises a large number of active fintech companies, consulting firms, and payment providers.
E-money providers are also affected
Three-quarters of emergent European e-money providers are headquartered in London and licensed as UK providers of financial services. One of the biggest advantages of European e-money services is that they can easily be provided across international borders. If UK financial licences become invalid within the EU, e-money providers will find themselves in a similar situation to banks.
Their only option will be to obtain a new licence within the EU, a process which involves additional regulatory requirements, duplicating infrastructure, and – most importantly – additional cost. This could put a considerable dampener on the development of e-money in Europe.
Despite this, e-money promises to be a key future issue for the financial industry as innovative companies seek out other options, including options outside the UK.
Brexit was ill-conceived in many respects, but the deed has been done and there is unlikely to be any going back now. PPRO Group is one of the companies which provide services under a licence from the FCA, the UK’s financial regulatory body. Should this licence become invalid for the EU, we too will need a new one to continue to provide services to all our customers.
Before the referendum, therefore, the PPRO Group contacted regulatory authorities in various other EU countries to lay the groundwork for the worst-case scenario: the loss of EU passporting rights for UK financial services providers.
Unlike Johnson, we must assume that UK financial services providers will not retain passporting rights as part of the negotiations with the EU.
With Brexit, therefore, a considerable industry volume, including a great many experts, will disappear from the UK.
These experts include not only the emigrating banks, but also the innovative financial services providers who are now being forced to switch gears.