Today, the UK triggers Article 50 of the Lisbon Treaty formally starting the two year process of exiting the European Union. Despite months of debate there is little clarification of what this will mean for the UK financial sector and its related industries. Here are five considerations of how Brexit will impact the future of RegTech:
1) Supply and demand
The talk of a possible “bonfire of regulation” post Brexit is causing some to ask what this means for the financial services regulatory environment and the RegTech solutions used. But when it comes to financial regulations this “bonfire” is unlikely to even char the number of existing regulations.
During the two year negotiation period the UK must continue to follow existing EU financial regulations. More importantly the UK must still implement directives whose implementation date falls within the Brexit period. This means that UK financial institutions will still have to implement PSD2, MiFID2, GDPR, 4MLD and most likely 5MLD whose first draft is expected later this year.
Will current regulations disappear post Brexit? This is unlikely as the FCA has been instrumental in the formation of all of these regulations. It is improbable that they will move significantly away from them. Additionally the amount of money and time that financial institutions have already invested in getting ready for these regulations, means that they will not look favorably on their total dismantlement.
Regardless of leaving the EU, it will still remain a key trading partner for the UK. To make trade as seamless as possible, especially if the UK loses its financial passports, it will have to pursue a regime of regulatory equivalence. Meaning UK regulations will have to be equal to or better, to ensure ease of trade. All of this means that the supply of financial regulations is not going away. The demand for systems that can navigate subtle differences between them will be greater than ever post Brexit.
2) Attitude towards innovation
The FCA’s innovative outlook has fostered a burgeoning FinTech and RegTech industry in the UK and this attitude isn’t going anywhere. Without the time constraints of EU Directive’s moving sluggishly through the EU Parliament, the FCA will be able to react much more quickly to new technologies and crime trends. It’s ability to quickly legislate will give the UK a competitive advantage over other European countries, which we believe will cement the UK as the home of FinTech and RegTech.
3) Unparalleled infrastructure
The UK has been such a good place to start a RegTech or FinTech business because of the infrastructure it has around its mature financial services sector. It’s stringent enforcement of the rule of law and its position as an international transport hub make it ideal to do business in. It would be very difficult for a European country to rival this infrastructure, with some commentators saying it would take upwards of twenty years to mimic.
4) Strong investment
In the past five years the UK has attracted more investment in Tech than any other European country. In 2016 alone it received £6.8bn, two thirds more than the closest competitor, France. Investment in the UK’s tech industry may have initially slowed after the Brexit vote but the figures for 2017 Q1 show that investment is recovering. If these recent figures are indicative of long term confidence in UK FinTech then strong investment is likely to continue.
5) Access to Talent
There has been a lot of uncertainty around what will happen to jobs and talent post Brexit. 30% of UK tech employees come from the EU and although their right to work here will remain in place until we have formally left, their post Brexit status is still uncertain. The government has stated its commitment to protecting the interests of financial services, but until there is further clarification on the type of deal the UK will negotiate there could be a long term risk when it comes to access to talent.
The outcomes of Brexit for financial regulation are likely to be less dramatic than some might expect. The need for regulatory equivalence at both a European but also global level means that the UK is constrained by how far it can deregulate. This is especially true for financial crime regulations which are prescribed at a higher level anyway by the UN and FATF. Despite regulations staying in place, Brexit will make the global framework a little more fragmented. Reinstating the need for businesses to partner with technology companies who have the deep expertise to successfully manoeuvre the increasingly complex world of regulatory compliance.