February 22, 2017

Brexit could kill passporting. Can equivalence save British fintech?

Passporting, it seems, is lost. The big players are betting against British businesses retaining the right to sell their services within the EEA. Goldman Sachs, Barclays, HSBC and many others are looking to move their business to retain these rights.


But what does this mean for companies who can’t move their business abroad? What can startups and SME’s do to keep selling to their customers within the EEA?


The loss of passporting is unlikely to be the death knell that some expect it could be. While the sheer size of the sector in the UK will mean many businesses might weather any significant change, there is a Plan B: the EU’s “Equivalence”.


And it might be an adequate alternative for many businesses.


The benefit of equivalence is that rather than starting from scratch, the application forgoes the long winded process of seeking approval from every country British businesses want to do business in. It allows continued access to the EEA countries with which British companies are already trading, and, rather than every business requiring a passport, is applied for the whole British financial regulatory jurisdiction.


If the government are able to provide proof the financial regulations here are as rigorous as that of the EU, access to the EEA could be possible under equivalence rules – and, as the government adopts the policy of the European Union word-for-word, it is a definite possibility.


However, equivalence is not without its drawbacks. The decision is subject to the will of the European Commission – an institution which is not without political consideration in its decision making process. As well as this, the process is not automatic.


With no fixed deadline for the EU to approve a British application by, and the rules on equivalence subject to change with relatively little notice to participating countries, this doesn’t create a hugely stable environment for the financial sector.


Larger businesses may still choose to relocate, even with Equivalence, leaving smaller peripheral businesses potentially away from their customers. Without these larger players, and importantly access to funding, London fintech risks finding it harder to attract scaleups – especially if the European mainland is able to offer greater access to institutional support or talent.


As well as this, the rights gained are not exhaustive. There are several important areas of financial services with no current provision in the EU’s equivalence legislation – namely wholesale and retail banking services such as deposit-taking, commercial lending, and payment services. As many have pointed out, the rights secured are far more piecemeal than the passport system.


For all UK businesses to retain the rights they currently enjoy, the British government would have to secure additional rights to those that are provided by equivalence. Otherwise, some businesses might find themselves unable to sell services from the UK within the EEA without a subsidiary abroad.


While the government has promised the “freest possible trade in financial services between the UK and EU member states”, the future of just which rights the Prime Minister will be able to secure are unknown.  


We now have to hope the government’s negotiations focus on smaller finance partners as well as the largest City firms in her “bespoke” deal. Consideration needs to be given to building a robust framework needed to secure a profitable future – not only for the largest firms – but for British SME’s and startups.



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