Can the UK FinTech industry weather Brexit’s storm?

With just three days to go until London FinTech Week, we invited the organisation’s founder, Luis Carranza, to answer this question:

Can the UK FinTech community weather Brexit’s storm?

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If I was a weather forecaster, I would describe the outlook for the UK fintech industry as calm and cloudy with spells of uncertainty. But could these clouds have a silver lining ahead?

There is no doubt that Brexit has cast a cloud of uncertainty over the finance industry and as a result, we’re already beginning to see pre-emptive action being undertaken. There is a gradual but not sudden exodus of people, companies and investment which has already begun. Companies cannot wait for the political powers to finish their negotiations in two years’ time – hedging risk and planning for the future started yesterday.

When it comes to the levels of investment going into the UK’s fintech sector, the impact of Brexit and the uncertainty it has brought is clear. Analysis conducted in association with William Garrity Associates, reveals that UK FinTech investment declined significantly by 40 per cent in 2016, partly due to Brexit and the investment cycle.

Between 2013 and 2015, UK FinTech investment increased 175% to $2.2bn. However, in 2016, investment declined 40 per cent to $1.3bn – pre-2014 levels. Meanwhile, FinTech investment into European companies increased by over 400 per cent in the same period – jumping from $0.3bn in 2013 and reaching $1.7bn in 2015. Investment has stayed flat in 2016, compared with the decline in the UK.

But the real winner is China, which saw investment growing from $0.2bn in 2013, to $2.9bn in 2015 – only to jump almost a further 248% to $10.1bn in 2016. In fact, China is incredibly close to putting the US in second place, who only attracted $10.5bn in 2016.

Many commentators have suggested that London’s heritage as an international financial services hub will see it weather through this storm. Indeed, hundreds of years of regulation, tradition and business culture is ingrained in London’s DNA. Yet I fear this won’t be enough. Furthermore, as a sector which contributes over £6bn to the UK economy, can we really afford to rely on our heritage alone?

As Damian Kimmelman, CEO and co-founder of London-based fintech, DueDil, recently suggested, because of Brexit and nationalism “countries are becoming politically and culturally more insular in their mindset”. This mindset has manifested into an “each country for itself” mentality and the rules of respecting – or at least accepting – the incumbents have gone out of the window. From New York and Paris, to Frankfurt and Hong Kong, with the UK out of the picture, countries are now all actively jostling in some way to be the next global FinTech hub.

Yet where there is uncertainty and greater competition, opportunity can be found. As the Red Queen said to Alice in Lewis Carroll’s Through the Looking Glass, “Now, here, you see, it takes all the running you can do, to keep in the same place”.

London has to run and evolve in order to stay in the same place or remain existent. The good news is that our DNA provides us with the foundations to evolve – and even come out stronger – providing we address the right issues. In speaking with the fintech community, it is clear we must address three key issues – policy and regulation, talent and culture.

It is critical that we re-attract FinTech investment before we suffocate innovation in the UK. Speaking with the investment community, most are committed to their existing portfolios. However, the real threat is new money flowing into fintech to fuel start-ups. To address this, we need entrepreneurial policies and a world class regulatory regime.

First, we need to maintain pro-business policies that encourage entrepreneurship. Early stage companies should be incentivised to experiment and fail fast. Research and development (R&D) tax credits is one example, but when you consider the Singaporean government will match half of your R&D budget, we must ensure the “full package” is attractive to start-ups.

Another aspect is ensuring there is easy access to investment. In the past few years, schemes such as the European Investment Fund (EIF) have established stimulating new seed stage funds. With our withdrawal from the EU, it is essential that we double down on the British Business Bank (BBB) programme and maintain Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Schemes (EIS) tax breaks.

In terms of financial services regulation, we must pay attention to our regulatory structure to double down on what works and what is exportable. Striking passporting deals on key pieces of regulation such as Open Banking with PSD2 will be important to maintain our ability to trade with Europe’s major economies should we wish to – but more importantly we should look at our ability to influence regulation.

The Senior Manager’s and Certification Regime is one example where we have stepped up to the plate in delivering much needed, world-class governance following the financial crisis. An international financial hub needs to develop policies and regulation that are brave, bold, and globally influential.

When it comes to talent, it is important to remember that an estimated 28 per cent of City workers are from the EU. Of course, their ability to remain in the UK as is our ability to hire foreign talent, remains in the hands of the powers that are both here in and in Brussels. But in the meanwhile, government should also seek to make London a desirable place to live. As Simon Squibb, an entrepreneur and angel investor who has moved back to London from Hong Kong, recently said, following Hong Kong’s sovereignty was restored in 1997, the government undertook strong infrastructure programmes to make the region efficient, safe, and exciting.

With Crossrail soon to be delivered, a rich culture and arts scene, London is a thriving, cosmopolitan city which attracts talent for all sectors from around the world. Government must not underestimate the power of investment into making London a desirable city to live and work in.

And finally, when it comes to culture, I believe more must be done to create a melting pot between finance and technology, to help breed new fintech players and initiatives to breakout from the apathy of legacy and complexity within the UK. I hope London FinTech Week will be one of many melting pots to help kick-start this breakout!

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Many thanks to Luis for sharing his thoughts with us today. Grab your last minute tickets for this year’s London FinTech Week and receive a 20% readers discount.

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