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The United Kingdom’s beleaguered Prime Minister Theresa May was back in Brussels last week for yet more talks with the European Union over Brexit. Despite winning a vote of confidence in her leadership of the Conservative Party, achieving 63% of the vote from her own MPs – the threat of a “no deal” Brexit remains significant thanks to the issue of the Irish backstop.
For those of you suffering from Brexit-fatigue, he is just a brief summary of where the UK currently stands:
If the UK’s draft withdrawal agreement on leaving the EU is indeed voted through by its Parliament, then Brexit will occur in March 2019 and a ‘transition period’ will begin. This will last until, at the latest, December 2020 during which time the British government will agree upon its future relationship with the EU.
If the British government is unable to reach an agreement with the EU during this time then a “backstop agreement” will come into force, allowing both parties the opportunity to continue trading.
This would see the UK enter a “single customs territory” with the EU where Northern Ireland would remain privy to some extra rules of the EU’s single market, to ensure that the border between itself and the Republic of Ireland would remain open.
However, May has received considerable opposition to the “backstop agreement” in the UK – none more so than from the marginal Democratic Unionist Party (DUP) in Northern Ireland, whose support she relies upon to maintain her government. The DUP opposes the additional Northern Ireland-only customs checks that the backstop could see implemented and has threatened to oppose May’s Brexit Deal when it is voted on in Parliament.
Reportedly, May requested a one-year limit on any backstop agreement in a last-minute attempt to appease the DUP but this was rejected by Brussels.
As a result, global investment research firm
So, What Would That Mean For Fintech?
London has long been considered the European – even global – capital for fintech with firms attracting over $5.08 billion of investment since June 2016. In comparison, Paris received $1.38 billion, Berlin $1.02 billion and Stockholm $683 million.
While Theresa May has announced that families in Britain will be given ‘official advice’ on how to make preparations for any “no deal”, it is less clear how such circumstances would impact the fintech industry.
Here, I have outlined what companies should be aware of and what preparations they can take to minimize any negative fallout.
The British government has revealed that in the case of a “no deal”, the UK would enter into a “third-country customs regime” with the EU.
On the ground, this means that there would be at least initial disruption to supply chains and delays importing and exporting software, equipment and produce due to more stringent checks on items moving between the EU and UK. Goods sent to the UK from the EU would be viewed as ‘imports’ from a “third country” and would therefore likely have to pay UK import VAT up front, increasing costs even for smaller value goods.
For any fintech service sent to the EU, the sender will have to pay VAT in the country of entry. While the exporter may be able to claim a refund, it is predicted that this may take up to several years to process. More comprehensive checks at the border are likely to lead to delays, as has been the focal point of discussions over the future of Northern Ireland, which fintechs should bare in mind if a “no deal” occurs.
HMRC has already predicted that it is likely to see an increase in customs declarations from 60 million a year at present to 255 million a year, thanks to produce which was previously checked on its entry into the EU in another member state – which by its own admission it does not have the personnel or infrastructure to handle. MPs on the Public Accounts Committee have already expressed concerns that HMRC is ‘dangerously overstretched’ as it attempts to transform its service and handle updates related to Brexit.
Eyebrows were raised when the CEO’s of
The Estonian pair is allegedly far from alone in their concerns, with one hundred fintech firms supposedly in talks to relocate to Berlin alone. The French government has also announced plans to attract ‘thousands’ of fintechs currently based in London post-Brexit.
In fact, the industry is by no means not immune from the uncertainty surrounding Brexit with a range of high-profile figures speaking out against the deal. A poll of business leaders in nine other technology hubs, including Silicon Valley, found that more than half would now not bring their business to the UK as a result of Brexit. A further quarter said they would not invest in a British technology business over the next year until terms of any deal were agreed with the EU.
While London remains Europe’s fintech capital, for now, research from the above study paints a concerning picture, with many venture capitals withholding investment until terms of any potential Brexit become clearer. Should a “no deal” occur, it is likely to spook investors further – with the impact felt most by smaller, start-up firms, with those at the seed funding stage most in need of investment.
It is likely, that many start-ups will now look instead to launch outside the UK, welcome by incentives from rival fintech cities, so as not to concern themselves with any possible negative “no deal” fallout.
In a recent study of its members, the Emerging Payments Association (EPA) found that 91% of respondents believed that passporting is either important or very important to the UK’s fintech sector. Passporting lets firms based in one EU country trade freely with any other abroad, yet within the union, with minimal additional authorization, as if they were a pan-European organization, to begin with.
This gives firms within the EU a significant advantage over those outside of the organization and in the event of a “No Deal”, firms based in the UK would immediately lose this right. Instead, fintechs would have to open subsidiaries in another European country to continue trading as they do now and apply for a local license from the country in question.
For many payments’ firms, like TransferWise, this poses a huge problem as a “No Deal” would mean they could be unable to offer their services across the continent again until they receive a further approval. Fintechs reliant on offering their services across the EU should now be looking at the possibility of opening a subsidiary on the continent and putting plans into place to obtain the correct licensing abroad.
Tony Craddock, the Director General of the EPA, previously told Forbes that the event of a “No Deal” and the loss of passporting rights for firms based in the UK, “reduces the chances London will remain as a Europe-leading fintech center. [Ultimately], no amount of leading-edge technology will prevent isolationism from damaging trade.”
The British government has announced that it would introduce a Temporary Permissions Regime that would allow fintechs based within the EU to continue to passport into the UK for another three years after Brexit, yet, it remains unclear whether this will be reciprocated by other EU member states.
London has established itself as a worldwide fintech hub thanks to its ability to attract the globe’s best and brightest. According to an EY study, there is currently 44,000 people working in the city’s fintech sector – the greatest number in any city across the globe – and 155,600 digital tech professionals calling London home. While 41% of inner-city London residents are foreign-born, 54% of the workforce in the city’s fintech industry is from abroad, according to a Tech Nation Survey.
The British government has promised to maintain the workplace rights that EU nationals currently enjoy in the UK should a “no deal” Brexit occur. In a document published in August, it clearly stated that: “The EU (Withdrawal) Act 2018 brings across the powers from EU Directives. This means that workers in the UK will continue to be entitled to the rights they have under UK law, covering those aspects which come from EU law (including those listed above except where caveated below). The government will make small amendments to the language of workplace legislation to ensure the existing regulations reflect the UK is no longer an EU country.”
However, British Home Secretary Sajid Javid revealed this week that as part of a new proposed white paper on immigration in the UK, “highly-skilled” employees from abroad will, in the future, only be allowed to continue to work if they are on a salary of roughly $38,000 or over.
Therefore, the future of EU employees currently earning less than this threshold remains uncertain, not to mention those looking to move to the UK in the future. The problems caused by Javid’s alleged whitepaper can be best illustrated through the employment market for software engineers in London. According to Glassdoor, their average salary is roughly $52,000. For start-ups on a small budget or firms looking to hire EU-staff in more junior or middle-level software engineer roles, this creates a complete reliance on the domestic employment market and could lead to major staff shortages.
Employers concerned about employees long-term right to work in the UK should encourage them to apply for permanent residency, if possible. This gives a non-UK citizen the right to live permanently in the UK, as long as they are able to prove they have spent five years continuously in the country. The government has said that individuals can continue to apply for permanent residency until 31 December 2021.
An EU Settlement Scheme is also planned to be introduced by March 2019, which would apply to EU citizens who currently live in the UK but have not done so for five years. The exact terms of the scheme remain unclear at the moment but it is believed it will provide an opportunity for EU nationals to obtain residency by obtaining ‘pre-settled’ status by demonstrating a further commitment to work in the UK.
Employers have been advised that in the event of any “no deal”, that they should diarise “right to work checks” for their EU workforce by October 2020 latest. With the transition period scheduled to end in December of that year, this should still give adequate time to apply to safeguard workers’ rights.
December 19, 2018 at 04:12PM
Forbes – Entrepreneurs