Just a few days ago, Europe went upside down: for the second time in its history, a member state leaves the European Union (the first time was Greenland, in 1985) after a referendum which until now has led to the following events:
- The resignation of the current Prime Minister, David Cameron
- The downfall of the pound, creating an instability that the UK has not seen since 1985
- Scotland has already expressed its’ willingness for a second referendum to leave the UK (the first one was in 2014), as it wishes to be part of the European Union and to not follow UK in the upcoming Brexit.
Nothing has changed, and everything has changed at the same time for Britain. But what are the prevailing scenarios? What is it that we will see shortly in the FinTech scene? What will happen with London, which is the current FinTech capital? Let’s take things one by one here and let’s keep it simple….
First of all, EVERYTHING will depend on the status of UK right after the activation of the article 50 of the EU. The most important thing that we should notice after that is how will the EU treat the UK: will it get a “good deal”, such as the one that Norway and Switzerland have, or does Brexit mean “out is out”? Everything will be dependent on those two scenarios. Let’s take a look at those two scenarios separately:
- Scenario 1: the UK loses all EU rights, it is not an EEAS member and it does not have free trade with the other member states. It becomes a “complete stranger”, and it has a third country status in relation to the EU.
- David Gyori, founder and CEO of Banking Reports, gives us a very nice sum of what could such a change bring in the European FinTech (to read the full story click here). This would simply make things harder, but how? As he notes, one of the greatest challenges of the FinTech expansion is the compatibility of regulatory environments. Luckily, the EU has a generally approved environment, which in the case the UK would lose all kinds of relationship with the EU, then it would automatically need to adapt itself to a domestic legislation – and a substantially different regulatory environment. This would be a huge disadvantage for a European FinTech company that would like to expand.
- Market uncertainty: every company, big or small, is affected by macroeconomic changes, David Gyori In the scenario where the EU does not grant a “special membership” status to the UK just as the one of Norway, then this means that the whole economic status of UK will change. Of course, the UK might be able to pull it off as it is a huge power anyway, but at the moment the downfall of the pound says otherwise and we will not be able to know much until the EU decides what will the relationship be. The worst case scenario though, does not leave a lot of room for market certainty and stability, at least for the next 2 years.
- Hiring people: this will become very hard for the FinTech startups! A number of EU nationals are currently working for startups in the UK and in this scenario, the hiring process will be way more difficult, making startups moving their headquarters to other countries. London has in recent years grown to become a major hub for European startups, and particularly FinTech businesses. But that could change if investors get cold feet about the city’s future.
- In this case, London loses its’ chance of being a “hub” for FinTech startups. The rest of the European startups can finally get their momentum, David suggests us.
- Scenario 2: the UK gets lucky! It gets an EEAS status and it gets all the special benefits Norway has.
- The freedom of movement will allow the citizens to be hired in other EU countries and vice versa. In that case, the part c from the previous scenario is automatically erased.
- Regulatory environments? Well, the countries that have such special relationship with the EU can easily make their legislation compatible with the rest of the EU legislation, which means that number a from the previous scenario is also erased. In other words, it will mean that the UK can’t vote on European law, but it can still adopt laws that other countries voted for.
- Do it like Canada? Well, A deal like the one Canada has with the EU will give the UK access to the free market and limit immigration, but it will exclude a lot of financial services.
- Market uncertainty: we honestly don’t know! In the case the UK is lucky enough to get any preferential status such as the ones that Canada, Norway or Switzerland have, then its’ market will continue to grow and nothing – seriously, nothing- will change, neither in the market in general, nor in the financial services. London will still remain the FinTech hub and it will be equally as easy to keep it like that.
Until then, we have to wait for the activation of the article 50 of the EU. The EU leaders do not seem very positive when it comes to the status of the UK after the referendum and they have already made their statements: Schauble, Minister of Finance of Germany, believes that “out is out” and Juncker, President of the European Commission, reassures that there is no “cherry picking” in the UK exiting the EU, which leaves little room for the second scenario. It will be very interesting to see how things will play out in the near future, though.