If there is one thing that Ireland can get from the City of London post Brexit, it is Fintech. Forget about banks, clearinghouses, trading platforms and much else besides. But finance related technology start-ups – now there is a sector ripe for the plucking. Time to plan a harvest.
The House of Lords EU committee certainly thinks Fintech could leave The City after Brexit. In its report on Brexit and Financial Services, published this week, the Lords say "The FinTech industry has thrived in London, but could potentially move elsewhere. We note the concerns of the industry over future adherence to the EU data protection regime, and over its ability to recruit adequately qualified staff, and to attract the entrepreneurial talent needed for innovative startups. The Government should be particularly mindful of the opportunities for FinTech to develop further in the UK and of the effects of Brexit on a promising industry".
The great thing about Fintech is that Dublin in particular is already something of a hub in this emerging industry. There are a goodly number of skilled personnel available in the city, and if more are needed, its still pulling in graduates from all over the EU and beyond. Startups don’t need big offices, and the local venture capital scene is pretty attuned to the Fintech scene, and understands how to scale up. We can handle more of this business (but so can Berlin and Stockholm, so don’t hang about).
And the point the Lords make about worries over the UK’s position regarding EU data protection laws after Brexit are well founded: this is going to be a serious issue for any UK based technology business, particularly data driven ones. Regulatory excellence in data protection will be as vital for Ireland in developing and scaling Fintech companies as it has proven to be in the pharmaceutical industry. Max Schrems has done this country a big favour by shaming the government into spending proper money on the Data Protection Commission.
But what of the rest of the financial services industry after Brexit? The Lords report says its understandable that other countries will be queuing up to strip-mine London’s financial services as a consequence of Brexit (not to mention the London-based European Banking Authority, which will definitely be moving “onshore” to an EU state after Brexit). They point to a report from consultants Oliver Wyman which suggests that some £40-£50bn of financial services revenue a year for UK financial services comes from the rest of the EU, and that the UK trade surplus in financial services with the EU was £19bn in 2014.
It is understandable, they say, that other countries would want to get their mitts on some of that surplus. So its equally understandable if a report of the UK parliament also sets out ways to protect the UK financial services industry, which accounts for 7% of UK GDP and employs 1.1 million people (two thirds of them outside London).
Its main defence is that the services the City of London offer to the rest of the EU cannot be easily replicated elsewhere in the EU in the short or medium term, and possibly not even in the long term – at least not without doing damage to the overall European Financial services industry, to the advantage of the Americans, particularly New York. Because of this, they argue, it is in the interest of the rest of the EU to do a deal with Britain that minimises disruption to London’s business model. Normally there is a Pavlovian reaction to be expected from mainland Europe by brandishing potential American leadership in anything – but in the post-Brexit world, the usual psychological tactics may no longer produce the usual response. The fatal weakness in this line of argument is that US financial services providers would suffer from the same disadvantages as post-Brexit British providers in terms of market access.
So nobody might win, but Britain would definitely be worse off. Its not such a strong argument. Still avoiding self harm on the European side should be worth something to the British, and should definitely enter the negotiating calculus. London is the European financial centre, it does add value to the rest of the EU by being able to provide deep and liquid markets in a concentrated, efficient way, with a solid legal framework and all the support services to cosset the high skill/high wage workers in the industry. This really will not be easy to replicate elsewhere – even in big, wealthy, connected places like Paris and Amsterdam.
Besides, as Sir Jon Cunliffe, the deputy governor of the Bank of England, told the committee, EU related business is a minority of the City’s turnover. It is a global financial centre, the biggest in the world. “The idea that this eco-system is transplanted somewhere else into Europe in the foreseeable future is highly unlikely to me”, said Sir Jon.
As for the idea that big banks or finance houses are going to come to Dublin – well, where are their skilled workers going to live? Where are they going to work? Who is going to provide the kind of services a host of well- heeled bankers are used to? In theory people living and working in the lower end of financial services in Dublin could be forced down to Cork or Limerick, where offices and houses are cheaper , to make space for the higher end staff that would be forced by their employer to migrate to Dublin. But this theory only works in a Stalinist state (which is not exactly appealing to financial services types).
So post Brexit London (and its wider UK satellites, such as Leeds and Edinburgh) will need a “bespoke” deal with the EU that gives them most of what they already have – assuming the rest of Europe wants to give it – or can be blackmailed into giving concessions because of the “threat” of “disruption”. Ideally they want to be able to continue with the current “Passporting” arrangement, under which firms based in one EU state can carry on business in any other EU state without having to set up local subsidiaries, with all the cost that entails. One troubling note from the Lords – it seems a lot of UK firms don’t know themselves how dependent (or not) they are on passporting. The committee recommends the industry, and the UK government, find out fast what the situation is, so the government can negotiate a deal with confidence
If that can’t be done – and by the tone of the Lords report they aren’t hopeful , as passporting is essentially a facet of the single market – the next best solution, and one they are pushing hard, is an upgraded “bespoke” equivalence regime. This is the recognition by the EU that the regulatory regime in post Brexit UK is equivalent to the EU rules and regulations that will apply in the remaining 27. There is precedent here, with equivalence applying to some financial services provided from New York. But crucially the equivalence regime for third countries does not cover things deposit taking and other ordinary banking services, UCITS or AIFMs.
So what they want is to “supplement the current equivalence regimes to mitigate any loss of access, and to ensure the continuation of equivalence decisions in order to maintain that access”. And they want a ruling that Britain – by continuing to apply EU financial service law after Brexit – will be deemed to be “equivalent” before the Article 50 process ends and the UK formally leaves the EU.
Of course the regulatory regimes in Britain and the EU will be the same the day the UK leaves, but over time the two regimes are likely to drift apart. To avoid that the British will have to kep up with EU laws. But the idea of simply cutting and pasting EU law into the British statute books is unappealing: in the land of having cake and eating it too, they want to keep their influence over EU lawmaking in financial services, even though they will not be an EU state. The Lords say “It is in the UK’s and EU’s mutual interest that the UK should maintain direct influence within the EU, especially in areas such as certain types of insurance, where there are less well developed international standards”. And it wants, as part of the negotiation, the British government to seek direct UK input into EU regulation-setting “upstream” – in other words at the earliest part of law making, where influence is most important.
This is a pretty ballsy demand – we are leaving your organisation, but we still want to set the rules for your organisation, as we are going to have to copy them to keep our access to your single market. And they think they can do this without contributing to the EU budget or being subject to the jurisdiction of the Court of Justice of the EU? The blackmail element here is the threat that of the EU doesn’t play ball, London will wither on the vine, and this will cost the EU dearly as it will lose the efficiency of the London financial centre. Its the financial version of Mutually Assured Destruction.
How will the other EU states take this? Governments always say they do not negotiate with terrorists. But we all know they do. The House of Lords knows this too.
It is clear from the report that the neuralgic point in the city is the Euro denominated clearing trade. The Lords are clearly worried about losing this, reflecting a wider fear within the City. This is based on a previous attempt by the ECB to compel this trade back into the Euro Area. The British took a case against the ECB to the Court of Justice (the one they now want nothing to do with), and won – on the grounds that EU member states had to be treated equally, and once the Euro clearing was taking place inside the EU it was within EU jurisdiction and the ECB could not force its relocation. But all this changes when Britain leaves, and the Lords are clearly expecting another effort by the ECB to force relocation “onshore” into the EU – which post Brexit effectively means the Euro Area. They say such an attempt will be “politically motivated”, and may “invite retaliation by other non-eurozone states, leading to the breakdown of the system of multi-currency clearing”. Clearly this has the potential to turn into an enormous and very costly row.
Various members of the UK financial services industry told the committee that they want quick decisions on what the future holds for their industry, so that they can start planning accordingly. Simon Gleeson, a partner at law firm Clifford Chance, told the committee “it would take two years to move a significant part of the business of an investment bank—the same as the entire length of the Article 50 negotiations”. Others said it would take longer. Some said they want to know before the Article 50 process starts what the UK Government’s final objective for financial services will be.
Because of this – and the need to avoid relocating some or all of a business before a final deal is done, only to discover that it wasn’t necessary to do so – the UK financial services industry was pretty unanimous in its view that there needs to be a transitional arrangement – lasting at least two years, to bridge the period between the end of the article 50 process, and the start of the “new relationship” between the UK and the EU.
Because of the very close relationships between London and the Irish Financial Services Industry, this aspect of the Brexit process is of particular importance to Ireland. The Lords Committee says it will be “vital, in the interests of all parties, to provide certainty as early as possible in the process”. It says negotiations n the Financial Services deal should begin as early as possible after the Article 50 notification and the UK government should “pursue and early announcement on the transitional period”. And it says the more the new UK relationship with the EU departs from the current arrangements, the longer any transitional period will need to be.
So that’s another important thing the House of Lords ants sorted out right at the start of the Brexit process – along with the Irish border and its associated Common Travel Area and an early deal on the UK’s new trade relationship with the EU. Indeed the Bank of England’s Jon Cunliffe pointed out that while normally transitional arrangements are agreed at the end of trade deals, in normal trade deals the aim of the negotiation is to increase market access and integration – Brexit is the very opposite.
Dealing with such abnormal processes and aims – as well as the sheer scale of this undertaking - will put enormous strain on the British civil service to be able to deliver such massive deals, with the clock counting down towards a hard deadline.
Indeed the Lords note with alarm that Brexit may already be having an effect, through the diversion of resources on the quality of legislation being produced by government departments, citing one example of a piece of mis-drafting from a piece of legislation on peer-to-peer lending which was put down to a “lack of bandwidth” in the Treasury and the Financial Conduct Authority, as staff are diverted into Brexit projects and away from their day to work. This is likely to become a widespread problem over there, but may also become a significant problem here in Ireland, which has a much smaller civil service to cover the same range of issues, and carry on business as usual.
