FinTech experts warn of Brexit brain drain

Key industry stakeholders have warned that the UK’s exit from the European Union could lead to a serious ‘brain drain’ in the booming FinTech sector.

Speaking at last week’s London FinTech Week, senior spokespeople at various venture capital firms with stakes in the industry gave honest opinions on what impact Brexit could have.

Force Over Mass Capital’s chief executive Martijn De Wever said London is at risk of “losing a big portion” of its FinTech business, as “other countries jump on and trying to get companies to open operations in their countries”.

As a lack of clarity around how hard or soft the UK’s final deal with the EU will eventually be makes it difficult for companies to plan ahead, it will become increasingly attractive to move operations elsewhere, De Wever pointed out. “Technology doesn’t know any boundaries, so it doesn’t really matter where your organisation is, so you have access to talent.”

Alex Macpherson, chairman of Octopus Ventures, agreed that access to talent is an issue for the companies they fund and work with. “How do you continue to scale up? Where you have businesses scaling up, they will be thinking whether they should do it in Berlin or Paris or Switzerland.”

Earlier this week, almost 500 British FinTechs received an email last week from the Bank of France questioning their intentions regarding the continuity of their activity in France post Brexit. The message from the ‘passport monitoring’ unit of the central bank’s supervisory authority asked them to fill out an online survey about their contingency plans – specifically where in the European Economic Area (EEA) they plan to set up a subsidiary and by when they expect authorisation to be in place.

British companies that provide payment services to customers in the EU will lose their ‘passporting’ rights after Brexit in March 2019, unless an agreement is reached to extend market access for a transition period. Many plan to set up separate EU subsidiaries to avoid losing access.

For instance, also this week, the Depository Trust & Clearing Corporation announced intentions to open a Dublin office ahead of the UK’s planned EU withdrawal in March 2019. “Our continued growth and desire to get ahead of new regulatory obligations, because of Brexit, now takes us across the Irish Sea to Dublin,” said Simon Farrington, managing director for EMEA at DTCC.

As was pointed out in a recent FStech feature on Brexit, other European financial centres are already actively marketing to UK financial firms. Dan Jones, head of UK digital capability at management and technology consultancy firm Capco, said he has seen certain roles in banks going to Dublin and Paris, which is a general trend across the industry.

“If we talk about digital skills – people who can work in an agile way, like product designers, developers, people with a lot of digital experience – those skills are in high demand in the UK full stop, there’s a massive shortage,” he stated. “The challenge for both FinTechs and existing banks who are trying to compete in this space, is just getting the numbers of people, but also the quality, and Brexit will only exacerbate this situation.”

At the end of April, a report found that in order for the UK’s FinTech sector to continue its growth between now and 2030, it will need approximately 33,500 European migrants to enter the workforce, particularly those with high skills.

The sector currently employs some 76,500 people, of whom 42 per cent are from overseas – 28 per cent from EEA countries and 14 per cent from non-EEA countries. The Innovate Finance analysis predicted a shortfall of 3,200 highly-skilled workers by 2030, at a cost to the UK FinTech sector of £361m.

Charlotte Crosswell, chief executive of Innovate Finance, said that while access to talent is a perennial issue, Brexit shines a light on it and risks exacerbating the issue further. “Without a flexible approach, the UK FinTech sector stands to lose its global pre-eminence with companies already facing challenges in recruiting appropriate skills and talent.”

In recent months, the UK Treasury has made several efforts to back the FinTech industry, appointing FinTech envoys for Wales and Northern Ireland, building a FinTech Programme across the country and working with the Bank of England to set up a FinTech hub.

Crucially though, the latest government whitepaper on Brexit was still light on detail.

Financial services will no longer be able to take advantage of passporting, and plans for a new relationship based on the concept of mutual recognition of financial regulations have been abandoned, partly because they were so comprehensively rejected by the EU. The government is still seeking something more ambitious than the ‘equivalence regime’ that the EU has with most other third countries.

The whitepaper repeatedly emphasises that free movement of people will come to an end, but again, specifics of a new immigration policy are due to be published in a separate paper, which has already been delayed several times.

The Financial Conduct Authority’s international executive director Nausicaa Delfas laid out the regulator’s Brexit preparations at a speech yesterday, but again, there was little in terms of new policy.

“Neither the UK nor the EU want to see a significant misalignment in regulatory standards – nor indeed “a race to the bottom” in regulatory standards,” she stated. “But it is likely that after our exit from the EU, our regulatory frameworks may evolve, so we need to find a way to ensure that despite such evolution, frameworks allow delivery of common outcomes.”

Christian Voigt, senior regulatory adviser at financial software and services firm Fidessa, said that London’s continuing dominance at a financial hub is largely down to ‘network effects’ - the positive benefits of being part of an established ecosystem - and ‘lock-in effects’ - or the barriers faced given past decisions.

“But with the regulators expecting firms to prepare for a worst-case scenario in the form of a ‘no deal’ Brexit, things are likely to change,” he commented. “Many firms are already investing a lot of money establishing separate entities in the EU.”

Voigt did note that for now, London is still attractive. “In the longer term, however, these firms are likely to want to see a return on their sizeable investment in duplicate infrastructure and so, the next time they think about growing, the default location may not necessarily be London anymore.”

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