Blockchain & E-Transactions Law

London is considered the European capital for fintech, and the third global tech start-up ecosystem, behind only Silicon Valley and New York. In the past two and a half years, fintech companies have brought more than $5 billion of investment to the city. Given that a third of London's tech company customers are based outside the UK and an estimated 54% of the city's fintech workforce comes from abroad, uncertainty over how Brexit will affect the ability of British companies to transact business and recruit talent internationally poses a threat to London's fintech prominence.

On March 29, 2019, the United Kingdom is scheduled to leave the European Union, with or without a deal in place with the EU.  Recent reports place the likelihood of a "no deal" Brexit occurring as anywhere from 10 to 40%. In the event that the UK is not able to reach a deal with the EU to govern its exit, and if no extensions to negotiations are agreed upon, the UK will leave the EU and EU treaties will cease to apply to the UK. A no-deal Brexit would have wide-ranging implications, not least of all for the UK's fintech sector.

Changes to customs present a prime example.  In the event of a "no deal" Brexit, goods sent to the UK from elsewhere in Europe would be viewed as going to a "third-country customs regime" rather than staying in the EU. This would disrupt software and equipment supply chains, at least initially, due to more stringent checks on goods shipments. Goods imported to the UK would also be subject to imports taxes that did not previously apply, thus increasing costs for London-based businesses that rely on such imports.

Passporting, which lets firms in EU countries trade freely amongst themselves, may also no longer be enjoyed by UK firms in the event of a "no deal" Brexit. In order to continue trading without impediment, fintechs would have to open subsidiaries in another EU country and apply for a local license in that country. Tony Craddock, the Director General of the Emerging Payments Association, told Forbes that the loss of passporting rights for UK firms "reduces the chances that London will remain as a Europe-leading fintech center." While the British government has said that it intends to introduce a Temporary Permissions Regime to allow fintechs based in the EU to continue to passport into the UK for three years after Brexit, other European countries have not yet reciprocated this gesture to UK-based firms.

Employment rights for EU nationals working in London may also be threatened by a no-deal Brexit. While the British government has promised to maintain workplace rights for foreign nationals working in the UK, the British Home Secretary has stated that highly skilled employees from abroad will only be allowed to continue to work in the UK if they earn $38,000 or more. This could pose staffing issues for UK fintechs, particularly for smaller startups that cannot afford to pay higher salaries. An EU Settlement Scheme, which would protect benefits for EU citizens who currently live in the UK if they demonstrate a commitment to continue working in the UK, is expected to be introduced by March 2019 to remedy this issue.

Brexit uncertainty has already started to affect London's fintech sector. TransferWise, a London-based money transfer service and one of London's few "unicorns," or start-ups valued at over a billion dollars, intends to move its European headquarters out of London due to uncertainty over Brexit, with other companies likely to follow. Some London fintechs also report seeing a drop in applications from European tech talent. Such moves over Brexit uncertainty may translate to gains for the U.S.' fintech sector, with potentially more businesses considering setting up or expanding offices in the U.S. when they may have otherwise focused on London. In any case, it is clear that London's status as the European fintech capital may be in jeopardy, particularly if a deal with the EU is not reached or measures are not taken to protect London-based fintech businesses.