The UK may have been the European RegTech leader for years, but the question is if this could change because of Brexit.
Brexit could change the European RegTech market. The UK may have officially left the EU at the end of January, but that does not meant that Brexit is a done deal. Now, British negotiators spearheaded by David Frost have until the end of December 2020 to agree with their European counterparts what the UK’s and the EU’s future relationship should be like.
Those negotiations will cover everything from fisheries to the rules regulating financial services firms. For the UK RegTech industry, this means that its position as the industry’s European leader might be up in the air.
Businesses from Britain have been at the forefront of the European RegTech sector for years. The nation’s ecosystem received more than half of the investment going into the European RegTech sector between 2015 and 2019, according to RegTech Analyst’s data.
Of course, it is difficult to predict what the future of RegTech will look like. “Without a crystal ball, it’s very hard to say how investment into UK industries – across all sectors – will be impacted by Brexit, especially as the UK’s exit is still being debated during this transition period,” David Clee, CEO of MirrorWeb, the RegTech company, tells RegTech Analyst.
That being said, he is confident that the UK RegTech sector is better equipped to deal with this uncertainty than what many other industries are. “For instance, tariffs on a trucking business could impact how investors view it,” Clee argues. “However, if you’re running a RegTech solution you will still be able to do business and attract investment as long as you have an internet connection and are meeting all the legal requirements. Borders, hopefully, shouldn’t have an impact here.”
Recognising that Brexit may cause disruption on the economy – fears that have now been amplified by the outbreak of the coronavirus pandemic – the UK’s chancellor of the exchequer Rishi Sunak unveiled a number of measures in his inaugural budget in mid-March that aimed to cushion the impact on the economy.
Among other things, Sunak said the UK government would continue to support its InsurTech and FinTech sector, which the RegTech industry is often considered a part of. The government will launch a review of the country’s FinTech sector to see what growth challenges it faces.
These measures have comforted some industry stakeholders worried about the future of British RegTech. “Whilst there has been concern about how well the UK RegTech sector may fare after Brexit, Rishi Sunak’s budget has confirmed that the FinTech ecosystem in the UK will continue to be supported from within and will continue to thrive,” Chris Steele, banking regulation director at KPMG, the professional services company, tells RegTech Analyst. “RegTech is a growth area and it is clear that the government will try to capitalise on the freedoms afforded to us after our departure from the EU, giving firms the chance to build stronger alliances beyond Europe and into the global market.”
Still, Clee believes there are more things the UK government can do to support the sector during the transition and beyond. “An accommodative environment for tech companies needs to be fostered and any way the state can support this – via tax breaks, sandboxes, grant schemes – is great,” he says. “At the same time, these tech companies thrive on the talent that is behind coding and technological development so being able to hire the best people helps.
“As a tech company founder, I would still want to hire high-quality people from the EU after Brexit and I hope work visas won’t be a significant hurdle. Any workarounds here, that make it easier for businesses to operate, would be welcome.”
Despite the government support offered and what could still be in store, Remonda Kirketerp-Møller, founder and CEO of Muinmos, the automated regulatory compliance platform, warns that RegTech companies primarily targeting the UK market might be at a disadvantage post-Brexit.
“Whilst the RegTech firms which focus on local markets often cater for fairly sizeable markets, I believe that firms which just focus on the UK will be at a disadvantage due to the disruption caused by Brexit,” she tells RegTech Analyst. “With the UK possibly being regarded by EU member countries as a third country for the purposes of the EU legal framework, there will be differing requirements from every member state.
“There are still so many uncertainties linked to Brexit and there will inevitably be many legislative changes, but these UK-based RegTech firms will need to spend a significant amount of time tweaking their frameworks and adapting their platforms to accommodate the new legislation. This will undoubtedly give European RegTech companies an advantage.”
Continental RegTech firms could also have another advantage, according to Kirketerp-Møller. She argues that UK-based RegTechs companies that only cater to the local market must wait and see what the legal framework will look like, but that continental ventures can just keep on doing business as usual.
“During this time of uncertainty, the European RegTech firms will be progressing their technology and their offering and also attracting investment,” says Kirketerp-Møller. “UK-based RegTech firms will then need to play catch-up in order to have a competitive offering in the market, that’s why it is essential that UK-based RegTech firms also focus on other markets in their offering.”
Clee agrees that there are a lot of unknowns still out there. Yet, he is confident that RegTech companies will continue to be chosen depending on the merit of the firm and not on its size. “Brexit may change some things but I’m sure financial services firms will still prioritise RegTech solutions that most effectively support their businesses and strengthen their compliance functions,” Clee says. “Hopefully, where a firm is based or located will have little relevance here.”
Moreover, European RegTech companies will also have hurdles to tackle of their own. The EU’s Markets in Financial Instruments Directive (MiFID II) is one of the laws that might be about to change. Indeed, MirrorWeb has previously highlighted that the EU might take Brexit as an opportunity to introduce MiFID III. Additionally, EU officials have flagged that the law might remove the concessions made to the UK during its 47-years of membership.
“RegTech solutions are only as strong as their understanding of the regulations they are tailored to,” Clee says. “Therefore, anticipating regulatory change is critical and Brexit could indeed mean changes to regulations such as MiFID II. RegTech providers will have to be switched on to ensure they understand what these changes mean and how their solutions will continue to meet the demands of the market and their clients.
“However, this also represents an opportunity, as large-scale regulatory change could be a boon for the RegTech space with regulated firms in need of more support in meeting their compliance needs.”
Still, he’s bullish about the UK RegTech sector’s ability to thrive after Brexit. “[While] there may be an initial shock and some difficult months or quarters after the transition period ends, in the long run the strongest British businesses should adapt to this new way of doing things and work around potential barriers to investment,” Clee concludes.
Originally publised on RegTech Analyst.