In 2015, professional services firm EY described the UK as the most fintech-friendly country, with industry employing over 61,000 people and generating £6.6bn in revenues. This year, the UK fintech sector is still disruptive and determined as ever before. But as we move into 2017, it’s important to know the major issues and challenges facing the UK fintech market.
Threats of Brexit
Although Billions of dollars have been invested in UK fintech in 2016, Brexit still remains a major challenge in UK fintech market. After Brexit, some Fintech executives predicted that many companies would leave London. “After the referendum, UK Fintech might relocate headquarters in another country,” said Philippe Gelis, CEO of Barcelona-based Kantox.
One of the greatest challenges to the expansion of cross-border fintech is the lack of uniformity between various regulatory environments. Differences in licensing, regulation, institutional oversight and compliances between countries create costs and difficulty. At present, much of the regulation relevant to financial technology is contained in EU legislation. If UK regulation decides to diverge from the remaining 27 EU states, cross-border activity might be impeded.
Passporting, a process that enables UK-based businesses to use their UK licenses to do business in the other EU member states, is among the most significant issues facing UK fintech market in the context of Brexit. A number of activities that are carried out by certain companies require a regulatory licence in EU countries: example includes retail lending and the provision of payment services. If the country loses its passporting rights, the UK fintech companies would not be relying upon their UK licenses to conduct business in the EU member states.
This will also affect staffing, as most of the EU member staff working in the UK, might relocate if their offices move.
Lack of Funds
In 2014, Kit Malthouse, a former Deputy Mayor for Policing in London and for Business and Enterprise in the capital, said that London’s fintech start-ups were held back by lack of investors. Whiles speaking at the launch of Startupbootcamp FinTech, a fintech accelerator in London, he said: “Our basic problem is access to venture capital”. According to the quarterly Enterprise Index by Smith & Williamson, only 50 percent of UK business leaders feel enough funding is accessible. Nick Travis, a partner in investment management at Smith & Williamson, said that since the UK is already excellent at creating tech start-up, there is a need to focus more on scaling up businesses.
This year, UK start-ups have a harder time getting funding, and it is possible that this trend might spill over into 2017. The number of fintech funds changing hands dropped by 26 percent during Q3 of 2016. According to Innovative Finance CEO Lawrence Wintermeyer, the UK has been experiencing a significant drop in investment, year on year.
One of the most obvious challenges for UK fintech start-ups is to identify the sets of regulations that apply to them. Some fintech firms do not know exactly which law, rulings or regulation require their compliance. Others are ignorant of the regulatory agency that governs them.
Although UK regulators have been praised as the most fintech friendly, the fintech community will need “strong guidance” to handle the challenges of post-Brexit regulation. Changing regulation might pose a serious threat to the growth of the fintech sector. According to a new report by the Association of Chartered Certified Accountants (ACCA), fintech firms would need “strong guidance against regulatory hurdles” in order to survive in the future.