In the lead-up to the UK’s referendum on whether or not it should exit the European Union, many of the headlines at the time centered around the impact a ‘Leave’ win would have on the country’s financial services sector. London is one of the world’s leading financial centers and there were huge concerns around the diversion of talent, resources and investment away from the capital city, and into the EU.
With financial services employing approximately 2.3 million people and making up 10% of total UK tax receipts, it’s unsurprising that the sector was a key piece of ammunition throughout the Remain campaign.
Well, we now know that Leave did win and the UK has since left the European Union and the Single Market.
And whilst it can be argued that the UK’s economy is suffering more broadly, in many ways, because of Brexit - it seems that the financial services sector has weathered the change in relationship pretty well. There are still hurdles that remain, but according to a new Parliamentary report out this week from the European Affairs Committee the outlook for UK financial services is still positive.
Fewer financial services jobs have moved from the UK to the EU than anticipated; current figures suggest approximately 7,000 in total, compared to estimates of 75,000 in 2016. Since taking evidence, peers on the Committee found that there was a strong sense that the sector has remained resilient, as London retained its position as the world’s second largest financial hub.
However, despite the positive news thus far, there are still significant hurdles to overcome. Some of these relate to the government’s approach to diplomacy with the EU itself, whilst others are concerned with the UK’s shift away from EU data protection legislation (GDPR).
On the first point, the Committee found that whilst the UK has lost influence over the development of future EU financial services rules (unsurprising), there is ongoing concern that the British Government appears unwilling to utilize the influence that it does still have. The Committee notes that the government seems reluctant to recognize the importance of the UK-EU relationship, seeming unwilling to fully engage with EU institutions, or to acknowledge that developments in the EU still have significance for the UK.
Given that the current administration in the UK’s approach to governance seems to be more reactionary than strategic (to put it politely), and appears to be spending most of its time putting out local fires of its own making, an unwillingness to engage in adult conversations is perhaps unsurprising.
However, there is a more technical concern that could have long-term consequences for the UK’s financial sector - data transfers and data adequacy.
Following the transition period, the EU granted the UK with a ‘data adequacy’ decision, to allow for transfers of personal data between the EU and the UK, as long as it continues to comply with regulations that are governed by GDPR. However, these decisions only last for a period of four years and can be revoked at any time.
This adequacy decision will be critical for core parts of the financial services industry in the UK, particularly in banking and insurance, which relies heavily on personal data processing and transfers. This is only growing in importance too, as data forms a core part of the industry’s business model.
And with the UK announcing its plans to deviate away from GDPR, with its own plans for how it approaches data protection, there is no guarantee that this data adequacy decision will be maintained. The Economic Secretary’s evidence to the Committee said that the UK would “take decisions in due course on an ongoing basis that will reflect what is right for the UK interest”.
The withdrawal or non-renewal of data adequacy wouldn’t necessarily prevent EU-UK personal data transfers entirely, as financial services firms could rely on alternative mechanisms, such as Standard Contractual Clauses, but these are more cumbersome and less efficient than operating in a GDPR-compliant environment.
The Committee’s report states:
While the future of these adequacy decisions is ultimately a matter for the EU, the Committee urges the Government to ensure that it carefully considers the implications of losing data adequacy, including for the financial services sector, into its future changes to the UK’s domestic data protection framework, particularly under the forthcoming Data Reform Bill.
However, despite the UK government’s unwillingness to engage with the EU, and its daring approach to data protection legislation, the Committee also found that there were some opportunities ahead for the financial services sector - if it plays its cards right.
In particular, the Committee found that there are “new and novel” areas of the sector which there is currently little, if any, regulation in place yet. These include financial technology (FinTech), crypto and digital currencies.
London is already one of the main centers in the world for FinTech, so the UK clearly has an opportunity to develop this further. And whilst the debate is still ongoing regarding crypto, FinTech could continue to be a major growth industry in the UK.
According to evidence the Committee received from Innovate Finance, £11.6 billion was invested into UK FinTech companies in 2021, up from £926 million in 2014.
And it appears that the government is aware of the opportunity in this area too. For instance, it commissioned an independent review into the UK FinTech sector - The Kafka Review - which made 17 recommendations in the area of policy, regulation, skills, talent, investment, international attractiveness, competitiveness and national connectivity. £5 million has since been allocated in the spending review for the establishment of a new Center for Finance, Innovation and Technology, with the aim of leveraging expertise from across regions to support the sector’s ambitions.
The Financial Conduct Authority (FCA) has also introduced a ‘Regulatory Sandbox’ to allow innovators in this field to test their products in a controlled, professionally supported environment, which has now been replicated by nearly 50 other jurisdictions around the world.
The Committee’s report urges the government to continue to pursue this sector as a vehicle for further growth. The report states:
The Committee welcomes the Government’s comprehensive and forensic approach to developing the regulatory and trading structures for innovative and novel products and technologies, including through high-profile Government-sponsored reviews such as those for green finance and FinTech. In particular, we welcome the UK’s pioneering role in establishing ‘regulatory sandboxes’ for FinTech, which have since been imitated in other jurisdictions.
The Committee urges the Government to prioritise leadership and cooperation with its global partners in the establishment of global standards for novel and innovative products and technologies.
There’s little point arguing over the pros and cons of Brexit at this point, but that doesn’t mean the government can ignore the relationship dynamics that continue to exist between the UK and the EU. Our closest and largest trading partner, the UK should always be seeking to have a productive relationship with the EU, whilst continuing to pursue its own national interests where it is sensible.
It’s too soon to tell what will come of the UK’s plans to deviate from the EU’s GDPR - diginomica author Chris Middleton has done an excellent job of dissecting that topic. But what’s clear is that the UK does have an opportunity in certain technology sectors, if it can get out of its own way…