The UK has been the forerunner among peer EU member states in its approach to regulating FinTech firms. Recent developments such as the launch of the "regulatory sandbox", allowing FinTech applicants to test their ideas with the FCA without immediately incurring regulatory consequences and the notable co-operation agreements entered into by the FCA with the Australian and Singapore authorities to support FinTech businesses evidence the UK government's commitment to developing the UK financial services "to be the most competitive and innovative in the world".
In the wake of the Brexit referendum, the UK regulatory environment for FinTech is set to undergo further transformation. Depending on the outcome of the withdrawal negotiations, the UK may remain as a member of the EEA, in which case EU regulations and directives applicable to UK financial institutions would continue to apply and hence the regulatory impact on FinTech firms may be minimal. On the other hand, a complete departure from the EEA will no doubt open up the opportunity to diverge from the EU regime, further reducing the regulatory barriers for FinTech firms. Any such changes would however need to be balanced against the interest to have an "equivalent" EU regime enabling UK firms to be eligible for third-country passports available in some EU regulations including the MiFID II/ MiFIR.
Currently many FinTech firms rely on the passporting rights currently available under various EU single market directives to conduct their business across the EU either through a branch or on a cross-border basis. Major single market directives offering passporting rights for FinTech firms at the moment include:
- Payment Service Directive (PSD) - Under the current regime passporting rights are available to a UK authorised payment service provider ("PSP") as long as the procedures set out in the Payment Service Regulation 2009 are followed. A UK-authorised PSP is also able to provide services in another EEA State through an agent established in the UK or in another EEA State. There are no provisions allowing third-country firms (which are what UK FinTech firms would be post-Brexit) to passport across EU in the PSD or the PSD II which will come into force on 13 January 2018.
- Second E-Money Directive (2EMD) - A UK-authorised electronic money institutions ("EMI") are currently able to exercise their passporting rights by following the procedures set out in the Electronic Money Regulations 2011. A UK authorised EMI can also provide payment services in another EEA state through an agent established in the UK or an agent established in another EEA state and may engage an agent or a distributor to distribute or redeem e-money in another EEA state. Again, there are no passporting rights for third-country firms under the 2EMD.
- MiFID and MiFID II/MiFIR - There is no passporting rights for third country firm under MiFID but the position is set to change when MiFID II and MiFIR comes into force from 3 January 2018. Article 46(1) of the MiFIR gives third-country firms the right to provide investment services to eligible counterparties and professional clients without the need to establish a branch or subsidiary in the EU and without being subject to supervision by an EU competent authority. Such cross-border services passport is however dependent on a positive equivalence determination and the conclusion of relevant cooperation arrangements between the UK and ESMA. While the process of obtaining an equivalence determination may seem straightforward given that the UK is likely to implement MiFID II, whether such third-party passports would be available timely upon the formal Brexit date remains to be uncertain and will likely be drawn into the overall Brexit withdrawal negotiations.
The potential loss of passporting rights may well prompt a need for FinTech firms to establish a subsidiary in another EU member state in order to continue to operate across the EU. The process of establishing a subsidiary and obtaining authorisation is likely to be time-consuming and costly, and contingency planning should be considered well in advance of the formal Brexit date.
Fintech is a key topic at the DLA Piper European Technology Summit in London on September 28. Register for your place to hear what the experts see as the challenges and opportunities, and to have your say.
And you can follow the conversation ahead of the event with the Twitter hashtag #dlapipertech16