The Brexit vote was not good news for UK fintech. As ‘Project Fear’ has fast become ‘Project Facts’ many will be now wondering how to navigate the political, regulatory and strategic minefield that the vote has laid. Strategic decisions on funding, expansion and hiring are on hold for now.
One open question the vote has raised is whether the strategic opportunities and protections that PSD2 offered UK based fintechs still hold and, if so, when might they they apply? For UK fintechs this includes the right to register as AISPs and PISPs locally, to passport that registration across the EU and to operate without contracting directly with banks.
To answer this, it is worth looking at the three post-Brexit models that are being touted for the UK’s relationship with the EU and examening their impact on PSD2 for the UK.
- The WTO model.
“PSD2 would not apply”
This is the ‘Brexit-in-full’ scenario where existing regulatory and trade links with the EU are severed and are replaced by either bilateral or collective trade agreements negotiated with member states as part of WTO membership rules.
For fintech in the UK this is the least favourable scenario as PSD2 would no longer apply. There would be no registering as AISPs nor PISPs and no ability to passport around the EU. This loss would be felt beyond fintech leading to an existential crisis for the wider financial services sector. We would likely see a haemorrhaging of both business and tech talent to other EU destinations. London would still remain an important hub for financial services and fintech, but its global role would be diminished. New fintechs wishing to serve the wider European market will be less likely to choose London as a centre to establish themselves in.
- The EEA model
“PSD2 by 2021?”
Aka the Norway option, this scenario would see the UK retain access to the single market via membership of the EEA while still having to comply with all its regulations (including free movement of people). From a Brexiter’s perspective this is the worst of both worlds – still subject to the same EU laws and regulations without having a voice in their making. Yet paradoxically it seems to be the favoured route of the remaining candidates in the Tory leadership race. Perhaps some feel a deal on the galvanising issue of the Brexit campaign – the free movement of people – can be struck, although this appears to be politically unpalatable to many member states.
For fintech in the UK this model could be a workable scenario, as it means PSD2 is back on the cards. However its timing would be uncertain, for current EU law states that a member state cannot conduct its own trade deals with other countries, meaning the UK would have to leave the EU first before beginning negotiations. This would put the starting date on accession talks to the EEA somewhere around the beginning of 2019, two years after invoking article 50 of the Lisbon Treaty. If one were being optimistic and assumes that those accession talks took only a further two more years, we have a situation where PSD2 would fully apply in the UK from early 2021. That is a 5 year wait from today.
- The status quo model
“PSD2 by 2019, maybe”
The status quo model. The scenario where there is no Brexit and PSD2 still applies. Perhaps there is an element of clutching at straws here. Realistically, this would require a centrist party winning a general election on a mandate of rolling back Brexit. Or six months or more of economic hardship forcing an about turn from the current government on either holding a second referendum or not invoking Article 50 in the first place.
Under this scenario PSD2 still applies. But it seems unlikely it will come to pass given the current political environment. At best would be looking at PSD2 being implemented in the UK either on time or with a slight delay should the Treasury request an extension for transposition to national law given the uncertainty that preceded it.
In discussing the impact of Brexit on fintech in the UK some commentators have pointed out that PSD2 will go live while the UK is still in the EU negotiating its divorce terms and therefore the directive will apply. Unfortunately, it isn’t so obvious that this will be the case. For PSD2 to apply in the UK it has to be transposed into UK law and responsibility for that will fall to the Treasury. Is the Treasury likely to transpose a directive into UK law that might only be valid for the next 6-12 months? It seems more likely that they would wait for the outsome of those negotiations. Similarly, will the EC pursue the UK through the ECJ for not implementing PSD2 while negotiations are ongoing? Again, unlikely.
Others point to government sponsored initiatives in the UK including the Open Banking Working Group. For sure, the Treasury is keen to promote an agenda of open API banking and in many ways the OBWG scope is broader than that of PSD2. But it does not offer aspiring fintechs the same freedom or protections as PSD2 nor can it grant passporting rights across the EU. And arguably it puts banks back in the driving seat in their relationships with fintechs.
All this uncertainly is in danger of stifling fintech development in the UK over the short to medium term particularly for those who wish to operate across the whole of the single market. With many financial service providers looking for an alternative EU presence from which to passport their business, fintechs wishing to take advantage of PSD2 may want to do the same rather than waiting in limbo for the political situation to resolve itself. For given current circumstances there is a real danger of a significant delay in PSD2 being implemented in the UK, if ever at all.