Can RegTech solutions help businesses prepare for Brexit?

No matter if the UK will crash out of the EU without a deal or if there will be an extension for next year, financial services companies must prepare for Brexit.

The divorce from the EU has dominated British news since before the referendum in 2016. From the roller-coaster of the Sterling to the uncertainties of what it will mean for the country’s position as a FinTech leader, Brexit has impacted British finances in numerous ways.

As the possibility of the UK leaving the EU on Thursday October 31 draws closer, the industry has ramped up its efforts to make a potential Halloween Brexit less scary.

The Financial Conduct Authority (FCA) has discussed this at length at several occasions. It warned in September that seven matters were still left unresolved ahead of a potential Halloween Brexit. Left unchecked, these seven issues could affect the financial services industry in massive ways. They included concerns about what the Shared Trading Obligation and the rules about the data exchange between the two blocks would look like after the conscious uncoupling.

Then in October, the FCA issued an update about what businesses should do in case of a no-deal Brexit. Recognising that leaving the EU without a deal in place would cause tremendous strain on the financial sector, the regulator still told market stakeholders that they still had to comply with the requirements of the law, no matter what form Brexit may take.

And that is where RegTech may play a vital role. Even though the more or less conscious uncoupling could lead to massive challenges for the RegTech sector, RegTech could help financial institutions through Brexit, according to Remonda Kirketerp-Møller, founder and CEO of muinmos, the company helping businesses onboard clients in a compliant, safe and smooth way.

“Businesses across all sectors need to be prepared for both a deal and no-deal scenario,” she tells RegTech Analyst.

Kirketerp-Møller adds that adjusting to the post-Brexit regulatory landscape “can seem like a minefield, particularly given Brexit uncertainty combined with the complexity of regulations in this sector.”

Yet, she believes RegTech solutions such as the muinmos PASS can play a major role in easing this burden. By leveraging the technological solutions of the industry, both foreign and domestic financial institutions can efficiently arm themselves with the knowledge “to help them make informed decisions, to stay compliant and to plan ways of growing their business,” Kirketerp-Møller explains.

One of the key things that would change if the UK leaves the EU without a withdrawal agreement is that the country be regarded by the remaining member states as a third country. “The automatic right for UK-based financial institutions to set up and do business in EU countries, as a result of the EU’s single market, will therefore lapse,” Kirketerp-Møller says.

This is something UK bankers operating in the EU have previously expressed concerns about. They feared that they would be locked out the single market in case of a no-deal Brexit as the UK had – as of September – still not updated some of its legislation to be equal to some of the upcoming EU laws. British banks betting on continuous trade with clients in Europe are therefore worried that the failure to update these laws would mean the EU’s equivalence rules would not work for British banks.

What it boils down to is the uncertainty of what will actually happen in a no-deal scenario. Some authorities in EU members have tried to demystify these concerns. “These [efforts] vary considerably,” Kirketerp-Møller explains.

In April, Italian regulator Commissione Nazionale per le Società e la Borsa (CONSOB), stated that every British intermediaries would be forced to provide “CONSOB with specific information on existing relationships with Italian clients at the date of withdrawal, within 15 working days of” of the leaving date this date.

The Portuguese government adopted similar contingencies for a potential no-deal Brexit. The new rules stipulate that credit institutions, investment firms and fund managers already authorised to operate in Portugal can continue to do so.

However, there are conditions attached to this right. For instance, the relevant authority – may that be the Bank of Portugal or the Portuguese Securities Market Commission (CMVM) – must be notified by the relevant UK authority for the provision of services or the performance of an activity in Portugal by these actors.

Secondly, within three months of the UK leaving the EU, every financial institution operating in the country must either terminate existing agreements in Portugal or seek authorisation to continue to operate in Portugal.

“Furthermore, in both cases, UK-based authorised institutions will need to cease doing business with retail, opt-up professional clients and non-professional investors,” Kirketerp-Møller explains. “How these categories are defined is left to each member state and is not necessarily given the same definition applied by MiFID. This may result in a number of authorised institutions in breach of applicable temporary permission regimes.”

She also warned that firms in the UK must ensure they comply with the requirements in every member state. “Of course, EU member states with clients in the UK will also need to adapt their operations to comply with the new-post Brexit requirements for cross border activity into the UK,” Kirketerp-Møller continues.

So how can RegTech solutions help financial firms navigate Brexit? “RegTech solutions can provide financial institutions with clear visual mapping across all jurisdictions based on their client base,” says Kirketerp-Møller. “The software can provide meaningful data in real-time – data which is not only costly to obtain from lawyers, but which constantly changes and could therefore quickly become obsolete unless additional legal fees are paid to be kept updated.

“Automated RegTech solutions have been designed specifically to help financial institutions to navigate effectively through cross-border challenges. Our PASS software, for example, can help financial institutions to categorise and validate regulatory compatibility for a range of financial products and services on a national and cross border basis. The SaaS based solution can validate whether a financial institution can onboard a client from any part of the world and uses rule based algorithmic AI to categorise clients, conduct suitability and appropriateness testing and cross-border clearances on a per product, per service, per country basis.”

Kirketerp-Møller says software solutions like the one developed by muinmos have two major advantages. “Firstly, because it is a real-time solution, it can provide an accurate overview to financial institutions at any given time, reflecting the different requirements from differing EU member states,” she says. “This helps financial institutions to mitigate risk, remain complaint and avoid fines from any inadvertent breaches. Financial institutions will have a clear understanding of which clients they can and cannot onboard, and which clients they can offer particular products and services to.

“Secondly, and of equal importance, the technology can also identify opportunities for financial institutions to grow their business in the rest of the world. For example, a number of our clients didn’t offer their clients the opportunity to trade in certain parts of the world – such as in the US – where stringent criteria need to be met in order to trade with US clients. They were fearful of hefty fines for breaches in compliance.

“However, our RegTech solution, which provides a clear overview about where their products and services could be applicable, identified US opportunities for them and provided reassurance that regulatory requirements would not be breached. This has opened up significant new revenue streams and enabled them to grow globally.

“Brexit may limit opportunities for trading in certain EU countries but there are a wide range of opportunities worldwide which can be tapped into. RegTech solutions can play a major role in identifying these opportunities, helping financial institutions with global expansion whilst remaining compliant.”

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