What will Brexit mean for RegTech companies?

Britain is poised to leave the EU in the end of October. The divorce could affect everything from RegTech funding to legislation.

Prime minister Boris Johnson has pledged to push the UK out of the EU by Thursday October 31. For the RegTech sector, this project could lead to a lot of challenges.

The first of them is that regulations – the bread and butter of RegTech companies – risk becoming even more complicated.

Remonda Kirketerp-Møller is the founder and CEO of muinmos, the regulatory compliance solutions company. She tells RegTech Analyst, “Even without a Brexit, it has become obvious over the years that the regulatory terminology applied by the United Kingdom is quite different for a number of the services, activities and instruments when cross-referenced with the Markets in Financial instruments Directive better, known as MiFID. This has for many years resulted in confusion amongst the EU member states, especially when the financial services authorities of these member states passported their financial investment firm’s services into the United Kingdom and vice-versa.”

Kirketerp-Møller continues, “There is also no doubt, that at least for the foreseeable future, Brexit will add even more to the complexity for both financial investment firms and financial services authorities having to consider uncertainty, and potentially a whole new legislative framework not just for financial investment firms in the UK, but also UK citizens and residents wishing to become clients of EU financial investment firms and vice versa. The UK is very likely to become a third country for the purposes of the EU legal framework which means that it will not be possible for the UK to rely on the existing passporting regime.”

A similar sentiment was recently shared by Gareth Gadd, chief business development officer at Compliance Compendium, the RegTech enterprise. Speaking with RegTech Analyst, he believed Brexit could cause compliance requirements regarding data protection to change. While the General Data Protection Regulation, (GDPR) is currently the go-to legislation for data privacy, leaving the EU could mean this could change. The law is currently part of UK legislation.

Some of the uncertainties, for instance, is due to it being unclear whether or not a post-Brexit UK would be allowed to remain a member of the European Data Protection Board, which is the European body coordinating the cooperation between the member states’ data regulation authorities. Gadd suggested this would cause doubt about who would launch infringement cases against the UK in case of misapplication of GDPR and how Britain would make sure it is up to date with GDPR changes.

What about funding? According to RegTech Analyst’s research, UK-based RegTech companies have attracted almost half of the investment going into the European sector in the first six months of 2019. During that period, $254.8m were injected into the country’s ecosystem. $515.7m were invested in the European RegTech sector during that same period. Over the past five years, RegTech investment has increased from $45.6m in 2014 to $217m in 2018.

But what about after the UK’s more or less conscious uncoupling from the EU? “The UK is still the leading destination in Europe for global tech investors and that is not likely to change in the coming years,” argues Samuel Leach, founder of trading consultancy Samuel & Co. “Tech remains a thriving sector despite the threat of the Brexit outcome. While the upheaval of Brexit could eventually have an impact, sources suggest that talk of the UK’s demise is certainly premature.”

Indeed, the Government has taken measures to ensure that’s the case. In July, it launched a review to see how the country’s financial services can remain ahead of the pack come Brexit.

In fact, Kirketerp-Møller believes that Britain leaving the EU could be a boost for the sector. She says, “The need for RegTechs in Europe will become even more relevant where RegTech solutions can alleviate vast parts of this confusion and therefore aid the financial services authorities in understanding how the changes impact their jurisdiction and clients as we well as aid that financial investment firms in not only being compliant but also assist them in conquering new markets, delivering a clearer framework on any new legislative requirements and thus lead to faster onboarding. Therefore, financial institutions need not despair as seems to be the backbone reaction, but rather seek the opportunities, which new developments always bring.”

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