19 August 2017
Mohit Joshi

Innovations in Fintech

Mohit Joshi - Infosys

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Brexit: the way ahead for the financial services industry

01 July 2016  |  10577 views  |  0

To the regret of the financial sector and many businesses, the UK has indeed voted to withdraw from the European Union.

While the actual decision has been met with disenchantment by the wider business community, the bigger concern is the lack of information and clarity over what happens next and how we get there. This is the ultimate challenge facing every facet of both British and European business – all need and crave a playbook with which to navigate the next few years. At present, one simply does not exist. Only one country has ever technically left the EU – Greenland – and no country has ever evoked the Article 50 exit procedure now facing the UK.

An untested and therefore unseen pathway out of political union, this situation poses particular uncertainty for the global financial sector. It is, after all, an industry that is built on clear structures, interoperation across borders and long-term planning. Equities, FX and debt markets have all recoiled in the days following the result. Over 250 foreign banks currently enjoy access to the single market via Britain’s EU membership. Also, the financial services Industry is one of the largest employers in the UK with 2.2 million workers.

The uncertainty

It will be a minimum of two years before the UK actually exits the EU in any shape or form. It may reclassify itself as a European Economic Area (EEA) country in the style of Norway and Iceland. Doing so retains the free trade elements, but loosens the political and legislative union. It may follow the lead of Switzerland and negotiate direct bilateral agreements independent of the EU. Nevertheless, the shape of that exit strategy and the form of the UK’s on-going relationship post-exit is a necessary consideration now for banks and other financial service providers. It will contribute to everything from IT procurement and software development to data centre strategies and the location of resources.

Passporting Rights, if impacted, will represent a major blow to banks. These rights allow British-based institutions to sell into another EU member state without having a physical branch in that given country. Similarly, Non-EU banks often sell to the EU via their UK bases. 

If these rights are lost, overseas banks will look at moving some of their UK offices to mainland Europe or Ireland. Such a move is a costly investment for any organisation. Such capital investment makes Brexit seem like a very costly affair, aside from the disruption, and there will be an obvious desire among the business community to conclude a deal that minimises such exposure so that investment can be on growth and innovation, not relocation.

As they do now, UK-based banks will still need to comply with EU rules to trade in the region, such as the AIFMD and MiFID II. There may be no specific compulsion for the UK to adopt EU-matching legislation after exit, so the burden of compliance will rest with organizations. How these laws impact the UK will of course depend on how the new relationship takes shape during negotiations. US banks operating in the UK may also have to deal with new sets of financial regulations, especially across cards and payments, money laundering and audit trailing of transactions.

The opportunity

Some financial centres in mainland Europe will gain from an industry rejig triggered by Brexit. However, overall business sentiment is one of needing stability, not upheaval. That means that as the UK negotiates its political and legislative exit, financial institutions worldwide need to plan for a politically neutral future. That means amending financial systems to account for alternative outcomes around regulation, compliance, currency handling, money laundering and data handling. Systems, procurement, training and data strategies need to be agile in order to adapt quickly and cost-effectively to any changes the process throws up.

The same agility can also help create new business opportunities and growth, supporting mobile and branchless banking, automated claims management and more. This is something the UK-based financial services sector and its participants will need to embrace soon. Doing so will underpin confidence and reaffirm the country’s established position as the global centre of finance services.

Can technology help? 

In times of uncertainty, a strong core is what keeps organisations afloat. Whatever the outcome, there will be an IT overhead. Systems will have to be adapted at least, possibly completely or even rewritten to cope with changes in legislation, separation of business units and borders and other short and long term implications. Unquestionably, there will be a need for financial services companies to double-down on training and innovation. Staff will need to adapt quickly to changing systems and trading environments. There will also be a need, especially in the UK, to embrace more agile and modern systems such as mobile banking in order to redefine relevance and leadership in the global banking and fintech sectors.

Banks will need to do a comprehensive stress assessment of their systems and processes and make availability provisions in this state of flux. Again, technology such as data analytics will be critical to enabling swift, efficient and accurate assessments and modelling the impact of different negotiation scenarios.

For banks within EU member states, post-Brexit trading could mean devising entirely new compliance systems that account for variations in the UK. For instance, exporters/importers who hold SME accounts with UK-based banks will need to have two different Customer ID numbers and accounts for the UK and the rest of EU. This is likely to put an enormous pressure on the banks’ backend systems.

Without EU harmonisation of data privacy and issues such as cyber security – something that was set to be addressed in two year’s time with the introduction of the GDPR – banks could be exposed to greater complexity around data retention, transmission and usage best practice between locations in the EU, EEA and beyond. It is likely to trigger a boom in data centre and shared services investment, both in the UK and across the EU. In the UK, this growth opportunity will depend on how the government approaches infrastructure investment around power as well as broadband – both of which are also uncertain as a result of the proposed split.

Irrespective of the Brexit outcome – digitally armed banks stand a better chance than a deficient one. At times like these, it’s important for banks to use platforms that enable business to operationalise their data assets and uncover new opportunities for rapid innovation and growth. Not to mention having flexibility to cope with and support trading and legislative environments that experience a period of flux.While we wait for the start of formal negotiations, it is critical that we focus on being agile, adaptive and able to respond proactively to any changes in circumstance trigged by the completion of exit negotiations. Let’s remember: “The best way to predict the future is to create it.”

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job title President, Financial Services
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Mohit Joshi heads up the Financial Services practice at Infosys. With over 18 years of professional experience working across the US, India, Mexico, and Europe, his area of expertise lies in the inter...

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