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Will smart divergence set the UK apart post Brexit?

Will smart divergence set the UK apart post Brexit?

During a panel session for UK Fintech Week 2021, moderator Kristy Duncan, founder and CEO of Women in Payments noted that while the UK and EU benefits from a progressive regulatory regime which favours innovation and competition, fintechs are hindered by regulatory challenges including lack of enforcement and passporting headaches.

Calling on Keith Grose, head of international, Plaid, Duncan asked whether there are specific areas that regulators could improve in this area.

First, Grose set out that when done correctly, regulation builds trust and bring legitimacy to a space which then increases investment and adoption. What he is most interested in seeing from regulators in the open banking arena is that of further enforcement of PSD2 across continental Europe.

He added that “the UK has taken a great lead, but I think there are definitely markets where PSD2 could be higher quality in continental Europe. I think regulators should step in and enforce the regulations there.”

Second, Grose also raises the need for “smart divergence” post Brexit, as “the UK can make changes to their regulatory environment in a faster way than maybe they could have previously.”

He believes the concept of smart divergence centres on how regulators in the UK can, in the context of PSD2 for instance, update their regulation to be fintech friendly and accelerate its adoption - particularly given it's one of London and the UK’s key sectors.

For Myles Stephenson, chief executive of Modulr Finance, it’s “more of the same” that he wants from regulators. “For us, it’s thinking about what’s next. What else can the regulators, central banks and government do.”

But this comes with a flip-side risk, Stephenson argued, of becoming stuck in “halfway house” of progress. “There has been momentum, innovation and change which enable us to exist and do what we do which is great, but then we come up against the challenge of having to make this innovation really work.”

He flagged a frustration for fintech in that this change and progress tends to result in friction points which is blamed or attributed fintech, when in fact, fintech is simply trying to use the system properly. It is the system or enforcement of regulation is where the fault truly lies.

The changes to passporting rules post-Brexit have also proven to be a significant challenge according to Neil Harris, group chief commercial officer, Global Processing Services (GPS) who argues that while it doesn’t impact GPS itself, there has been a huge additional cost and complexity because of the lack of measures and visibility of actually what it means from a Brexit perspective.

“The regulations and the lack of clarity on passporting, from a challenge perspective, has created that new cost dimension for financial service providers. My ask of the regulators would be to acknowledge the power of the passporting rules we had [pre-Brexit].”

Echoing Grose’s comments on smart divergence, Harris added that passporting opened up significant opportunity, new competition, new markets, and therefore, perhaps what is needed going forward is not just smart divergence, but a smart passport.

While also lamenting the associated costs being borne by firms as a result of Brexit, Sophie Guibaud, chief growth officer, OpenPayd, believes that “Regulation is and will always be key.”

In light of the strengthening of defining trends such as embedded finance across the industry, Guibaud furthered that she is very much a believer that every company will one day become a fintech and that we are already seeing a move towards this from numerous large brands.

“Of course, fintechs needs to work hand in hand with regulators to actually enforce this, because making a regulation simple and accessible and developing further will be key for enabling traditional companies to become fintechs in the next few years.”

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