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Why Brexit probably won’t diminish London’s fintech status

London is unlikely to lose its unofficial status as the pre-eminent fintech hub. The reasons for this are over-riding commercial advantages, relatively minor disruption to the status quo, and the government’s emphasis on industrial policy.

London’s fintech status is unlikely to be diminished by Brexit, yet it is a matter of fact that investment into London-based fintech has decreased since the referendum vote. Uncertainty over the UK’s links to the EU single market is clearly a primary concern. However, a period of normalization will soon begin as investors, market players, fintech start-ups, and the talent that has driven London’s fintech scene are pulled back into its competitive dynamic.

This competitive dynamic is driven by the ‘cluster’ of fintech start-ups in and around London. Businesses gravitate towards clusters because of the commercial benefits, which include cheaper and bigger labor pools supporting soft and hard infrastructure, and cheaper suppliers. Therefore, any dispersion of business activity from a cluster is likely to be more costly and less efficient, resulting in the dispersed activity being kept to an absolute minimum.

Fintech hubs are stronger than other business clusters because they are more nebulous. With fintech being the intersection of two broad sectors – financial services and technology – its center of gravity is less clear, making it less dependent on the fortunes of any one industry. With London ranked the number one fintech hub globally (Global Fintech Hub Federation 2016), it is in the best position possible to overcome any challenges to its status. The commercial advantages of London’s fintech cluster are important to note, since commentary on this topic is written with an underlying assumption that membership of the single market has somehow granted this status.

This assumption has led many commentators to believe that London’s fintech hub will soon be in demise once the UK has left the EU. They commonly cite the loss of EU funding and financial ‘passporting’ to support their assertion.

The importance of the loss of ‘passporting’ rights has also been overstated by proponents of London’s fintech demise. In a report by Open Europe, an EU-funded think tank, it was stated that access to the single market is not essential to the City of London’s success. It also noted that large EU-based banks made a significant proportion of their income through ‘passporting’ into London.

Funding and government support is another area that is claimed will be withdrawn after Brexit. According to fnlondon, the European Investment Fund invested £2.3bn in 144 UK private equity and venture capital funds, supporting over 27,000 SMEs in the UK between 2011 and 2015. However, since the UK government is a net contributor to the EU, any money it receives back is its own money at a reduced rate. Moreover, Chancellor Phillip Hammond has publicly guaranteed to replace existing EU funding streams.

Given that the current government is the only one to seriously look at implementing an industrial policy in decades, it is likely that the UK government will replace and probably further fund a proven and successful sector. The government’s Patient Capital Review also demonstrates that there is a significant push in government to take a more active role in supporting the growth of innovative businesses.

It is inevitable that a completely unexpected political decision with a binary outcome has caused market participants to pause and consider the implications. However, it is unjustified to claim that London’s inherent commercial advantages, compliance with EU regulations, and UK government support will not counter the negative aspects of Brexit.

By Sean Harrison, Retail Banking Analyst

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