When president Trump signed an executive order cracking down on immigration in the US, one of the largest protests was registered by technology groups in California. The Bay Area attracts highly talented and motivated engineers from outside the US. Google chief executive Sundar Pichai issued a memo to his employees urging them to return to the US before the ban kicked in. Google also donated $4m to pro-immigrant causes and ridesharing app Lyft donated $1m to the American Civil Liberties Union.
In early February, Lyft and Google were among those companies that submitted an amicus brief – a legal document filed by non-litigants with a strong interest in the subject – to the ninth US Circuit Court of Appeals. Other signatories included Apple, Microsoft, Uber and Twitter.
California remains far and away the region which receives the most investment in technology companies, outstripping entire countries, including the UK. Nevertheless, with around £1bn invested in UK FinTech in 2016, it remains a key sector and one which is expected to have a general upward trend, with due regard to lower investment in 2016 compared to 2015. The prominence of the UK on the global FinTech scene is a result of a combination of a number of factors, which broadly fall into the following four categories: (i) talent – businesses in the UK currently have access to a large pool of talent, in no small part due to the UK’s membership of the European Union (EU), and the freedom of movement which that entails; (ii) capital – UK companies have found favour with investors; (iii) policy – the authorities have supported the sector through a number of initiatives, including the Financial Conduct Authority’s launch of Project Innovate; and (iv) demand – namely, corporate demand, assisted by the sector’s proximity to London’s financial institutions.
Each of those categories should be considered in light of the referendum result on the UK’s membership of the EU in June last year. That is, perhaps, easier said than done, given that since that vote much has been written about Brexit, but there are few hard facts on which to make any meaningful predictions or assessments. However, a ‘hard’ Brexit is widely anticipated, with the removal of the four freedoms provided by EU membership.
It is too early to suggest that the enthusiasm for UK FinTech will automatically decline as a result of Brexit. We know financial institutions are exploring their options on the continent in order to preserve access to the single market, yet with financial services such a key part in the UK economy it is unthinkable that it will be cast onto the pyre. Furthermore, FinTech is not just technology associated with big banks and it is not just fixated on London. By way of example, a number of digital-only challenger banks have emerged, with the current largest, Durham-based Atom Bank, having recently raised £83m, including from overseas investors, valuing the company at £261m.
Incentives around policy will, arguably, not be affected or will be strengthened by Brexit, as shown by city minister Simon Kirby’s recent supportive comments. The FCA continues to take a leading role in promoting and supporting UK FinTech talent, with the FCA promising to enter into an agreement with the Financial Services Agency of Japan for easy-access referrals for help and guidance for entities looking to enter new markets. That agreement would be the eighth such agreement the FCA has entered into.
Unfortunately, the perceived need to reduce immigration was a central issue on which the UK electorate were convinced to vote ‘leave.’ Prime minister May is taking her lead from this: the message from the government is clear; freedom of movement will cease to apply to the UK as soon as the UK is no longer a member of the EU. No concessions have (as yet) been made to those EU nationals who are currently resident in the UK, and no concessions have (as yet) been made in respect of any relaxation of the immigration requirements for any industry sectors which may be adversely affected by the impact of the loss of EU-wide freedom of movement. The government, it seems, is not minded to give any guarantees or guidance on how businesses can manage these issues until it has some clarity in terms of the exit deal it will get from the EU.
This is a wholly unsatisfactory position for many businesses which rely upon human capital from outside the UK. The problem is twofold: not only do such businesses face the prospect of existing EU workers being removed from the country as Brexit takes effect, but also UK employers may face difficulties in future recruitment and a potential brain drain of local talent. There is a significant risk that talent will transfer to another European location, such as Berlin, Stockholm, Amsterdam or Lisbon. If the Californians are worried about curbs on immigration then so should the UK. And the FinTech sector is likely to be more affected than most.
And here is why: the FinTech sector is heavily dependent upon human capital. It has been estimated that as much as 30 percent of the UK’s FinTech human capital is from the EU and overseas. The risks to the sector are therefore enhanced because of its characteristics, both in relation to the existing workforce and future recruitment.
Much has been said about the ethical and economic problems of not permitting current EU nationals who live in the UK to remain here, but the government, backed by Parliament, has made it clear that there will be no early concessions in this respect. This presents an immediate problem for the UK FinTech sector: what happens if, overnight, up to 30 percent of its workforce loses the right to work in the UK?
But the issue goes deeper still – even if UK FinTech can weather the immediate impact of Brexit, it is likely that the longer-term effects in terms of talent retention and recruitment are more intractable in the absence of government intervention. UK FinTech may well find itself caught between the issue of accessibility of working in the UK and how desirable working in the UK is likely to be in a post-Brexit world.
Take away the talent and no amount of policy support for the sector will prevent investors looking elsewhere, and so the capital investment begins to shrink.
Increased immigration hurdles may deter or prevent EU nationals from coming to work in the UK – a
risk which has been recognised by government ministers David Davis and Philip Hammond and the London mayor, Sadiq Khan. The ministers appeared to have accepted, in principle, the need for the UK to protect and encourage its intellectual human capital. Suggested options include a system based on regional needs, or perhaps with exemptions for specific industries. The government has, on the face of it, rejected a regional needs system, on the basis that this would not be conducive to UK business. With regard to specific sector exemptions, we simply do not know whether this is something the government would be willing to consider or implement.
A government commissioned report in 2016 raised a concern about the pipeline for talent within the UK FinTech sector. One of the issues it raised was that the pre-Brexit immigration regime for non-EU nationals was relatively restrictive and not helpful when attracting new tech talent to the UK. Post-Brexit, if it is a hard Brexit, those difficulties will apply to all non-UK nationals except, perhaps, the Irish. This will exacerbate the problem.
The UK needs to address a perception that it may be ‘closed’ to workers from overseas, which might be a natural conclusion formed as a result of a hardline stance on the freedom of movement taken by the government in the Brexit negotiations. This has to be, at least in part, government led, as it plays to the perception of the UK in the global marketplace. This is an issue which should be considered now. The UK’s ability to retain talent in the lead up to and post-Brexit may well depend upon whether there is a general trend within the sector to vacate the UK.
There may be a perception that the UK FinTech sector is largely immune from a negative Brexit impact and will go from strength to strength. However, the government should perhaps be cautious about assuming that the country’s present strong position will continue. For private capital to be invested, the UK needs the demand, the central support and the talent to create and work. However, policy support is impotent without the human capital. The government must not make a universal concession to the anti-immigration lobby. It must be more sophisticated and sensitive to the differing demands of sectors. In the case of FinTech, we simply do not have the human capital to do this alone. Unless we heed the lessons from California, there is a significant risk of a decline in the UK FinTech sector.
Sam Pearse is a partner and Caron Gosling is counsel at Pillsbury Winthrop Shaw Pittman LLP. Mr Pearse can be contacted on +44 (0)20 7847 9597 or by email: firstname.lastname@example.org. Ms Gosling can be contacted on +44 (0)20 7847 9529 or by email: email@example.com.
© Financier Worldwide
Sam Pearse and Caron Gosling
Pillsbury Winthrop Shaw Pittman LLP