August 6, 2016

Brexit; FCA Passporting, Digital Single Market, EU Grant Funding

We are convinced the UK remains the best place in Europe to build a global B2B software business despite the recent vote to leave the EU, indeed there is much to be confident about and a quote from Russ Shaw in City AM today sums this up neatly.

With the entrepreneurial spirit that has defined our digital success, tech companies and professionals almost instantly set their sights on turning adversity into opportunity.

Notion Capital is an early stage B2B SaaS investor. We are committed to helping our founders across Europe build big, valuable, even iconic businesses. However, we know many people have questions they want answered about the implications of the UK leaving the EU so are gathering speakers from across our network of Strategic Partners and Notion Experts to address key topics.

Three weeks ago we discussed:-

  • Implications for fund raising
  • Immigration
  • Data protection
  • View from the US
  • Communications strategies

You can find details of that coverage on our web site blog here.

Today we have three more great speakers on critical topics.

  • Paul Anning from law firm Osborne Clarke and will be sharing his thoughts on passporting for FinTech.
  • John Davidson-Kelly, also from Osborne Clarke will be discussing the Digital Single Market.
  • And Caroline Bergaud, from Bergaud & Partners will be sharing her thoughts on the implications for EU grant funding and Horizon 2020.

Brexit and FCA Passporting

Paul heads up Osborne Clarke’s Financial Institutions Group providing services across Investment Funds, Payments and Financial Regulation. The first question I get every day is “Do we still have to abide by EU laws?” and the answer is yes: until the day the UK formally withdraws from the UK, we have to abide by EU-derived laws, including any new regulations that come into force before that official withdrawal, such as the second Payment Services Directive.

The critical question that will affect us all is “Will there be a clean break?”. The consensus of the City and FinTech is that our preference will be to follow the EEA model (also known as the Norwegian model) whereby we can continue to access the EU and benefits of legislation. But the issue with that is it seems unlikely we can adhere to that while also opting out of freedom of movement of people.

With regards to the passporting rights for FinTech, there is currently nothing to say they will be withdrawn but equally nothing to say that they will continue, so the question is “What should FinTech companies be doing?”.

If you are starting a new regulated company where should you go?  Before our answer was that the decision was automatically for firms looking for authorisation to choose the UK. Now the options are to look at Germany, France, Netherlands or Ireland.  However it is important firms look at the broader picture beyond the regulatory environment and receptiveness of local regulators to factors such as availability of key personnel/skill sets, employment law, tax, target customer base and of course local language.

In terms of contingency planning for existing UK FinTech companies the question is should I change locations. There is as yet no obvious easy migration route to other EU states, like Germany, however, this may develop and for example the Dutch regulators may be open to such migration. Dual authorisation is rare.

When we have looked since Brexit at comparative analysis, we keep coming back to the UK’s strengths and in the context of FinTech, its policy approach and encouragement: the UK’s Project Innovate, its regulatory sandbox, and authorisation of challenger banks demonstrate that this is still a very powerful factor.

Brexit and the Digital Single Market

John is a Partner in Osborne Clarke’s commercial team with particular expertise in the digital media and technology sector. He specialises in commercial contracts and joint ventures and in providing regulatory advice on intellectual property rights, consumer law and broadcasting regulation, which often involves coordinating multi-jurisdictional compliance exercises. He is also an expert in the EU Commission’s Digital Single Market initiative.

The EU released a whole range of statistics that clearly demonstrated that consumers generally purchase digital products, services and content within their member states and not across borders. And that companies typically behave in the same way.  So the intention of the Digital Single Market (DSM) is to enable 28 jurisdictions to act consistently in terms of consumer rights and remedies, which will make it easier (and cheaper) for businesses and consumers to buy and sell digital products, content and services across borders.

Launched in May 2015, the DSM has three objectives:-

  1. Better access for digital consumers across europe
  2. Creating the right conditions for digital networks to thrive – the underpinning legislation
  3. Maximising growth potential by, for example, harmonising standards

DSM has achieved a lot of momentum in a short period, for example the Commission has published proposals banning GEO blocking and enabling the portability of content, however Brexit has thrown a spanner in the works. The negotiation for legislation coming into force over next 18 months is going ahead and we have to question UK’s ability to influence this.

Without the UK’s more liberal voice the more protectionist digital policies from France and Germany will have greater influence.

The UK will want to be part of the DSM and continue to influence it,  the question is will we be able to. Perhaps there is the opportunity for us to remove some of the more onerous provisions but that will not necessarily offset the benefit of losing single access.

Brexit and EU Grant Funding / Horizon 2020

Caroline helps European start-ups/scale-ups leverage EU funding opportunities and is an evaluator for Horizon 2020.

Horizon 2020 is an €80bn grant fund for research and innovation where the majority of the funding goes to consortia of at least three legal entities from three or more EU countries. This is already very tough financing to secure, with success rate of about 11%. The UK has been doing extremely well in gaining access to these funds but the results of the most recent round that took place in June will be very indicative.

There is however early indications that UK may suffer because of Brexit due particular to the unwillingness of other countries to collaborate and form syndicates.

The other sub-fund worth considering is the SME instrument. This fund is part of Horizon 2020 and is designed to support early stage companies. The total amount available is €3bn out of the total €80bn fund, investing between €0.5m and €2.5m across a broad area of topics, including clean-tech, health, open disruptive innovation, etc.

The UK has been doing extremely well in gaining access to these funds but the results of the most recent round that took place in June will be very indicative. There is however early indications that UK may suffer because of Brexit due particular to the unwillingness of other countries to collaborate and form syndicates.

The benefits of this fund are:-

  • You don’t need to be part of a consortium
  • You can apply four times per year.
  • Level of bureaucracy is relatively light.

However this fund is even more competitive, with success rate between 1-5%.

The key advice is to focus on the SME instrument is and be sure to focus on a topic where

  1. you have clear differentiation and
  2. where you can demonstrate clear alignment with EU policy

There is early indication that the UK’s funding chances in H2020 may suffer because of Brexit due in particular to the growing unwillingness of other countries to collaborate and form consortia (the traditional EU funding format) with UK entities.

The UK has been doing extremely well in gaining access to the SME Instrument programme and the results of the most recent round that took place in June will be very indicative of whether the funding prospects of the UK are likely to get hurt in that specific sub-fund too.

Posted by Stephen Millard, Chief Platform Officer, Notion Capital.

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