Destination Europe: FinTech Passporting Hotspots post-Brexit

The impact of Brexit on the UK FinTech Sector

London has seen an exodus of firms as a result of Brexit. Five months before the UK left the European Union (EU), banks wrote to British customers living in the EU to inform them that their accounts would be closed by the end of the year. A departure of firms from the UK, including German neobank N26 whose European banking licence would no longer allow them to operate in the UK, then followed.

Now, UK FinTech firms look towards the EU for countries that offer potentially lucrative passporting services, enabling them to export their products and services to the European Economic Area (EEA) to continue to grow and expand their customer base.

So where are firms relocating to, and what should they expect?


Hot destinations post-Brexit

Being authorised in the EU can give FinTechs access to 30 EEA Countries, which bears a collective potential customer base of almost 450 million people. Not to mention the circa 25 million small and medium enterprises throughout the EEA who could be looking for new financial and accounting services.

In 2019 approximately 275 financial institutions moved a combined total of over £800bn in assets out of the UK to other parts of Europe. Dublin accounted for more than 100 relocations, grounding itself as one of the EU’s biggest FinTech hubs – unsurprising given it’s the European home to tech giants like Stripe and Google. Post brexit, Ireland continues to be an attractive gateway to the European financial and technology sector.

Lithuania also continues to be a popular choice for FinTech, with approximately 118 fully passportable FinTech licences being issued by the Central Bank. Much like Ireland, the baltic nation has anchored itself as a rising star of the FinTech world with a business-driven regulatory environment and a large pool of FinTech talent.


So what makes Ireland attractive?

Ireland is renowned as a world-leading centre for the technology industry. The Emerald Isle is a gateway for international technology businesses seeking to enter or serve the European market making it an attractive proposition for FinTech.

The FinTech sector is a priority for the Irish Governmentas evident from its strategy for developing Ireland’s financial services sector, IFS 2020. The Government is proactively promoting Ireland as a global digital hub.

As a result, Ireland has already seen a number of large banks move to her shores, including Bank of America, JP Morgan, and Goldman Sachs; but also large FinTech players such as the payment processor Stripe.

FinTechs looking to set up in Ireland should be aware that the country has a cautious regulatory environment. The regulator tends to err on the side of strict, but very supportive, supervision over business-driven regulation that includes things like sandbox environments, or “lite licensing” programs. Firms will need to be confident their anti-financial crime program will pass muster with the Central Bank of Ireland (CBI) and that they are suitably resourced to cooperate with CBI as part of their oversight (which includes oversight of third party arrangements such as IDV vendors).

On the talent front, Ireland has a wealth of strong tech talent given it’s a strong tech-centric enterprise hub; however, talent is in high demand with the increase of firms looking to move services to Ireland. This could prove problematic for FinTechs as CBI looks for strong local establishment from firms with functions such as the MLRO or Head of Compliance to be local.

Overall, Ireland offers a stable environment to operate successfully in once licensed (average 6- month licensing time) with access to talent, and thorough regulatory support from the Central Bank. FinTechs moving to Ireland should be prepared to have close and regular engagement with CBI supervisors and ensure that before starting the licensing process their AFC programme is current. Any new regulatory or legal requirements should be quickly incorporated into the programme to remain compliant with the CBI expectations.


And what about Lithuania? 
At the end of 2020 Lithuania heralded 230 FinTechs licensed and operating in their country, contributing an 18% growth in their overall FinTech services since 2019.

It’s by no coincidence that Lithuania remains an attractive proposition for FinTechs looking to passport their services to the EU.

The Central Bank of Lithuania, who issues FinTech licences, has a turnaround time of circa 6-9 months to authorise FinTech under an E-money or Payment license. Challenger banks also have the option of applying for a “lite” license which enables fintechs to apply for licenses with a 5x smaller initial capital requirement.

Being licensed through the Central Bank of Lithuania also allows FinTechs to access the SEPA network through their direct access API and an ability to use unique IBANs meaning instant access to 36 SEPA countries, with potential to access worldwide payment networks.

For innovators, Lithuania has a favourable regulatory sandbox environment that allows new and emerging financial technologies to be tested in a live environment. The Lithuanian regulators have also obligated themselves to directly support FinTechs within their first year to become compliant with local regulatory requirements which can be of great value to smaller compliance teams, and fintechs that are new to the European regulatory environment.

However, the FinTech grass in Lithuania may look green for now, but firms looking to move their operations should be aware that the EU Committee of Experts on the Evaluation and AML Measures and the Financing of Terrorism (MONEYVAL) has placed Lithuania under “enhanced follow-up” with regard to how it is managing money laundering and terrorist financing risk.

For FinTechs, this could mean that Lithuania will introduce stricter regulatory measures and controls that it will expect firms to comply with, as well as potentially enhanced supervision of firms. Whilst enhanced supervision is by no means an obstacle, it will mean that firms will be expected to have tight financial crime programs and controls to satisfy the Central Bank supervisors.

So, if you’re looking for a business-driven environment to move your operations to, Lithuania could be the place for you; though it’s important to look to the future and ensure you’re well resourced enough to quickly respond to any changes in the Lithuanian regulatory environment that may result from increased EU scrutiny on their financial crime control expectations.


I’m interested in passporting. What do I need to think about? 

Whilst different passporting countries offer different services and prospects, one thing that they all have in common is regulatory scrutiny.

Firms will need to think about whether their current compliance programs are fit-for-purpose in the European regulatory environment. Where new controls need to be added to meet that compliance standard, firms should ensure they are equipped to clearly explain the rationale behind the changes to their customers to avoid any unnecessary friction. A key part of this will also be ensuring that adequate resources like engineering time and compliance analyst time are easily available from the word go.

Companies considering passporting will need to ensure they have their ducks in a row across the business, with particular focus on a robust anti-financial crime framework. It is particularly important to ensure documentation of the  anti-financial crime (AFC) programme, risk appetite, handling procedures, and governance arrangements to demonstrate to Central Bank regulators that a working and current AFC programme is in place. Third-party arrangements such as IDV vendors or customer screening providers will also be scrutinised, so it’s equally important to ensure that outsourcing arrangements are aligned to regulatory expectations in that jurisdiction (particularly in Ireland where regulators will closely review third-party arrangements).

Regulators will also be looking for detailed risk assessments and associated control frameworks to demonstrate a clear understanding of the risks and the necessary controls in place to mitigate those risks.

FinTechs also need to demonstrate their compliance and customer teams are adequately staffed to (1) ensure they are equipped to handle customer requests and issues, and perhaps more importantly (2) to ensure they are able to monitor and quickly respond to suspected instances of suspicious activity on their platform. This will demonstrate to regulators that they do not create additional financial crime risk to the European economic environment.

Financial crime leadership will need to demonstrate that they are equipped with the necessary skills and experience to manage the anti-financial crime side of the business. Regulators want to have faith that granting access to their financial ecosystem does not bring with it an increase in financial crime.

Finally, consider using external expertise to help get ready for the passporting process. Consider any support and advice that may be needed on programme changes and implementation before being granted a licence. Whilst the application process for licensing is relatively straightforward, it can be of immense benefit to get an independent view of the AFC programme and whether it is likely to pass the muster of the Central Bank supervisory expectations.


April 1, 2021,  published on FINTRAIL


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