When the UK voted to leave the European Union on June 23, a mood akin to panic suffused the group of entrepreneurs who had set up shop in London's “Silicon Roundabout" with the aim of developing Fintech companies. While there is still no warm glow in the British capital about the Brexit vote, many Fintech startups are getting a sense that London still offers some unrivalled opportunities.
The London financial center has been taking shape over several hundred years and a departure from the EU is not likely to stop that. After all, London is still the world's largest currency trading market, capturing 41 percent of the $5 trillion in daily currency trade. There are also more than 200 banks concentrated in The City, London's financial district — far more than in New York, Hong Kong or such European rivals as Frankfurt and Dublin.
Tax Benefits of Innovating in London
A key advantage London offers is one of the best tax regimes for young companies in the world. Two tax incentives, the enterprise investment scheme and the seed enterprise investment scheme, mean very early stage companies can raise up to £150,000 ($200,000) and for every £1,000 ($1,300) that investors put in to the firm, they will get £7,000 ($9,000) back in the form of tax breaks.
But it also benefits owners: investors, including company directors, can receive initial tax relief of 50 percent on their investments up to £100,000 and are exempted from any capital gains tax on their shares.
Innovation Hub Helps Cut Through Red Tape
In addition to tax benefits, Fintech startups based in London have distinct regulatory advantages compared to companies in Continental Europe. The principal one is a commitment from the country's main financial regulator, the Financial Conduct Authority (FCA), to streamline the regulatory process of getting approved, reducing the need for expensive legal advice or hiring financial service consultants.
The FCA's Innovation Hub staff advises qualifying startups on whether or not their type of business is regulated and needs authorization, which can save thousands of dollars in legal expenses.
To qualify for advisory support, entrepreneurs must show their innovation is groundbreaking and has an identifiable benefit to consumers. Businesses that receive support have their applications handled through a Project Innovate authorization process instead of the long and drawn-out process that normally clears banks and other major institutions. After authorization is approved, the Innovation Hub provides supervisory support for a year.
What's the benefit of getting authorized? As Brexit hasn't actually happened yet, authorized startups are legally able to work throughout Europe. And in a new wrinkle, the Innovation Hub is negotiating with other countries to recognize British authorization as sufficient to operate in their jurisdictions. It has already negotiated such a deal with Australia.
In addition, the FCA has set up what it calls a “regulatory sandbox" that allows startups to go live with their innovative services to see if systems work properly and iron out bugs without the normal regulatory consequences of running a pilot system.
London Is Likely to Remain a Fintech Hub
Of course, there are many other advantages to being based in London, including the ease of recruiting talent thanks to a plethora of universities with graduates studying finance. With over 200 banks located in The City, there's also a deep pool of experienced personnel who know financial services from the inside and are keen to devise ways to innovate and compete against established firms, as evidenced by the three accelerators dedicated to Fintech alone.
Despite the Brexit, London provides many opportunities to Fintech startups that they'll be hard-pressed to find elsewhere.
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