Following on from the momentous EU Referendum outcome in June of this year many of the dire predictions of imminent and immediate economic meltdown seem to have been somewhat overstated. That is not to say there may not be a bumpy ride ahead but clearly some of the more catastrophic and alarmist predictions seem to have not been much more than a chimera.
I have been very open about the fact that I was an advocate for the Leave Campaign, and as a person regularly contacted by financial journalists for a view on crowdfunding and alternative funding generally I have had the question What does Brexit mean for the alternative finance sector?” posed to me many times both before and after the vote. At a recent major European Crowdeconomy event it was an abiding subject of conversation, all the more so after I publicly declared my position on the Referendum, and the conversations have largely been thoughtful and cordial when I spoke with my colleagues from across the channel but occasionally acid and bitter from UK colleagues.
The reason the question is posed is, in large part, because most analysis suggests that the UK has a very dominant position in the European alternative finance sector. One of the more comprehensive reviews suggest that UK accounts for more than 70% of the European sector by value.
The implicit question when looking ahead is will this dominant position be threatened by Brexit?
I don’t believe it will be significantly so and here is why.
The UK’s dominance in the sector is not a function of its membership of the EU. In fact I would say that it thrives in spite of the EU. The position enjoyed by the UK in this sector is a function of a number of factors most of which will not be affected by Brexit.
One of the reasons that the UK enjoys a leadership position in the crowdfunding sector is because we have embraced all of the forms of crowdfunding, forever. In the main this is a result of our common law heritage as distinct from the civic codes of much of Continental Europe. Here in the UK the principle is that if you can satisfy existing regulations then you can get on with whatever it is you plan to do – hence equity crowdfunding and crowd lending just got on with it under existing regulations. In much of the rest of Europe the legal and regulatory tradition is that one needs to be explicitly permitted to undertake activities in order to do them and in the absence of that permission there is significant caution about proceeding to operate fearing that prosecution may follow. Hence innovation in finance in much of Europe requires additional regulation to be passed before it can take place and the usual can of worms, bun fight, – choose the your prefered metaphor – begins.
This advantage in being able to establish our platforms and explore and innovate in a much more enabling environment has given the UK a significant lead.
But there are other reasons why we thrive in this sector. The UK’s historical tradition as a trading nation has given us an extraordinarily robust and well recognised set of laws to build contracts, start companies and to do business. Our linguistic advantages are well known, our legal and tax systems, for all their faults, are manifestly better and more highly regarded than pretty much any other jurisdictions, and this familiarity, the cannon of case law and trust all play a part in making the UK the place of choice for many to do business.
This can be hugely frustrating to Commission regulators and has caused them to try to challenge or erode that advantage. This was well evidenced by the shameful VATMOSS debacle. Originally presented as a mechanism to challenge the practice of large online retailers from exploiting low VAT jurisdictions to compete against smaller nationally bound retailers it shifted the point of VAT from the retailer’s location to the purchasers location. Clumsily applied and badly thought through it not only singularly failed to address the corporate abuse it intended to challenge it actually had the effect of driving smaller retailers into the big retailers arms to simply avoid the cost of compliance. However a more unspoken aim of the regulation was to specifically implement it in a manner to take aim at the zero VAT registration option for small business enjoyed in the UK, a facility hated by many EU bureaucrats who wish to introduce common TAX rates across the UK be as bad a place for startups as the rest of Europe.
As for the impact of “no access to a single market”, the promise of a single financial market is simply bogus. It doesn’t exist and frankly has practically no chance of existing. The much vaunted “passporting rights” in the EU are undoubtedly relevant to some existing city activities and to the existing old world capital markets but have little or no impact in the crowding and alternative finance space. For example the MIFID permissions should, in theory, provide great opportunity for cross border offerings on crowdfunding platforms. This should be possible now and there are MIFID authorised platforms able to “passport” their offers. But the reality is that because of the huge range of local regulations relating to company formation, and diverse interpretation of “Pan European” directives like the Portfolio Directive, it means that it simply isn’t practical for platforms with MIFID clearance to undertake wide pan national offerings. This is particularly so in crowdfunding as low transactional costs are a key component of the model and complex compliance is just anathema to that.
So, in sum do I think the imminent exit for the EU will affect the UK’s dominance in the alternative finance space? In a word – No.
I am sure that other countries will grow and claim back some share of the market as it matures, but most have a way to go to put in place as good a framework of circumstances that exist in the UK to do that in any aggressive way. Besides the pie is a growing for the foreseeable future so there is plenty to go around. Of course the FCA could make a total hash of the UK’s regulatory position but that is for another day.
So, no I don’t believe Brexit is a significant challenge to the UK’s dominance of the European alternative finance sector and I welcome our opportunity to more readily embrace a global share in an unconstrained way free from the dullards and luddites of the Commission. We can venture in the the true promise of the crowd economy which is open and global and not constrained by the artificial walls of an EU block.
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