May 20, 2024


International Student Club UK

UK Brexit deal leaves startups in limbo on financial services, data

  • There are still big gaps in the UK’s “skinny” Brexit deal, even as the transition period ends January 1.
  • The UK and the EU have not yet agreed on how financial services will operate in the bloc, nor how personal data transfers will work, among other issues.
  • British startups, flying blind since the UK voted to leave the EU in 2016, have been forced to spend millions preparing for a no-deal Brexit.
  • Founders who spoke to Business Insider criticized the last-minute nature of the deal, and said the UK would inevitably become a less attractive place to set up shop.
  • Visit Business Insider’s homepage for more stories.

The last-minute and “skinny” nature of the UK’s Brexit deal throws up hurdles for startups still awaiting clarity on how they will continue to trade with the EU in 2021.

The UK’s Brexit transition period ends on January 1, meaning that UK-based tech firms will have to navigate a complex new set of rules to do business with European customers and users.

The government, with much fanfare, only agreed a deal with the EU on 24 December, leaving businesses with just seven days to familiarize themselves with the detail before the end of the transition period on January 1.

Many have spent the last 18 months preparing for a no-deal outcome, which has been averted, pending final approval by the European parliament.

Business Insider previously reported warnings by grocers and retailers that a combination of the coronavirus and uncertainty over whether a deal would be struck meant they could not be operationally ready for January 1.

Digital businesses also face continued uncertainty, waiting for final agreements on how data transfers with the EU will work, and whether the UK’s financial sector can continue to trade freely with the bloc. They must also navigate a more complex tax environment, and will find it tougher to attract talent from outside the UK.

It is galling for the British tech sector, which attracts by far the bulk of venture capital investment in Europe and boasts the biggest number of unicorns on the continent. In 2020, it attracted $12.4 billion in investment, compared to $5 billion each for France and Germany, per Atomico’s State of European tech report.

Founders who spoke to Business Insider criticized the last-minute nature of the deal, and questioned the UK’s viability as a tech and business hub in the long term.

Financial startups have expensively prepared by setting up abroad

One major gap in the deal is clarity on the future of the financial services industry.

We recently reported that the financial industry felt abandoned during to-the-wire Brexit negotiations, despite its world-leading stature, and contribution of around 7% of UK GDP and over 1 million jobs. The industry also comprises financial startups, a bright spot for the UK’s overall tech sector.

Harry Franks is the chief business development officer and founder of Zego, a fast-growing insurance startup that focuses on on-demand firms like Deliveroo and Uber.

Prior to Brexit, firms like Zego could sell their services freely across the EU in a system called “passporting.” Passporting ends for UK firms on January 1, and the precise terms under which financial services companies can conduct business with the EU have yet to be agreed.

Franks and his team at Zego spent the last couple of years expensively preparing for the worst outcome of a no-deal Brexit.

“What we’ve done over the last 18 months is set up regional entities within Europe to continue writing business within Europe,” he told Business Insider.

That has cost time, money, and brought the startup into conflict with slow regulators.

“We worked hard to get set up in the Netherlands,” he said. “The Central Bank of Ireland were just too slow, so we couldn’t do it in Ireland.

“We were prepared, but we were prepared for a no-deal. Until we actually know what’s going on [for financial services], there’s no real impact for us. The damage was done at the moment we decided Brexit was happening.”

Franks added that the startup, which is backed by venture capital and was loss-making in 2019, “spent a vast amount of money” on legal fees and “task forces” to prepare it for the complexities of Brexit. Although the majority of the insurance startup’s business is with UK customers, Franks sees European growth as highly important.

He continued: “My personal sense is that the government has no true understanding of the impact of this on real businesses … [Brexit voters] don’t understand the real impact on companies that are doing so much to grow, scale, launch. My general feeling is pretty negative. Like many, whether it’s on COVID-19 or Brexit, I feel completely helpless.”

The UK is set to drive away the very businesses it wants to attract

Martin Taylor, deputy CEO of Content Guru, was equally unimpressed and described the deal as “skinny.”

“I wish there were more people with real business experience in government,” he said. “There’s nobody who’s a real business person, therefore they don’t understand the concerns of running a business.

“Building and running organizations at meaningful scale requires a lot of planning and organization, and from what we see of government, they don’t possess those skills.”

Content Guru is a UK-headquartered cloud services firm, posting pre-tax profits of nearly £1 million ($1.4 million) on £18.8 million ($26 million) in revenue in the year to 31 December 2019. It is the type of company that the UK government publicly claims to want to nurture and attract.

But Taylor said Brexit preparation had cost the business £5 million ($6.8 million).

While it was still part of the EU, the UK complied with the bloc’s strict data privacy regime, making it easier for British digital businesses to deal with users based in Europe. With the UK breaking away, the EU will need to determine if the UK is up to snuff privacy-wise and, in a worst case, halt cross-border data flows. For any UK business storing names, email addresses, and other types of personal data on European users, this is a potential nightmare.

The issue has not been resolved by the current deal. The EU and the UK have failed to reach an agreement on data protection so, for the next four to six months, businesses can transfer personal data as they did before. That is still under a cloud of uncertainty about the future, however.

Like Zego, Content Guru has prepared for a no-deal scenario.

“We had already taken the medium-bad case scenario that we simply wouldn’t be able to provide services from the UK for European customers, we couldn’t guarantee that we could,” said Taylor.

Content Guru has, accordingly, shifted to new data centers inside the EU. That is, ironically, money that could have been spent in the UK, added Taylor. “Having spent that money, we’re not going to bring it back here. From Britain’s point of view, that investment has already been made.”

Promising tech firms will reconsider headquartering in the UK

The UK and Europe as a whole still remain far behind the US and China in terms of cash invested in emerging tech, as well as the number of domestic tech firms going public.

This, purportedly, remains a priority for the UK government which has stated an ambition to build a $1 trillion tech firm. Prime Minister Boris Johnson has also reportedly lobbied UK unicorns, such as neo-bank Revolut and food delivery firm Deliveroo, to list in the UK.

But both Franks and Taylor agree that the UK will become a less attractive place to set up and run a business.

“If they don’t get this right, there comes a point where it’s better to be set up in the EU or the UK,” said Franks. “For us, it’s currently the UK, and the business might shift. I wonder what the government might think … It’s a lack of long-term thinking.”

Taylor said Content Guru was considering moving its headquarters.

“We’re thinking of headquartering in Europe, or perhaps in the US,” he said. “Exposure to the UK is a devaluing factor when [financial] analysts review organizations. Only we are attached to Britain — the industry as a whole is not.”