Looming Regulatory Flux A Boon For Fintechs, Says KPMG


Law360, London (August 1, 2017, 12:45 PM BST) —
Regulatory turbulence will pose major challenges for financial services providers and give a boost to the technology firms that can help them navigate the changing landscape, analysts from KPMG said on Tuesday.

The professional services firm’s quarterly financial technology study reveals that the London market has remained buoyant despite the threat of Brexit, as traditional names begin to rethink how they will cope with the logistical and legal changes starting in January 2018.

“The outlook for the U.K. is especially exciting as we wait to see just how much innovation Brexit will drive,” said Murray Raisbeck, global head of fintech at KPMG International. “As banks, insurers and asset managers reassess their business models they will need innovative tech solutions for everything from establishing a new office to engaging with staff and customers.”

Investment in U.K. fintech reached $1.4bn in the second quarter of 2017, up from $0.1bn in the same period last year, KPMG said.

This was largely a result of the $1 billion purchase of Vocalink by MasterCard Inc., which reinvigorated the previously subdued mergers and acquisitions market.

Regulatory technology, known as regtech, offers ways for firms and lawmakers to help the industry in areas such as reporting and financial crime. It continues to grow: KPMG calculated that $591 million had been invested in 60 deals in the first half of 2017.

Regtech investment has already exceeded 2015’s annual results and is on target to surpass the record for 2016, KPMG said.

The payments landscape is undergoing a major reshaping as a result of the Payment Services Directive, and many firms are reassessing their business models in preparation for Britain’s exit from the European Union in 2019.

Firms fear they will no longer be able to use London as their headquarters to serve the bloc because the U.K. will lose the right to freely passport services into the EU if there is a “hard Brexit.” If no deal with the EU is reached the U.K. is likely to lose that vital access.

“As a hard Brexit remains a possibility, many financial services companies licensed in London have started searching for possible alternative locations for operations, with Ireland, Luxembourg and Germany all high on the list,” said Anna Scally, partner at KPMG in Ireland.

“Yet while regulators are pushing major banks and insurers to come up with a ‘Plan B,’ fintechs haven’t been as quick off the mark. Expect to see fintechs increasingly focused on examining their options over the next six to 12 months,” Scally added.

Law firms have also been ramping up fintech-related activity in recent months to help firms prepare for upcoming changes including payment reforms. New benchmarking rules, ring-fencing, open banking and the formidable Markets in Financial Instruments Directive, a new rulebook for securities known as MiFID II, are also on the horizon.

In June Hogan Lovells launched a new online “lawtech” aid, a legal and regulatory product called Engage, aimed at established financial institutions and fintech firms.

The platform is designed to guide firms as they navigate the new legal landscape and to help small firms seeking authorization by the Financial Conduct Authority, Britain’s watchdog, a process which can cost more than $250,000.

“There is information overload coming out of the legal industry — most acute with GCs [general counsel], who just want a trusted, useable source,” said John Salmon, Hogan Lovells technology partner.

Consultancy Opimas estimated in January that MiFID II will cost the finance industry more than €2.5 billion to implement, with the biggest banks each spending €42 million.

Hogan Lovells launched a new regulatory mentoring program for aspiring fintech ventures in April, joining firms including Addleshaw Goddard LLP, Slaughter and May, Pinsent Masons and Simmons & Simmons LLP that have opened similar services to cater for the growing sector.

Another technology still making waves is blockchain, which continues to attract significant attention from both traditional venture capital investors and corporations, KPMG said.

Blockchain, also known as distributed ledger technology, is considered to be an evolutionary step in data and value collection, recording and transfer.

Unprecedented collaborations between traditional rivals have taken place between multinational banks, financial institutions, stock exchanges and market infrastructure providers on both the buying and selling side of the market.

Large consortia, such as R3CEV in banking and B3i in insurance, have helped catalyze interest in blockchain technologies, even as smaller groups have formed to explore individual blockchain use.

The U.K. has been leading the way through the FCA, which is nurturing around 20 blockchain-focused firms through its testing program, and a similar Bank of England venture. Governments in Singapore and the United Arab Emirates have also increased efforts to become leading blockchain hubs.

“The challenge with blockchain continues to be the lack of implemented production systems,” said KPMG. “Over the next few quarters there needs to be a shift from proving the technical capabilities of blockchain prototypes to proving that blockchain can create value by transforming different organizational functions.”

However it may mean that some blockchain and fintech firms will use London as a launchpad into areas such as Asia and the Americas, which promise greater riches, KPMG said.

“Fintech continues to evolve, with many established fintechs looking to expand their product offering and their geographic reach,” said Brian Hughes, KPMG U.S. partner.

–Additional reporting by Paige Long. Editing by Ed Harris.

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