"In 2019, the UK officially leaves the European Union (EU), signalling the single biggest shake-up of the country’s economic and political landscape in a generation."
For all the achievements the London tech sector has to shout about, there is no avoiding one particular elephant in the room. In 2019, the UK officially leaves the European Union (EU), signalling the single biggest shake-up of the country’s economic and political landscape in a generation.
Every sector of the economy will be affected one way or the other, just no one is quite sure how. Much will depend on the terms on which the UK leaves and what its relationship with the EU looks like afterwards. If the country remains within the European Economic Area (EEC), business and industry should largely carry on as normal. If it leaves without a deal, there could be widespread disruption to trade, inward investment and the ability to source talent from our nearest neighbours, amongst other things.
Another possibility is that the UK will seek to join the European Free Trade Association and then negotiate trade deals with the EU on a sector-by-sector basis. Given the strategic priority of digital industries across the continent, and London’s position as Europe’s biggest tech hub, it would make sense for both sides for the UK to remain within the proposed Digital Single Market even after Brexit.
The lack of certainty and clarity surrounding Brexit’s impact was evident in the responses we received to our London Tech Week Survey. The majority of participants said that leaving the EU would have a negative impact on their business, although only 16% felt this effect would be major compared to 46% who rated it as minor.
This compared to 24% who expected Brexit to have no impact at all, and just 14% who thought it would be a positive.
Some of the key concerns surrounding Brexit centre on regulation, trade and how they will both affect the way investors from across the globe view the UK. Should the UK not find its way into the Digital Single Market, there is a suggestion that London could look a less attractive proposition for investment than continental rivals such as Paris, Berlin and Stockholm.
The Digital Single Market is intended to align rules in areas such intellectual property, data protection, cyber-security and content distribution. From an investment perspective, it would remove some of the last remaining barriers to digital growth across Europe, making trade and transactions across borders seamless and efficient. Outside this club, the UK could not boast the same benefits.
Similarly, the presence of new trade barriers between the UK and its continental neighbours could make procurement more difficult and increase costs. The tech sector relies on a complex supply chain ecosystem, much of it criss-crossing borders. New tariffs and duties on those things the UK tech sector buys in from Europe, from hardware to SaaS solutions, could hit profit margins. And while the biggest, most established players might be able to ride this out, less liquidity in the start-up sector could restrict the country’s proud record in IT innovation.
On the other hand, the UK has taken a lead on creating a regulatory landscape that has supported growth and investment in its tech industry. In the FinTech sector, for example, the Financial Conduct Authority (FCA) has prioritised supporting the UK in becoming a global leader in innovation, through initiatives like its Regulatory Sandbox for testing compliance of new products and encouraging RegTech development.
Similarly, the UK’s Competition and Markets Authority (CMA) was instrumental in the introduction of the Open Banking Standard, which aimed to open up the financial markets to innovative new players by forcing large institutions to make their data available via secure APIs. Open Banking is now integrated with the EU Payment Services Directive.
This helps to explain why, when it was put to them that the UK tech sector was ‘Brexit-proof’, only half of our London Tech Week Survey respondents disagreed - considerably less than the number who thought Brexit would have a negative impact on their business. 31% had a neutral view on the matter, and 21% agreed that the tech sector was indeed immune to the Brexit fall-out.
It is clear to see where the optimism comes from. A supportive regulatory environment is just part of the picture. As we have seen, the London tech sector in particular continues to pull in huge investment from all over the world. If any industry can ride out the uncertainty of Brexit, and perhaps hold up other parts of the economy with it, many analysts believe UK tech has the profile, the talent and the momentum to do it.
Sources:
http://www.nortonrosefulbright.com/knowledge/publications/136983/impact-of-brexit-on-technology-and-innovation
https://www.infinityit-solutions.com/news/how-brexit-will-impact-the-uk-it-industry/
https://www.dlapiper.com/en/uk/insights/publications/2016/04/brexit-at-a-glance/brexit-tech/
https://www.wired.co.uk/article/open-banking-cma-psd2-explained