Future of Financial Services Post-Brexit – Challenges and opportunities

Miles Celic's speech to the 7th International Financial Markets Conference organised by the Ministry of Finance of the Republic of Lithuania and the Lithuania Financial Markets Institute.

Good morning and thank you for inviting me to join you today. It is good to be here in Vilnius to talk about the future of financial services at what is a historic time for our industry.

I’m particularly pleased to be here in Lithuania given the ever-strengthening links between the British and Lithuanian industries.

The FinTech sector here is among the most exciting in Europe. And in the UK, we are privileged to be the home for more than 200,000 Lithuanians, many of whom work in the British financial and related professional services ecosystem. In doing so, they make a key contribution to what is the world’s leading talent pool for our industry.

I have no doubts that the links between our industries will continue to deepen, as the UK, Europe’s biggest international financial centre strengthens its relationship with this, one of Europe’s most innovative and forward-looking.

And so this is a timely and important conference, with a theme that goes to the heart of my own organisation’s mission – to represent and promote an industry that makes up 10% of UK economic activity and employs more than 2.3 million people around Britain.

And so it will come as no surprise that the UK’s relationship with the EU is something that is of great importance for our industry. A relationship that - we argue - must not lose sight of the interests of citizens, customers, shareholders and employees.

And so, we have consistently argued for a bespoke future arrangement with the EU, that goes beyond the limitations of the current system of equivalence. We have worked with policymakers in the UK and the EU-27 to emphasise the need for:

  • First, delivering a Withdrawal Agreement, in order to provide a legally-binding transition.
  • Second, a bespoke future relationship agreement that delivers the best possible mutual market access.
  • Third, continued mutual access to talent and skills.
  • And, as we prepare for any eventuality, the resolution of technical cliff-edge issues, such as contract continuity, which should not be caught up with the wider Brexit negotiations.

Different parts of the industry ecosystem will have specific needs and requirements from the Brexit negotiations, but the final arrangement will need to work for all parts of the industry and its clients and customers.

So we urge both parties to view the UK-EU Political Declaration published in November last year as only the starting point for an ambitious agreement which recognises the importance of cross-border financial services activity. An activity that is a key driver of prosperity across the whole of the Continent.

In particular, it is important to have continued mutual access to corporate and wholesale financial services and capital markets, where cost savings and efficiencies benefit both UK and EU businesses, consumers and economies. This agreement should be as ambitious and should include the ability for expansion of that ambition in the future.

The worst-case scenario - as we all know - is a “crash-out Brexit” without key issues being agreed, such as decisions on data adequacy and equivalence. A no-deal Brexit would lead to an immediate reduction of access to EU markets and bring more uncertainty, higher risks, disruption, and significant adverse economic impact for both the UK and EU.

If we do manage to avoid a “no deal” outcome then we should be in no doubt about the scale of the task ahead of us. There is much still to be negotiated to define the future relationship. The sooner we can get started, the better.

So against that backdrop, I would like to share some thoughts with you on the future of financial services and to consider the various challenges and opportunities that we in Europe will face in the years and decades ahead.

Because the reality is that - for our industry - Brexit is in many ways less a foundational event and more a strategic accelerator. It has acted as a catalyst and a multiplier of trends that we have been grappling with for some time: technological change, shifting customer expectations, and the ongoing economic rise of Asia to name just three.

And these are factors that will influence and shape how our industry plays its traditional socio-economic role of helping drive prosperity, manage risk and work with people to secure their futures.

Irrelevant of the outcome of the Brexit negotiations the UK, Lithuania and the rest of the EU Member States will share these common challenges.

Some of these challenges will also bring huge opportunities to European financial services post-Brexit. In particular, I wanted to focus today on:

  1. the structure for the future cooperation between the UK and the EU
  2. capital markets
  3. FinTech
  4. and finally, sustainability.

Firstly, future cooperation between the UK and the EU
The challenges I’ve just spoken about our shared challenges. British regulators already work closely with counterparts in the US, Asia and many other jurisdictions in examining these. I fully hope and expect that in the future there will continue to be an open and collaborative relationship between British regulators and their European colleagues.

This is a relationship that is critically important if we are to continue to help promote financial stability, avoid regulatory arbitrage and duplication, help to efficiently mitigate and manage risk and to support economic growth in both the EU and UK.

Many financial services firms which are based in the UK already have a considerable presence in the EU27 serving European customers and are subject to European supervisory and regulatory mechanisms such as the SSM. Many more are building their EU27 legal entity footprints. Similarly, a great number of EU27 firms benefit from a UK presence. Therefore, our key priority is for continued close integration of our industries with the overall goal of supporting both the EU & UK economies. We must seek to minimise unwarranted fragmentation of financial markets that would increase economic costs, undermine financial resilience and lead to less consumer choice.

And, as international standards continue to develop it is vital that the UK plays an active role in collaborating with regulators in the EU and elsewhere in helping shape those standards.

Secondly, Capital Markets

Capital markets are a vital source of funding for business in addition to bank lending. Deep and liquid capital markets provide engines for economic growth and job creation.

European capital markets are fragmented across many domestic markets and remain less developed compared to the US. For example, outstanding debt securities issued by non-financial corporations in the EU are about a third of US levels, and total stock market capitalisation is only half.

And European businesses remain heavily reliant on bank lending. Europe can remain competitive on the global stage, compared to the US on one side and Asia on the other, only with sustained economic growth and job creation. This requires well-directed investment which, in turn, is promoted by a well-functioning capital market.

Although progress has been made on Capital Markets Union further work must be done to fully realise the potential of Europe’s capital markets. European capital markets are highly interconnected and are fundamental to funding and managing the economy. As we go forward, we must explore ways in which we encourage flows of capital across borders and seek to learn from the experiences of others. The development of a pan-Baltic capital market may well provide valuable lessons.

According to the latest Z-YEN Global Financial Centres Index, five of the top 10 European financial centres will be outside the EU post-Brexit. So, it is in Britain’s interests for there to be a successful EU Capital Markets Union. It is also in the EU’s interests to be able to have the best possible access to capital markets in the UK, Switzerland and elsewhere.

By enlarging the aggregate pool of capital, removing frictions between markets within the area and establishing a strong, fluid network, as well as further strengthening and developing each local market we can accelerate progress that will ultimately underpin prosperity across Europe.

SMEs would benefit from improved capital markets access through specialised platforms, stronger local markets and an interlinked pan-European network. They would find it easier to raise capital and depend less on bank lending.

These outputs would also help the development of FinTechs, who are in themselves an engine for innovation and competition in the financial sector.

Which brings me to my third focus:
FinTech has been the dominant high growth area for financial services throughout the past decade and it is an area where Europe has established itself as one of the leading regions.

On the UK side, we continue to go from strength to strength as a place which encourages innovation and welcomes the opportunities unleashed by FinTech. While we can’t boast consistency year on year, 40% growth in FinTech like Lithuania has, we are making our own modest contribution.

The UK FinTech sector in 2017 – a record year - saw a 154% increase in year-on-year investment; the British Financial Conduct Authority launched in August last year its Global Financial Innovation Network, taking the lead on the global stage; and almost a year ago today, the Government launched its FinTech Sector Strategy. London’s FinTech sector has grown faster than Silicon Valley for the last five years and last year attracted more investment.

Looking at FinTech from a Lithuanian perspective there are over 170 FinTech companies based here with around 2600 people employed in the industry, and Lithuanian FinTech companies are securing a leading reputation in payments, cyber and blockchain. The work of initiatives such as Barclays rise is enormously exciting. But, international competitors are fast on our heels, particularly in the South Asian markets, where for example Singapore is seen as highly innovation-friendly and as having a supportive regulator.

If we in Europe are to succeed, we must play to our natural strengths. In the UK we have shifted from a focus on disruption to one on collaboration between established players and FinTechs. This recognises that the growth of UK FinTech is in part due to the encouraging regulatory environment and consumers’ widespread digital adoption – factors we also see here in Lithuania.

But it also recognises the fact that the blend of talented FinTech start-ups we have in the UK, sits right alongside some of the world’s leading corporates and financial institutions. This has enabled a unique approach to FinTech evolution, which harnesses the disruptive potential of FinTechs with the in-depth knowledge and scale of established players.

The embrace of collaboration also rebuts one of the pervading myths in this field – FinTech is not seen as some sort of apocalyptic threat by established providers, in reality, they see FinTech, and the associated innovations, as an area of major opportunity. Many established providers regard the FinTech community as a source of inspiration. There is a desire and an excitement to engage and work hand-in-hand with FinTech start-ups to bring about the many customer benefits which can be secured through these technologies.

Unfortunately, that does not mean it is completely plain-sailing. There are always challenges alongside any opportunity. Barriers that impede collaboration include misalignment of business models or inappropriate cultural fit. In many instances, the FinTech start-ups and the incumbent financial services firms come from very different backgrounds or approaches.

But, as a recent TheCityUK report highlighted, these barriers can be successfully overcome. There are in fact a spectrum of different solutions: these range from sandboxes and corporate accelerators, through to FinTech product sourcing and JVs, as well as venture capital and M&A.

What is more, the collaboration at the heart of such partnerships may, in fact, help to provide solutions to some of the biggest challenges currently facing the financial services ecosystem.

For the FinTechs, we are aware that funding can still be a challenge, especially for those looking to reach the next stage of maturity. These partnerships should be seen as the gateway to another potential pool of capital.

While from the perspective of established providers, these partnerships can circumvent many of the difficulties associated with legacy systems and help to broaden our appeal to the wider range of talent which is needed for FinTech adoption.

This particular issue will be critical to the longer-term success of both the UK and Lithuania. A pipeline of talent is paramount to enabling financial services firms to embed and utilise FinTech innovations.

Another TheCityUK report highlighted that this requires both individuals with deep technical skills, such as coding, AI, augmented reality, and a wider workforce which has the tech literacy to understand and rely upon FinTech based platforms and processes.

Securing access to these skills is not guaranteed and the financial services sector must realise that it is and will continue to be competing against many other industries and sectors for the same tech talent. Some of these other industries have historically had more formal arrangements in place with universities to secure their future recruitment.

Further, tech firms and others can sometimes be perceived as more attractive or innovation-friendly than financial services. A recent Deloitte report identified that students expected to find innovation less in banking than in many other industries.

I saw this for myself last year in Silicon Valley - many leading FinTechs are finding it harder and harder to attract or retain talent in the face of competition for staff from Big-Tech firms. As we all know, this perception is far from reality.

There is, therefore, a need for the industry to help sell financial services as a career path which welcomes a wide variety of dynamic tech talent. And longer term, we need to foster a more visible pathway from early learning to the FS workplace. Representatives of the industry must especially reach through into schools and help careers advisors to set out the range of careers which are possible.

It also means being willing to change culturally by being more diverse, particularly in recruitment, and casting a wider net, with a specific strategy for attracting talent from other sectors.

And last but certainly not least, it means proactively trying to tackle the gender imbalance which exists at the school and university level by establishing in-house diversity initiatives or supporting ongoing schemes, recognising that diversity is not just about gender.

Finally, Sustainability

TheCityUK highlighted the risk of Europe falling behind our international competitors in the area of sustainability and green finance, in which both the UK and Europe play a leading role. In order to progress our achievements to date, we must have a strong commitment to industry-wide standards for impact reporting and transparency, sending a clear signal about global leadership.

In September 2017, TheCityUK along with the Imperial College London Business School launched a report ‘Growing green finance’. It made the case for our industry to better seize its position as an innovation in Green Finance and argues that the sector should become an integral part of mainstream financial markets and global capital markets.

I know the green economy and green investment are among the priorities of Lithuania’s Development Strategy 2030. The project initiated between the EBRD and the European Commission will be helpful in assessing best practice in this field and to prepare the most comprehensive strategy. Moreover, this vital and urgent challenge is one where states and industries must put aside politics so that we can all play our part in tackling this unparalleled global risk.

The scale of the task – and the opportunity – is enormous. This is one of the fastest growing forums of investment and the increasing demand for impact investment is a sign of how urgently society and customers are engaging with this challenge.

So in conclusion:
Our industry is one that thrives on change. Although there are a number of challenges that we face, we will continue to adapt in order to best serve our customers, clients and to play our historic role of contributing to the wider economy.

The focus should be on working with domestic and international policymakers to ensure shared challenges are met and to harness the mutual economic benefits of cross-border financial services.

As part of this, there is a critical need to promote global regulatory coherence, as well as emphasising the need to avoid fragmentation of global markets.

Initiatives such as Lithuanian’s development strategy 2030 and the five strategic directions outlined by the Board of the Bank of Lithuania will be immensely helpful in setting out a clear strategic direction for how Lithuania’s FRPS industry plays its role in tackling the risks and seizing the opportunities of the coming decades.

Supporting this will be the strong pipeline of talent in Lithuania, with 84% of young professionals speak fluent English, 52 % of the population speaking at least 2 languages and 31.5k IT professionals of which - as I mentioned earlier - 2,000 employees already work for FinTech companies.

As we move forward we must ensure that collaboration, openness and innovation are at the forefront of our minds, not only in the UK and Lithuania but across Europe. It is this that will secure our shared future success. I look forward to working with you to achieve it.

Thank you.