UK-wide (and Scotland is no exception) Brexit has raised many uncertainties – never well received in this typically cautious arena.  Possible loss of passporting rights – which facilitate the operation of UK businesses across Europe without the need to establish a separate subsidiary – is the hottest topic.  To establish a new sub in another country is not insurmountable but should this prove necessary businesses will face significant practical, and costly, issues – the need to transfer assets from one entity to another is a complex regulatory process.  The extent to which the business would need to relocate is also a major concern, for employers and staff alike.  How much of a firm’s operation will, and can, remain in Scotland?  The risk of the loss of material financial services resource from Scotland’s economy is something that both the Scottish Government and trade bodies are fighting to minimise.

There are alternatives, but all have their challenges.  Switzerland, for example, relies on a number of trade agreements with the EU but subsidiaries are necessary for its banks to gain access to the EU market. “Equivalence” is an alternative whereby banks can operate in the European single market as long as British and EU regulations are compatible. Equivalence status can be withdrawn at 30 days notice, however, so is unlikely to give sufficient security to financial institutions. A “hybrid” arrangement could be achieved requiring the UK having to accept all future EU regulations which affect financial services.

And when will Article 50 be triggered? The Government’s stated aim is around March 2017. However, the recent ruling that the Government requires parliamentary approval is likely to delay the process. The Government is expected to push for a grace period for banks to adopt any new arrangement.  In short the only certainty is continuing uncertainty, which will be destabilising and it could be a number of years before any change is put into effect.

The dissatisfaction of the Scottish Government with the decision to leave the EU is well known as is its desire to do all within its means for Scotland to remain part of the single market. Ultimately, this may result in a second referendum on Scottish independence.

So how is the Scottish financial sector faring in this daunting environment?  Today, many of Scotland’s innovators are to be found in the financial sector. With its highly trained workforce and technology focus, there is a feeling of confidence that Scotland will develop a key presence as a financial services technology hub, whether or not subsidiaries are required to gain access the single market.  Technology and modern communications mean that there is no reason why the majority of work cannot still be carried out in Scotland.  The inherently cautious FS sector is now, finally, engaging with cloud sourced products and services and so, achieving operational benefits including scalability.  The sector has been buoyed by fairly positive FCA guidance issued during the summer on cloud outsourcing, but practical questions remain over compatibility with core regulatory requirements, particularly around control and access to data. From a commercial perspective we see this as a dynamic and evolving area for 2017.

Application programming interfaces (APIs) are making a significant impact. For financial services, this allows banks to streamline their processes. In turn, it facilitates what will, in our view, be the biggest topic and challenge of 2017 – Open Banking.   Government and EU initiatives have determined to open up access to data held by banks to stimulate competition and innovation in the sector.  Already we are seeing some exciting ideas from Scottish businesses eager to be at the forefront of these developments.

Fintech disruptors are leading new competition, and major financial institutions will have to adapt to a market which is continually changing if they are to enjoy continued growth. Our experience is that banks recognise this, but as with all large, regulated institutions, face challenges of agility. Nevertheless, we are now seeing banks investing increasingly in new technology and beginning to partner more effectively with smaller fintech SMEs.  If Scottish banks can continue to back promising fintech startups and innovate with their internal process, Scotland can realise its ambition to become a centre for fintech enterprise.

Post-Brexit it has never been more difficult for businesses or advisers to predict the course of events or the best path to take. However, with its emerging tech hubs and highly experienced resource pool, the Scottish financial services sector is well placed to tackle these challenges, continue to create jobs and stimulate the economy into 2017 and beyond.