Innovate Finance Post-Brexit Member Survey

1. Post-Brexit Member Survey FRIDAY 1 July 2016

2. | Introduction and Background FinTech Survey Results High Level Impact Assessment S1 S2 S3 FinTech Survey Verbatim S4 S5 CONTENTS All Members’ Survey Summary 2

3. S1. Introduction and Background

4. | S1. Introduction and Background (1 of 4) 4 § On 23 June 2016, the UK held a referendum to decide whether to remain or leave the European Union (EU). The UK public voted 52% to 48% to leave, a result we must all respect. Nevertheless, uncertainty created by the votehit the global stock, bond and currency markets § The pound is at a 30 year low and UK government bonds are in negative yield territory. With a revised forecast for negative growth, the macro situation remains uncertain § UK stocks have recovered with the FTSE 100 up 7.2% for the week, the best performing week since Dec 2011. The FTSE 250 gained 2.3% over the week § The S&P rose 3.2% for the week and recouped almost all of its post-Brexit losses § Venture Capital into UK FinTech showed signs of slowing before Brexit, indications suggest VCs are still committed to UK FinTech, but are focusing on existing portfolio investments over new ones in the short term § Corporate Venture Capital (CVC) and Financial Institution investment into FinTech remains firm though uncertainty over the UKs future in the Single Market has driven UK contingency planning § London is the financial services and FinTech capital of the world and will remain a dominant force § Since 2008, the UK government has successfully promoted greater competition in financial services and driven the digital innovation agenda across London and the UK

5. | S1. Introduction and Background (2 of 4) 5 § The UK financial services regulator, the FCA, has led the way globally with Project Innovateand the Regulatory Sandbox, dedicated to accelerating FinTech prototypingand regulatory authorisations, and helping to secure the UK’s position as the global FinTech sandbox and innovation hub § To ensure we do our utmost retain our position as the leading global FinTech hub, Innovate Finance has surveyed its global membership to understand the key issues FinTech faces during this time of post-Brexit uncertainty § During the week of 27 June 2016, a digital survey was conducted with our start-up members and interviews were conducted with our institutional members § In addition, we have spoken to key participants in the global ecosystem including national and local government and supporting agencies, venture capital and global FinTech hubs § In total, the survey and interviews represents ~30% of the 250 strong membership, and we have left the survey open as we continue to receive responses § This presentation is the first draft of the results of the survey which delivered a clear set of post- Brexit priorities from across the UK (global) FinTech membership : § Ensure access to investment capital and liquidity (FinTech Members) § Ensure access to single market and Passporting regime (All Members) § Ensure access to talent (All Members) § Ensure coordination and convergence on payments area and Data Framework (All Members)

6. | S1. Introduction and Background (3 of 4) 6 § These results will be presented to the national and local government and the global community on behalf of Innovate Finance members as key membership priorities in a post-Brexit environment § By communicating these priorities on behalf of the membership, InnovateFinance hopes to draw attention to the importance to accelerating the development of the UK Brexit roadmap as it relates to FinTech § To remove uncertainty through the delivery of a Brexit Blueprint that includes single market access and financial services passporting § To deliver a vision for the UK in Europe as it relates to FinTech § To deliver leadership through communicating this intention at the earliest possible opportunity § InnovateFinance and our members and partners are on call and available to support the government, the community and the ecosystem in any way possible to accelerate the planning and development of our FinTech future

7. | S1. Introduction and Background (4 of 4) 7 21.0% 4.8% 9.7% 3.2% 12.9% 22.6% 12.9% 3.2% 12.9% 12.9% 11.3% 14.5% 17.7% 16.1% 9.7% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% CapitalMarkets ChallengerBanks Crowdfunding CyberSecurity DigitalCurrency& Blockchain EnterpriseSoftware FinancialInclusion& Education Insurance MoneyTransfers& FX Payments Peer-to-Peer PersonalFinancial Management RegTech SMEFinancing Other(please specify) 42% 33% 13% 8% 4% US: UK: Europe: India: Australia: § Innovate Finance has a UK based global membership of over 250 member § FinTech start-ups and momentum members represented in this survey can be found across 15 FinTech verticals, the top 5 are: § 22.6% - Enterprise Software § 21% - Capital Markets § 17% - RegTech § 16.1% - SME Financing § 14.5% - Personal Finance Management § Institutional members representedin the survey, from Retail to Capital Markets and Investment Banking, are domiciled across 5 global geographies: § 42% - US § 33% - UK § 13% - Europe § 8% - India § 4% - Australia FinTech Members* by FinTech Vertical Institutional Members by Geographic Domicile *FinTech Members = A representative sample of Innovate Finance’s 200 FinTech startup to high-growth members

8. S2. All Members’ Survey Summary

9. | 9 Ensure access to investment capital and liquidity (FinTech Members) § Access to capital and liquidity is at risk for start-ups and momentum plays § Uncertainty gives investors pause for consideration. From anecdotal evidence of Brexit, clauses to VC/ CVC investor appetite in UK FinTech softening, investor confidence must be restored § State-backed risk capital is at risk as we withdraw from European Frameworks such as the European Investment Fund pulling back from supporting aspiring UK Venture Capital funds in the wake of the Brexit vote. The UK government (British Business Bank) may need to step up to help plug this gap *All Members = A representative sample of all Innovate Finance’s 250 membership base S2. All Members’* Survey Summary - Priority

10. | S2. All Members’ Survey Summary - Priority 10 Ensure access to single market and Passporting regime (ALL Members) • 20% of Innovate Finance members are authorised to use passport regime • Exclusion from the single market of 500 million people will be a further barrier to UK FinTech companies scaling to access a greater market, including the plans for the Digital Single Market (DSM) and the Capital Markets Union (CMU) capital market union • The access to the Single Market will also be important in helping to secure the 2.1m jobs in the UK – 7.2 per cent of workers – that are in the financial services, 66k of which are FinTech jobs • The loss of financial services passporting may force firms to relocate operations and employment into EU locations

11. | S2. All Members’ Survey Summary - Priority 11 Ensure access to talent (All Members) § Over 30% of the UK’s FinTech human capital is from the EU and overseas § FinTech human capital has complex skill sets, such as advanced computer science, regulatory understanding and knowledge of capital markets processes, and it is dependent on domain knowledge § EU FinTech talent could face post Brexit UK VISA barriers and may be tempted to other European hubs, New York or Silicon Valley

12. | S2. All Members’ Survey Summary - Priority 12 Ensure coordination and convergence on payments area and Data Framework (All Members) 1 of 2 § Brexit could mean restricted access to the Single European Payments area for UK payment service providers § Firms need to be authorised under the PSD in the relevant EU member state, which could have a significant cost impact on businesses § Data sharing via API’s (the EU Payment Services Directive 2 PSD2) makes it mandatory for Banks and Financial Institutions to share data with third parties. In the event of Brexit UK based FinTech companies will be outside of the EU PSD2 area. Firms may need to relocate or open a separate company in an EU country to get the benefits of payment data sharing

13. | S2. All Members’ Survey Summary - Priority 13 Ensure coordination and convergence on payments area and Data Framework (ALL Members) 2 of 2 § The new data protection regulations, which are due to come into force across the EU within the next two years, sets out hefty fines for data breaches. These would not apply in the UK if it were no longer a EU member, but would affect UK businesses operating in the EU § Without EU co-ordination on data privacy and issues such as cyber security, banks could be exposed to greater complexity in dealing with Europe-wide data issues

14. S3. FinTech Survey Results

15. | S3. FinTech Survey Results 15InnFin FinTech Member Post-Brexit Survey June 2016 3.30 3.95 3.95 4.02 4.08 4.30 4.43 4.46 4.54 4.65 1.00 2.00 3.00 4.00 5.00 Access to EU grants PSD2 implementation Promotion of traditional and alternative SME lending Defined trading terms with non EU countries Coordination on Financial Crime (e.g. for KYC) Continuation of General Data Protection Regulation (e.g. for data transfer / storage / cloud services) Passporting across EU states (e.g SEPA / MIFID) Free movement of labour / access to EU talent Access to the EU single market Access to international capital and investment into sector The following are critical ongoing success factors for UK FinTech: Strongly Disagree Strongly Agree Neither Disagree or Agree Disagree Agree

16. | S3. FinTech Survey Results 16 2.79 2.87 2.90 3.05 3.16 3.18 3.19 3.37 1.00 2.00 3.00 4.00 5.00 Greater M&A activity in the sector Greater access to capital Regulatory independence Ability to negotiate favourable trade deals with EU member states Greater collaboration between institutions and startups Ability to negotiate favourable trade deals with new markets More targeted immigration policies focused on attracting highly skilled labour Better business and investment taxation The following are new opportunities for UK FinTech: InnFin FinTech Member Post-Brexit Survey June 2016 Strongly Disagree Strongly Agree Neither Disagree or Agree Disagree Agree

17. | S3. FinTech Survey Results 17 19.0% 9.5% 23.8% 34.9% 12.7% Strongly Disagree Disagree Neither Disagree or Agree Agree Strongly Agree 0.0% 10.0% 20.0% 30.0% 40.0% In light of the EU referendum result my company is considering relocating jobs / expanding the team primarily outside of the UK Strongly Disagree Disagree Neither Disagree or Agree Agree Strongly Agree InnFin FinTech Member Post-Brexit Survey June 2016

18. S4. FinTech Area Impact Assessment

19. | S4. High Level Impact Assessment 19 Access to Capital at risk § Access to capital and liquidity concerns are paramount for start-ups and momentum players. We risk lower venture capital inflows for an extended period of time, which hurts investment, growth, and prosperity of the sector § Many of the momentum players in our ecosystem are pre-revenue, working capital is critical

20. | S4. High Level Impact Assessment 20 UK FinTech Investment and FDI levels would be put at risk by Brexit § A potential consequence of Brexit would be that foreign investors would look increasingly to EU based companies to invest in. This would occur just at the point when US PE/VC investors have become the lead investors in UK FinTech Series A and subsequent funding rounds, having become convinced and confident of the viability of investing in international scaling of UK FinTech companies. Examples: § Funding Circle: – Blackrock New York, DST Global New York (ex Moscow), Temasek Holdings Singapore, Ribbit Capital Palo Alto, Sands Capital Ventures Arlington VA § WorldRemit:- Accel Partners Palo Alto, Project A Ventures Berlin, Silicon Valley Bank Santa Clara, TCV Technology Crossover Ventures Palo Alto, TriplePoint Venture Growth Menlo Park. Union Sq Ventures New York, two UK investors Baillie Gifford and Index Ventures

21. | S4. High Level Impact Assessment 21 State backed venture funds at risk § The European Investment Fund Owned by the European Investment Bank (EIB), invests in a wide range of public and private banks and financial institutions and plays, a crucial role in the creation and development of high-growth and innovative SMEs by acting as a fund of funds investing in venture capital and private equity firms across the continent § The EIB agreed to invest £100m into UK SMEs through the Funding Circle platform and SME Income Fund from the European Investment Fund (EIF). Future of this programme, which is now in doubt

22. | S4. High Level Impact Assessment 22 Role of British Business Bank § We might well also see the EIF pulling back from supporting aspiring UK venture capital funds in the wake of the Brexit vote, and that the UK government by way of the British Business Bank may need to step up to help plug this gap. The EIF has often acted to cornerstone VC funds in the past

23. | S4. High Level Impact Assessment 23 Single Market § Financial services contribute more than £65bn in taxes to the Treasury every year – 11 per cent of total government receipts – members we have consulted believe they must be allowed access to the Single Market § This access to the Single Market will also be important in securing the 2.1m jobs in the UK – 7.2 per cent of workers – that are in the financial services, 66k of which are in FinTech jobs both areas where the UK leads the world

24. | S4. High Level Impact Assessment 24 Single Market Helps FinTech scale § Brexit would make it more difficult for UK Fintech companies to scale. For meaningful economic impact, a UK FinTech company has to grow, requiring unfettered access to the EU’s market of 500 million consumers

25. | S4. High Level Impact Assessment 25 Passport § Member State benefit from a ‘passport’ which enables them to access the markets of other EEA Member States without having to set up a subsidiary and obtain a licence to operate as financial services institution in those Member States. On this basis a financial institution which establishes itself in the UK may choose either to: § Establish a branch in another EEA Member State (the ‘host’ state), referred to as an ‘establishment’ passport; or § Carry out its permitted activities cross-border, without establishing a presence in the host Member State, referred to as a ‘services’ passport. This passport is used extensively by UK financial services institutions to access other EEA markets and by other EEA financial services institutions to access the UK markets.

26. | S4. High Level Impact Assessment 26 Capital Markets Union CMU § Many UK FinTech business models are predicated on capital markets. UK FinTech companies, with their domain knowledge generated from one of the world’s largest capital markets, are exceptionally well placed to benefit from this initiative

27. | S4. High Level Impact Assessment 27 Digital Single Market (DSM) § The DSM is one of the EU’s top ten political priorities. Its objective is to create opportunities for new startups and allow existing companies access to a market of over 500 million consumers. The EU estimates completing a Digital Single Market could contribute an additional €415 billion (£320 billion) per year to Europe’s economy, creating jobs and transforming public services as only 4% of EU Digital

28. | S4. High Level Impact Assessment 28 Freedom of Movement § Over 30% of the UK’s FinTech human capital is from the EU and overseas. EU Citizens come to the UK with ease and London attracts Europe’s most talented and highly educated. FinTech human capital has complex skill sets, such as advanced computer science, regulatory understanding and knowledge of capital markets processes, and it is dependent on domain knowledge

29. | S4. High Level Impact Assessment 29 Freedom of movement for talented EU migrants is important for scaling (1 of 2) § Having to go through either a Tier1 entrepreneur VISA, Tier 1 exceptional talent visa for digital technology sponsored by TechCity UK or Tier2 general VISA application process would severely restrict UK FinTech companies in their ability to employ the best human capital they need to succeed and grow. § EU FinTech talent would be faced with a post Brexit UK VISA maze and could be tempted to jump that particular hurdle not in the UK but by relocating to New York or Silicon Valley § Freedom of movement for talented EU migrants is important for scaling. Some kind of carve-out for financial services specifically (retaining freedom of movement and therefore the right for passporting) would therefore be very helpful

30. | S4. High Level Impact Assessment 30 Freedom of movement for talented EU migrants is important for scaling (2 of 2) § If UK Financial Services loses freedom of movement, we must ensure we can access the talent we need: creating a more liberal regime for skilled workers (esp in tech) would be a potential angle here § Three quarters of Azimo's (an online money transfer service) London staff are non- Britons. Goldman Sachs, for example, has 6,000 of its 6,500 European staff in the UK, against just 200 in Frankfurt § Before the vote HSBC said it could transfer 1,000 of its London staff to Paris and JPMorgan Chase warned that up to 4,000 of its 16,000 jobs in Britain could go. Morgan Stanley has denied a report that it is already working on moving 2,000 investment bankers to Dublin and Frankfurt

31. | S4. High Level Impact Assessment 31 Payments Although the UK is not part of the Eurozone and retains its own currency, as a current member of the EU we are a member of the Single Euro Payments Area (SEPA). SEPA is an initiative established by the European banking industry, with the aim of creating a harmonised, common market for payment processing across Europe § Current members include all 28 EU member states, the four European Free Trade Association (EFTA) members (Iceland, Liechtenstein, Norway and Switzerland), as well as Andorra, Monaco and San Marino

32. | S4. High Level Impact Assessment 32 SEPA Exit (1 of 2) § In the worst case, a Brexit could mean restricted access to the EU market for UK payment service providers and impact many FinTech start-ups § It’s highly likely that payment service providers who are not authorised credit institutions (or other categories of institution exempt under the Payment Services Directive) within the EU will need to establish a payment institution within the EU. This would have to be a separate legal entity, not a branch of a UK legal person § This entity would need to be authorised under the PSD in the relevant EU member state, which could have a significant cost impact on businesses

33. | S4. High Level Impact Assessment 33 SEPA Exit (2 of 2) § Another Key issue is the future of FinTech is European Banking Authority’s Payment Services Directive, or PSD2. That initiative sets policies for how FinTech firms and software developers can build applications that access data from bank accounts § Data sharing via API’s (the EU Payment Services Directive 2 PSD2) makes it mandatory for Banks and Financial Institutions to share data with third parties. In the event of Brexit UK based FinTech companies will be outside of the EU PSD2 area the option is to relocate or open a separate company in an EU country to get the benefits of payment data sharing. The impact of PSD2 combined with Single European Payments Area SEPA could become an irresistible reason for UK FinTech companies to relocate to the EU Area

34. | S4. High Level Impact Assessment 34 Data Protection (1 of 2) § The EU General Data Protection Regulation will still apply to UK companies dealing with the EU, regardless of whether the UK remains in the union § By retaining European Economic Area (EEA) membership post-Brexit, the UK would see little impact on the laws governing the use of personal data. Members of the EEA are subject to existing European data protection laws, so the UK could prevent the need for further red tape and bureaucracy by staying in § If not, the UK would be free to create its own legislation in this area, subject to the terms of any treaties it might enter into. The pros and cons of both options would need to be given careful consideration

35. | S4. High Level Impact Assessment 35 Data Protection (2 of 2) § The new data protection regulations, which are due to come into force across the EU within the next two years, set out hefty fines for data breaches. These would not apply in the UK if it were no longer an EU member, but would affect UK businesses operating in the EU § Without EU co-ordination on data privacy and issues such as cyber security, banks could be exposed to greater complexity in dealing with Europe-wide data issues

36. | S4. High Level Impact Assessment 36 KYC / AML § As part of on going global efforts to eradicate money laundering, the Financial Action Task Force (FATF) has established an international Anti-Money Laundering (AML) framework, applicable to all FATF members. This includes the European Commission, so even if the UK were to leave the EU, it would still be bound by FATF’s rules and would need to abide by its requirements § In a post-Brexit environment, both the UK and the EU would presumably continue to take their lead from the FATF with regard to their respective AML requirements

37. S5. FinTech Survey Verbatim

38. | S5. FinTech Survey Verbatim 38 The combination of financial expertise of the City of London and expertise in technology is unique to London and the UK and that will not change after Brexit. The ground gained by having an open and collaborative financial regulator will confirm this. The U.K. Government did a greatjob of empowering the creationof London as a fintech capital, and Brexit stands to ruin that. The most important thing is access to talent. The best thing the UK government can do now is to massively relax the immigration restrictions for anyone who is working in fintech - ie add the entire fintech sector to the highly skilled job list or give approved fintech companies special rights around fast-tracking/approving visa applications. That we continue to be the hub for fintech and continue to be the most innovative country on the planet in this sector and their support is vital to ensure we don't lose our position to the U.S The Leave vote is a challenge but an exciting opportunity. Our creative, dynamic approach to business will now be able to move forward more quickily won't be held back by a political Union that is not moving with the times Focus on the positive benefits and opportunities that may be available to strengthen the UK's global status. Fintech startups are a huge benefit to the end consumer. Now is the time to be bold, to increase the attractiveness of investing in British businesses, reduce tax and broaden access to highly skilled tech employees regardless of their nationality.

39. | S5. FinTech Survey Verbatim 39 If the UK loses passporting and the seemless access to the European financial market that it has thus far enjoyed, both the finance and technology sectors will FLOOD out of London. The cost of living here is already way too high...as a cash strapped startup, trying to hire talent on bare-bones salaries, any excuse to leave to Berlin, Paris, Stockholm, Amsterdam, or Lisbon is one that we'd jump at. The unique crucible that brings the City and Silicon Roundabout together is only relevantif its developments are scalable into the EU. Without that...talent, capital, and growth will leave in droves. Regulatory harmony across Europe will enable FinTech/RegTech companies to provide solutions that will benefit the industry as a whole. Fragmented regulations will only cause more difficulty and delays in building viable solutions. The Single Market is critically important, more so than concerns about immigration Do not halt innovation even during 'uncertainty’ - Push STEM Education FinTech functions better when markets and regulators cooperate and collaborate.Brexit threatens the ability for the UK to cooperate and collaborate with our EU neighbours. Please make sure the passporting across EU states is maintained, otherwise a lot of jobs will be destroyed in the UK Passporting is key Access to talent will be an issue Prompt agreementwith EU on terms of business, access to markets. The UK and FCA have worked for decades to carve out a niche, establish competitive advantage, nurture cooperation and create a leading global FinTech centre. This is why we came and set up in Canary Wharf - please don't throw it all away, and then throw out the baby with the bathwater.

40. | S5. FinTech Survey Verbatim 40 The UK is in a very dangerous place, both in terms of its situation with the EU but also in trying to negotiate favourable trade deals with other countries. One only has to look at China to know that any trade deal with them will be less favourable than it would be as part of the EU, China has a lot more to bargainwith than the UK as does the United States. It is also an extremely diffucult time to negotiate trade deals when the whole concept of Free Trade and Globalisation is under threat from political and social forces beyond any of our control. Brexit is a huge mistakeIf a significant part of the financial services industry is leaving the UK, FInTech will leave as well. FinTechs may even leave before that if hostile climate towards EU tech workers on the street persists. We risk lower venture capital inflows for an extended period of time which hurts investment, growth and prosperity of the sectorThe vote to leave has already had negative impact on our business Quick indication of direction is important. People are already not being considered for jobs in restof Europe because they are British, and the longer the uncertainty goes on the more companies will move out of London to Frankfurt/Paris to protect their position. We may find that we have decimated our financial sector even if we eventually negotiate favourable terms.

41. END

Innovate Finance Post-Brexit Member Survey

Innovate Finance Post-Brexit Member Survey

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