What to know about trading in the EU post-brexit
How do you prepare for something when you don’t know what you’re preparing for? You might say such a notion is ridiculous. An impossibility. Yet UK businesses have been grappling with this conundrum since the country voted in 2016 to leave the European Union.
Although the agreement reached between the UK and EU did little to define the future for financial services, one thing is without question: the days of unrestricted access to the EU market are over.
Before Brexit, financial services regulated by the Financial Conduct Authority (FCA) could trade in any EU member state without needing a license for each jurisdiction. But as part of the withdrawal agreement, the UK had to sacrifice its ‘passport’ to the rest of the bloc. Subsequently, UK-based firms are no longer permitted to service EU clients unless they have an appropriate form of EU coverage.
It’s the biggest challenge facing British financial services in the post-Brexit landscape.
The importance of obtaining forex broker license
The loss of the UK’s passport was always a possibility. But in the absence of absolute clarity, some didn’t prepare for this outcome and others left it too late.
After a long-drawn-out period of political uncertainty, the tardy conclusion of the Brexit negotiations and the disruption caused by COVID-19, it’s no surprise many people hoped the passporting problem would somehow disappear. But it hasn’t.
If you haven’t obtained a license from an EEA regulator and you’re continuing to operate in the EU in 2021, you’re venturing into precarious territory.
Brokers regulated by the FCA only should have terminated relationships with their EU clients by 31st December 2020. If you haven’t done this then, technically speaking, you’re likely to be in breach of local regulation and risking the resulting penalties.
A proactive approach
Of course, many brokerages did anticipate that the UK would have to forego its passport as a condition of Brexit. One such business is VertoFX; a B2B currency exchange marketplace. Knowing that the UK’s departure from the EU was no longer hypothetical, the firm took a decisive, proactive approach.
VertoFX co-founder, Ola Oyetayo, explained:
“As soon as we knew that it was going to be more of a hard Brexit and that 31st December was going to be sacrosanct, we started thinking through what it would mean for us as a business if we were no longer able to passport across the EU.”
Although only about 5% of VertoFX’s business is in the EU, it was still vital for them to find a solution to the passporting problem.
“Even though we don’t have this huge concentration of customers in the EU, we had to think what Brexit would mean to that base of customers. But, most importantly, we had to think what losing our passport would mean for our future plans for growth as well.”
For VertoFX, finding an alternative way to access the EEA wasn’t only about continuation of service – it was a strategy for future-proofing the business:
“Losing our passport was less of an existential risk than a strategy. We wanted to make sure we were still able to offer our products in this large region where there’s potential to have so many customers.”
How to get a forex broker license
To circumnavigate the looming restrictions, VertoFX decided to onboard with Currencycloud’s Dutch entity, Currencycloud B.V.
In July 2020, Currencycloud secured an e-money license from the Dutch National Bank. Being regulated in the Netherlands with this type of license entitles Currencycloud to EU passporting rights. In turn, this permits us and our clients to operate unencumbered throughout the EEA, just like we were able to before the UK left the EU.
VertoFX already had an established relationship with Currencyloud, having worked with us on FX and payments since 2019. So, when VertoFX discovered they could leverage our regulation outside of their core jurisdiction to continue to provide their services, it “made sense” to transition to Currencycloud B.V.
Ola told us: “We realized we had the option to leverage Currencycloud’s regulatory and compliance services to continue to offer our FX and payments services in Europe. We did a bit more research and evaluated all the options available to us. Currencycloud was the most reasonable and cost-effective, it was a no-brainer.’
cost of obtaining forex brokerage license
Applying for a license from an EEA regulator was always a possibility for VertoFX; but it wasn’t necessarily the most advisable path.
“Going down the licensing route would mean having some sort of physical presence and, most importantly, staff on the ground”, Ola explained. “It’s an expensive option … There’s the set-up cost and the licensing cost – and the fact that you’d have to maintain a subsidiary as well.”
As VertoFX found out, the licensing process is a costly, time-consuming, resource-heavy and laborious endeavour for brokers of all sizes and means.
A license alone roughly costs GBP20,000 to GBP100,000. Depending on the type of license you apply for, you may have to meet an initial capital requirement and you wouldn’t necessarily have authority to operate in all EU states. You would also need to set up a fully operational office with a team senior enough to carry out key business functions.
Plus, whilst your application was being processed – which could take 6 to 24 months – you wouldn’t be able to work with EU clients without taking a considerable risk.
Give yourself a competitive edge
VertoFX’s seamless transition to Currencycloud B.V. will enable the firm to continue servicing its EU customer base whilst shielding them from the disruption of Brexit. It’s re-opened the door to the rest of the bloc, laid the foundations for expansion and, as Ola asserts, it has given them a competitive advantage – not just now, but in the future.
If you haven’t sorted out your EU coverage yet, leveraging the payment services provided by our Dutch entity will offer you these opportunities, too. You’ll benefit from Currencycloud’s regulation without the hassle, complexity and cost of having to apply for your own license.
You can continue to service your EU client base, confident that you are compliant. If you’re a smaller brokerage business hoping to expand, it’s an opportunity to grow at pace with minimal outlay. Learn more about how we help FX Brokers here.
