Executive Summary

In 2020, the Chancellor asked Ron Kalifa OBE (of Worldpay renown) to independently review the UK Fintech sector. The report was published on 26 February 2021, it is 108 pages long and is available for download here: The Kalifa Review of UK FinTech – GOV.UK (www.gov.uk)

The aim of the review is to provide a strategy for the UK to build on its world-leader status in Fintech in the post Brexit and post Covid world in which the UK is re-positioning its global status and is recovering from the effects of Covid, but in which mass digital adoption has been fast-tracked due to the pandemic and demand for SMEs using Fintech is high.

The focus of the review is on scaling up business rather that starting up, recognising the growth capital funding gap and that UK listings over the last 5 years are disproportionately low compared to its investment into Fintech.

The review:

  • outlines the main opportunities for and pressures facing UK Fintech;
  • proposes the creation of a Centre for Finance, Innovation, and Technology to bring about greater inter-governmental co-ordination; and
  • makes recommendations in 5 focal areas: policy and regulation; skills and talent; investment; international competitiveness, national connectivity and ‘levelling up’.

The recommendations are private sector led, with recommendations for the government intended to support and encourage private sector progress.

It has been reported that whilst we are waiting to see what the government implements from the review, the Treasury is looking at it and it has had a warm reception.  The Chancellor mentioned the review in his budget speech and recommended fast-track tech visas to give companies the opportunity to recruit at a faster rate.  Jonathan Hill’s report on the Listing Rules came out shortly afterwards.

Threats to UK Fintech

The review outlines out three broad threats facing the UK Fintech sector:

  1. Competition from other jurisdictions which are investing heavily in capital, skills and direct support for Fintech companies. These overseas centres are seeking to emulate the UK’s success.
  2. Brexit has led to a degree of regulatory uncertainty in specific areas relevant to Fintech.
  3. Covid has accelerated digital adoption globally in a way that marketing or policy never could. This has created opportunities for jurisdictions which are quickest in capitalising on opportunities for Fintech.

Opportunities for UK Fintech

The Review also sets out three opportunities for UK Fintech:

  1. Jobs: The potential to create high income tech-based employment across the UK. This could become a component of the “levelling-up” agenda and substantially contribute to the UK economy.
  2. Trade enabling Fintech companies to achieve global scale and reach via access to international markets, with the UK continuing to lead on regulation and standard-setting in fast-moving tech.
  3. Inclusion and Recovery supporting citizens and small businesses to access more, better, and cheaper financial services.

Centre for Finance, Innovation and Technology (“CFIT”)

The CFIT is intended to act as an organisational link to accelerate, scale and co-ordinate a combined approach across economic sectors to Fintech market development. The CFIT will provide pre-product development, facilitate data sharing, build partnerships between start-ups and incumbents, and create proofs of concept to be scaled.

The CFIT will also set up three industry coalitions on: SME sized enterprise finance, open finance and digital identity. These each have their own goals and specific deliverables outlined in the review.

Recommendations

The Review makes recommendations in its Five-Point Plan:

  1. Policy and regulation;
  2. Skills;
  3. Investment;
  4. International; and
  5. National connectivity.

  1. Policy and Regulation

The UK has led the way globally in its policy and regulatory approach to Fintech, which is exemplified in the regulatory sandbox which was a pioneer concept, now adopted in 50 countries across the world. The review seeks to ensure that the policy and regulatory approach continues to protect customers and creates an environment which enables growth and competition. The review therefore proposes to:

  • Deliver a digital finance package that creates a new regulatory framework for emerging technology. The UK should prioritise new areas for growth and cross-industry challenges such as financial inclusion. This includes the adoption of specific policy initiatives such as digital ID and data standards which will assist in creating an improved environment for Fintech.
  • Implement a “Scalebox” that supports firms focussing on scaling innovative technology. This would enhance the regulatory sandbox by making the digital sandbox pilot permanent and supporting partnering between incumbents and Fintech and Regtech firms and providing additional support for growing regulated firms.
  • Establish a Digital Economy Taskforce (“DET”): The DET would be responsible for collating the multiple departments and regulators which have competencies and functions in Fintech, into a policy roadmap for tech and digital, in particular, the “digital finance package”. This would provide a single customer view of the government’s regulatory strategy on tech and a single touchpoint for the private sector to engage; and
  • Ensure that Fintech forms an integral part of trade policy: The review contends that the UK must build on its successes and develop its global trade policy in relation to Fintech, ensuring a coherent and consistent approach, and securing commitments in future trade agreements that will benefit Fintech.

  1. Skills

The review highlights that there is a rich pool of Fintech talent in the UK and that as many as 67% of the fastest growing Fintech firms consider talent to be a high priority. The Review proposes to:

  • Retrain and upskill adults to meet the needs of UK Fintech by ensuring access to short courses from high-quality educational providers at low cost;
  • Creating a new visa stream to enhance access to global talent for Fintech scaleups. The review notes that if the UK does not act then it risks a significant shortage in human capital; and
  • Build a pipeline of Fintech talent by supporting Fintech scaleups to offer embedded work placements to further education and higher education students and Kickstarters.

  1. Investment

The review states that private funding has been crucial to the success of the UK as a Fintech hub and notes that more can be done to support firms at the later stages of funding. The review proposes to:

  • Expand R&D tax credits, Enterprise Investment Scheme and Venture Capital Trusts: The vast majority of founders have used tax-incentivised investment schemes, and 47% of founders were concerned about their ability to qualify for such tax relief if their business models switched from being unregulated to regulated in the future;
  • Unlock institutional capital to create a £1bn “Fintech Growth Fund” of sufficient scale to act as the catalyst in developing a world leading ecosystem:  There is a substantial Fintech growth capital funding gap in the UK and many entrepreneurs prefer to sell rather than continue to grow their company. The review notes that a small portion of the £6 trillion in UK private pension scheme could be diverted to Fintech growth opportunities;
  • Improve the listing environment through free float reduction, dual class shares and relaxation of pre-emption rights: The UK accounted for 4.5% of initial public offerings at the world’s major stock exchanges between 2015 and 2020, these measures are aimed at making the UK more competitive in Fintech initial public offerings; and
  • Create a global family of Fintech indices to enhance sector visibility:  Once enough UK Fintech companies have listed, a UK index will be created for all UK Fintech stocks, cementing the UK’s reputation as a listing destination.

  1. International

The review notes that the UK government has successfully sponsored Fintech Bridges and that setting out further steps to strengthen the international support offered by the UK would make a big statement about the openness of the UK post-Brexit. The review proposes to:

  • Deliver an international action plan for Fintech: this combines private and public sector priorities and would identify markets with the potential to scale and build leading positions for UK Fintech companies;
  • Drive international collaboration through the CFIT and launching an international Fintech taskforce. This would monitor industry progress against the ‘international plan for Fintech’; and
  • Launch an international “Fintech Credential Portfolio” (“FCP”) to support international credibility and increase the ease of doing business: led by CFIT to help Fintechs demonstrate an international sign of quality, resilience, trust, and standing in international markets.

  1. National Connectivity

The Review notes that the UK will need to focus on scale and supporting regional specialisms to maintain its position as a Fintech hub. It has set out three proposals in relation to national connectivity:

  • Nurture the high growth potential of the top 10 Fintech clusters. Each cluster should produce a three-year strategy to support growth, foster specialisms, and enhance national connectivity;
  • Drive national coordination strategy through CFIT; and
  • Accelerate the development and growth of Fintech clusters through further investment, such as in research and development.

Comment

The review is ambitious and extensive in its scope and details a range of proposals to enable the UK to maintain its position as a global leader in Fintech. Aspects of the review’s findings may be implemented shortly, for example, the recent UK Listing Review has made a recommendation that for premium listings, the London Stock Exchange allows for dual class share structures. The Chancellor has also recently announced that a fast-track visa scheme for UK scale-ups will be launched. This is complementary to the proposals in relation to human capital examined in the review.

The Government is in the process of examining the review’s findings and will publish a response in the coming months.

Rosenblatt can help

We have a wealth of experience across diverse sectors and closely collaborate with institutions, large and small companies (both public and private), start-ups, scale-ups and individual entrepreneurs.

The regulatory regime which applies to Fintech is increasing in complexity, Rosenblatt advises on all aspects of Fintech and regulatory law.

Contact us

Should you have any questions about the consultation and or wish to discuss its impact on your business please contact your usual contact at Rosenblatt or the authors named below.

Authors

Laura Clatworthy, Partner (Laura.Clatworthy@rosenblatt-law.co.uk)

Robert Bell, Partner (Robert.Bell@rosenblatt-law.co.uk)

George Kestel, Trainee Solicitor (George.Kestel@rosenblatt-law.co.uk)

 

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