The UK fintech sector’s eagerly awaited Fintech Strategic Review, also known as the Kalifa Review (the 'Review'), was recently released and its recommendations – taken together – certainly cannot be criticised for a lack of ambition. Ron Kalifa OBE was asked to conduct the independent review to identify priority areas to support growth and widespread adoption of UK fintech and to help maintain the UK’s global fintech reputation. Citing a five point plan, the Review focusses on (i) Policy and Regulation, (ii) Skills and Talent, (iii) Investment, (iv) International, and (v) National Connectivity, with each chapter outlining a set of detailed recommendations to further propel the UK fintech sector forwards and help it fulfil its potential of adding an estimated £13.7bn to the economy by 2030.
As the saying goes, nothing worth having in life is easy, and so fintech success does not come without its challenges (even before the surfeit of acronyms is introduced). The Review references competition from overseas jurisdictions investing heavily in fintech, the regulatory uncertainty caused by Brexit and the consequences of the pandemic as the three broad threats the sector faces. Some of the recommendations respond directly to these threats and pave the way for new opportunities, however any progress will be dependent on the Government’s willingness to adopt the measures that the Review outlines.
It is also worth highlighting the suggested Centre for Finance, Innovation and Technology (CFIT). The purpose of CFIT would be to coordinate and assist with the activity in the fintech market. Coalitions on SME Finance, Open Finance, and Digital ID are put forward to help organise ongoing efforts on these developments. Given their potential to facilitate innovative solutions, foster stakeholder collaboration and increase consumer utility, identifying and prioritising these areas in the Review is welcomed.
Due to the breadth of areas covered in the Review, we are taking each section of the five point plan in turn to provide a comprehensive overview of the details contained in each set of recommendations as well as our thoughts on what this might mean for the sector going forwards if adopted. In this first article, we focus on the recommendations in relation to Policy and Regulation which focus on protecting consumers and encouraging growth and competition in the market.
Policy and Regulation
The Review seeks to implement a new fintech policy and regulatory strategy for the UK, and within it, lists three proposals:
- Delivering a digital finance 'Package' creating a new regulatory framework for emerging technology
- Implementing a 'Scalebox' supporting firms to grow
- Securing fintech’s position as an integral part of the UK’s trade policy.
1. Digital Finance Package
- Developing a comprehensive fintech strategy, which identifies ‘Priority Fintech Areas’ and the additional support required where public infrastructure is better placed to develop industry-wide standards and initiatives that can in turn facilitate private innovation. Examples include digital identification and data standards.
- Adopting specific policy initiatives, including:
- a data strategy addressing common data standards, a digital ID trust framework, prioritising Smart Data and Open Finance, and considering the regulatory implications of artificial intelligence (AI)
- promotion of the digitisation of financial services around Central Bank Digital Currency (CBDC), Financial Markets Infrastructure, cryptoassets regulation and Environment, Social and Governance (ESG) data.
- Considering any necessary adjustments to existing fintech regulation both with respect to payments and the use of new technologies.
- Using fintech to support financial inclusion particularly around credit.
- Creating a new ‘Digital Economy Taskforce’ to assist in developing and delivering the UK fintech strategy.
- Developing fintech expertise both in Government and amongst regulators.
- The recognition that leadership by public institutions is necessary is extremely welcome. Provided these institutions work in tandem and collaboratively with each other (requiring active co-ordination and alignment) and other industry stakeholders, with a focus on practical solutions, then momentum should follow. Key initiatives with which industry has struggled for some time (such as common data standards and industry digital ID solutions) will benefit from this collective public leadership. Pan-industry developments like these should serve to benefit consumers (for example, in terms of easier access to digital solutions, improved cybersecurity and easier switching through improved market mechanisms), as well as allow financial institutions and fintechs to innovate their offerings and – in some cases – improve certainty around regulatory standards and compliance.
- The Review suggests that crypto is here to stay, with the promotion of both CBDC and further crypto regulation. This seems entirely consistent with what we are seeing in the market in terms of client enquiries, as well as the well-publicised steps by global investment banks. Multiple consultations have and are addressing the regulatory landscape for cryptoassets and their application as mainstream financial products, and it will be interesting to see how HM Treasury’s proposed regulatory framework will overlap with a more payments-orientated CBDC. CBDC could form a useful test case for evaluating consumer protection and consumer privacy concerns as cryptoasset use shifts from (speculative) investment to a means of reliable exchange, and it is possible that further crypto regulation may look to the solutions implemented to address these concerns for further guidance.
- The references to financial inclusion and the obstacles in the consumer credit space overlap with the Woolard Review’s recent recommendation to regulate Buy Now Pay Later (BNPL) firms and the regulatory focus generally on the unsecured credit market. The fintech industry has demonstrated that it has the potential to engage with and support the 'unbanked' that some traditional financial services institutions have struggled to reach. History (such as in relation to peer-to-peer regulation and other regulatory action, such as in relation to mini-bonds) shows that regulation – rather than seen as something to be dreaded or tolerated under sufferance – actually drives up standards and brings a sense of legitimacy. These outcomes will likely help the fintech sector move further into the mainstream consciousness.
- Enhancing the regulatory sandbox to support more proposals offering an innovative proposition and provide a dedicated space for Priority Fintech Areas.
- Creating a permanent 'digital sandbox' allowing digital collaboration and access to synthetic data sets as well as a broad range of tools including professional services.
- Taking steps to support fintech (and Regtech) partnerships including by offering financial incentives for partnering, supporting standardised onboarding procedures, introducing an accreditation regime for, and creating outsourcing compliance requirements in relation to, unregulated service providers.
- Providing additional support to, and ongoing dialogue with, regulated firms in their growth phase.
- Scaling has been repeatedly cited as a key concern within the UK fintech sector, and to crack this particular nut would be a fantastic achievement. The FCA’s regulatory sandbox and the UK’s openness to innovation generally has positioned the UK as a first choice jurisdiction for fintechs looking to set up, however where fintechs (and other technology sectors) have struggled is in the next phase of growth: accessing funding, expanding to a broader customer base, finding suitable talent and capitalising on global market access. As all fintechs will inevitably face this challenge, it is positive that the recommendations have drawn attention to this issue.
- Whilst potentially easily lost in the detail, the Review’s recommendation of requiring unregulated services providers to comply with outsourcing rules when providing services to regulated financial institutions is not insignificant. To date, fintech regulatory attention has centred on consumer facing products, rather than fintechs delivering B2B solutions to the fintech market. If taken forward, this proposal would certainly mark a shift in that attention and also diverges from the normal pattern of regulatory responsibility. That said, it could form a basis upon which – depending on whether adopted as policy – the regulator may want to build further.
3. UK trade policy
- Making fintech an integral part of the UK’s trade policy, ensuring a coherent and consistent approach.
- Continuing to establish fintech bridges with other countries, assessing agreements against sector needs and identifying areas for improvement.
- In light of Brexit forming a key economic threat, the Review’s inclusion of international trade is unsurprising and also welcome. Of course, the application of trade policy is inherently mired in politics when considered in the international perspective, but ensuring that fintech is a key pillar of trade policy must be a good starting place. Based on our international trade activity, we are certainly seeing evidence of a large amount of inbound and outbound fintech activity, and the two areas (fintech and international trade policy) cannot and should not be disaggregated.
- From a fintech industry perspective, the focus should be on minimising friction in cross-border trading and investment – and so to encourage new entrants and innovation – albeit in the regulatory context where this must be balanced with consumer protection and market integrity. There may be interesting debates on a more specific product or activity as to addressing these potentially conflicting aims. For example, would the UK cryptoasset regime move in tandem with international developments or go it alone? More generally, we may start to see tension if the UK prioritises global regulatory alignment in a manner that results in a departure from the EU’s regulatory framework, potentially reducing the likelihood of future equivalence decisions and increasing the burden of both UK and EU fintechs operating across borders.
- The regulatory landscape in many areas of the fintech sector has seen, and continues to see, potentially significant change. Whilst fintech industry players are now fairly adept at managing regulatory compliance in an evolving regulatory landscape (so balancing current regulatory requirements and keeping an eye on policy changes), we must all surely welcome steps towards coordination and a stated ambition to assess real world trading conditions.
In our next UK Fintech Strategic Review Series article, we will be focussing on Skills and Talent.