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The Kalifa Review of UK Fintech

The Kalifa Review of UK Fintech – No Apparent Progress Yet

The industry body serving the UK’s financial technology community, Innovate Finance, has raised concerns that the government has not yet, many months on, moved on the recommendations of the Kalifa Review, Ron Kalifa’s independent review of UK fintech, commissioned by UK Treasury ministers and published in February 2021.

The report is ambitious in both its scope and its proposals and sees contributions from across the fintech ecosystem. It contained actions for government, regulators and for industry; and focused on five key areas: policy and regulation, skills, international, national and investment. In particular, the continued lack of a co-ordinated fintech strategy to assist with the ‘alphabet soup’ of regulators and government teams is highlighted by Innovate Finance.

The Report called for progress to be assessed in February 2022. As we wait to see what the government will do and when, we set out a non-exhaustive high-level reminder of some of the key aspects of Kalifa’s recommendations.

  • Co-ordination of regulatory policy

In September 2020, The European Commission published its Digital Finance Package, a suite of materials to set the EU’s fintech agenda until 2024. It aims to help bring the agendas of various government departments and regulators together in line with a centrally co-ordinated strategy. The Kalifa Report suggests that the UK needs something similar and a Digital Economy Taskforce to manage that process.

Initiatives outlined include development of a central bank digital currency, supporting the digitisation of Financial Market Infrastructure, introducing a new regime for the regulation of crypto-assets and amending payments regulation to take a more principles-based approach. Most of this is under consideration already but needs cohesive alignment. As to Environment, Social and Governance (ESG) objectives, Kalifa suggests technology driven solutions to collect and process ESG data, addressing related obstacles, such as the need to standardise.

Looking wider, the report recommends the UK maintains its international outlook by continued participation in the Global Financial Innovation Network cross-border testing environment.

  • Cross-industry collaboration and geographical implications

Partnerships between incumbent financial institutions and fintechs, which remain low. should be encouraged. The low take-up, the report indicates, is not least due to regulatory factors causing incumbents to take an overly risk-averse approach to outsourcing (due to their retaining of the full regulatory burden) and necessitating complex procurement processes. To counter that, the report suggests the creation of direct obligations on unregulated service providers in relation to outsourcings.

Collaboration is also a feature of geographical implications. The report indicates that presently, 91% of the $4.1bn of venture capital flowing to UK fintech is attracted by London. The report recommends the development of 9 nationwide fintech hubs aping the London model; highlights the benefits of a collaborative UK connectivity network; and warns against inter-regional competition, all with a view to serve to promote the UK’s success on the global stage.

  • Better support for Fintechs scaling up

The report says more can be done to attract and retain fintech businesses beyond start-up. Domestic capital sources could be used to plug the scale-up funding gap. Acknowledging certain regulatory challenges, the recommendation is a £1bn fintech-focused and market-led growth capital investment vehicle to be funded by holders of domestic institutional capital.

The report says that the FCA regulatory sandbox which allows businesses to test innovative propositions in the market with real consumers, should be built out to create a ‘scalebox’ to support firms beyond start-up, establishing a permanent digital sandbox and otherwise providing additional support to help firms understand their evolving obligations as they expand.

International fintechs should also be courted to bolster the messaging of promoting the UK as a positive fintech destination for both start-ups and scale-ups.

Kalifa also recommends a new visa stream to allow scale-ups to easily attract the best global talent; as well as tax credits to encourage scale-up investment.

  • International funding/markets access

The report says that Investment in UK fintech totalled $4.1bn in 2020 (mainly from international investors) which is more than the next five European countries combined. As to growth, the UK is very dependent upon exports in fintech, due to the fairly small domestic market. The loss of EU passporting after Brexit is a current concern as to this.

Recommendations include making fintech an integral part of the UK’s trade policy, with fintech being expressly referred to in new trade agreements to enable access to and from UK fintechs and financial institutions. ‘Fintech Bridges’ which streamline regulatory approvals have already been established with Australia, Hong Kong, Singapore, China, and South Korea and further usage of these is encouraged. There are no recommendations as to ensuring ongoing access to the EU single market.

The report also recommends an international action plan for fintech to identify markets with the highest growth potential for UK fintechs to be led by a new International Fintech Taskforce.

As to further international expansion, the report suggests other measures including an internationally recognised standard for fintech trade based on a range of pre-defined metrics – a “Fintech Credential Portfolio”. This should enable UK fintechs to use that standard to demonstrate their credibility when marketing themselves internationally.

  • Data Harnessing

This is a prominent theme of the report. As part of its digital finance package, the UK should implement a data strategy to include: developing and adopting common data standards, building on the work already done by the Bank of England and FCA; creating a digital identity verification infrastructure for both corporates and individuals;  continuing to progress Open Finance data sharing principles, but within the framework of a wider plan with authorised third-party service providers sharing data across sectors; and considering the regulatory implications of AI, including specific guidance about the application of the existing rules in the context of AI.

  • Financial Services talents – transitioning to Fintech (L9)

As well as proposing the measures above as to improving access to the global talent pool, the report makes recommendations as to retraining and upskilling personnel from other sectors; and growing a pipeline of homegrown talent through the UK’s education system.

The review specifically identifies that the key attributes needed for fintech development are ‘deep financial services domain experience and people management experience’ and it suggests creating a specific training route to help legacy financial services talent to transition more easily into the fintech industry.

  • Anticipating Fintech Consolidation

The report highlights that an element of consolidation will be critical in facilitating the growth of UK fintechs. The sector is fast-moving and the report calls on the Competition and Markets Authority (CMA) to take a more flexible approach in merger control assessments.

However, recent trends indicate that global competition authorities are enhancing their scrutiny in dynamic markets, especially digital ones, given the perception that potentially problematic deals may have slipped through the net in the past. The CMA has taken a tough line on mergers in recent years, including in tech/fintech markets and its response to the government’s July 2021 consultation on a new pro-competition regime for digital markets underlines this. As such, pushback from the CMA as to the report’s recommendation to relax its approach in the sector is likely.

November 2021

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