The review is ambitious in both its scope and its proposals. It interprets “fintech” in a broad sense, encompassing both new businesses offering fintech propositions and the use of technology by incumbent financial institutions. It makes 15 recommendations over five areas: policy and regulation; skills and talent; investment; international attractiveness and competitiveness; and national connectivity. These reflect months of discussions with scores of contributors from both the public and private sector. The recommendations are helpfully summarised on p4 of the report. Whilst some recommendations are relatively high-level (notably in relation to proposed regulatory change), in many areas they are very targeted and specific.

The report recognises the need for a vehicle to coordinate the delivery of its wide-ranging recommendations and suggests establishing a government-backed industry-led Centre for Finance, Innovation and Technology (CFIT) to take this task.

The review found that whilst the UK is recognised as a global leader in supporting fintech start-ups, there is much more it could do to help attract and retain fintech businesses as they move beyond the start-up phase and seek to grow into global champions. Many of the recommendations are aimed at addressing this from various angles. 

From a capital perspective, for example, the report identifies that there is a significant scale-up funding gap in the UK and that domestic sources of capital could be used to plug it. It recommends the creation of a £1bn fintech-focused and market-led growth capital investment vehicle to be funded by holders of domestic institutional capital. It acknowledges that there are certain regulatory obstacles to achieving that which would need to be addressed. 

From the regulatory side, the report advocates creating a “scalebox” which supports firms beyond the initial start-up stage. This would be achieved by building out the Financial Conduct Authority (FCA) regulatory sandbox, establishing a permanent digital sandbox and otherwise providing additional support to help firms in understanding their evolving obligations as they grow and/or to encourage pre-identified priority sub-sectors or topics.

Other recommendations in this vein include creating a new visa stream to enable fintech scale-ups to access high-quality international talent more easily and various tax credits aimed at encouraging investment in scaling fintechs. 

The report also recommends a number of actions aimed at courting international fintechs. As part of this it highlights the need to “bolster the messaging” in order to promote greater awareness of the UK as a fintech destination for both start-ups and scaleups.

The strong focus on this area suggests we are likely to see new opportunities for both UK firms looking to expand and overseas fintech firms considering establishing themselves in the UK.

Firms at the top end of the growth spectrum look closely at their options for listing venues when considering their expansion strategy. According to the report, the London Stock Exchange attracted only 4.5% of global IPO listings between 2015 and 2020, compared with 39% in the US’ NASDAQ and NYSE. 

This result has been attributed in part to certain requirements in the UK’s listing rules for the Premium segment that are unappealing to some fintech founders. This includes restrictions on dual-class shares, which can prevent founders from retaining control after a float, as well as requirements to maintain at least 25% of shares in public hands in order to support liquidity. 

The report recommends revisiting these requirements to make the UK a more attractive environment for fintech IPOs. It also recommends creating a specific fintech sub-sector to allow investors to compare the performance of companies in this space and to enhance valuation prospects for fintechs. Such measures may not be popular with everyone, however. For example, some potential issuers have identified tensions between these proposals and their social responsibility objectives, due to concerns over investor protection.

A wider review into the UK’s listing rules, which considers these issues in more detail, is due to report soon.

It is interesting to note that the report flags that some degree of consolidation will be critical in facilitating the growth of UK fintechs and calls on the Competition and Markets Authority to take a more flexible approach in its merger control assessments in this fast-moving sector.  

That said, recent trends indicate that global competition authorities are in fact enhancing their scrutiny in dynamic markets (and this sector specifically), given perceptions that potentially problematic deals may have slipped through the net in the past. The CMA has in particular been taking a tough line on mergers in recent years, including in tech/fintech markets. Against that backdrop, we expect the CMA to be cautious in responding to the call to relax its approach in the sector.

The report identifies that investment into UK fintech stood at $4.1bn in 2020, more than the next five European countries combined. Most of this came from international sources. However, with other jurisdictions (in Europe and elsewhere) stepping up efforts to create innovation-friendly environments, UK firms’ access to international funding may be at risk.

Likewise, the UK’s relatively small domestic market means that UK fintechs are highly dependent on exports for large-scale growth. The loss of EU passporting rights for UK firms poses a direct short-term threat in this regard, which has raised strong concerns in the industry.

The report acknowledges these issues and makes various recommendations to address them. In particular, it recommends that fintech should be an integral part of the UK’s trade policy and that the UK should expressly include fintech in its new trade agreements to allow global access both to and from UK fintechs and financial institutions. It also recommends greater use of “Fintech Bridges”, which have already been established with Australia, China, Hong Kong, Singapore and South Korea. These arrangements do not typically provide for direct access to foreign markets, but in some cases include support to streamline regulatory approvals. There are notably no recommendations in relation to securing ongoing access to the EU single market. 

As well as regulatory support, the report recommends creating an international action plan for fintech which would identify markets with the highest growth potential for UK fintechs, among other things. This would be led by a new International Fintech Taskforce. It also suggests other measures to help UK fintechs expand internationally. This includes launching a “Fintech Credential Portfolio”, i.e. an internationally recognised standard for fintech trade based on a range of pre-defined metrics. The idea is to enable UK fintechs to use this standard to demonstrate their credibility when marketing themselves overseas. 

Last September, the European Commission published, with great fanfare, its Digital Finance Package. This included a strategy outlining its fintech regulatory agenda to 2024. The Kalifa report suggests the UK could do with a similar sort of plan. This would help bring the agendas of various government departments and regulators together in line with a centrally coordinated strategy. The report also suggests creating a new Digital Economy Taskforce to manage this process. 

The report outlines, at a relatively high level, examples of specific policy initiatives that could form part of the UK’s digital finance package. Among other things, this includes developing a central bank digital currency, supporting the digitisation of Financial Market Infrastructure, introducing a new regime for the regulation of cryptoassets and amending payments regulation to take a more principles-based approach.  Much of the discussion on these topics is consistent with ongoing work in these areas.

It also sets out specific recommendations in relation to cross-sectoral issues such as data (as we discuss under point 7 below) and Environment, Social and Governance objectives. In relation to ESG, the report identifies the opportunity for technology-driven solutions for collecting and processing ESG data. It makes a number of recommendations aimed at addressing potential obstacles to achieving this, for example in relation to standardisation needs.

The report also recommends that the UK continue to maintain an international outlook by participating in the Global Financial Innovation Network, leading the development of policy and regulation in areas of crypto and digital assets and monitoring initiatives of other jurisdictions.

Another prominent theme in this report is the importance of harnessing data. In particular, it recommends that the UK develop and implement a data strategy as part of its digital finance package, which may provide for:

• developing and adopting common data standards, building on work done by the Bank of England and FCA in this area
• creating a digital identity verification infrastructure for both corporates and individuals
• continuing to progress Open Finance but within the framework of a wider initiative to facilitate user-driven data-sharing with authorised third-party service providers on a cross-sectoral basis
• considering the regulatory implications of artificial intelligence, including to provide specific guidance about the application of existing rules in the context of AI

Some of these areas are also identified as priorities for cross-industry collaboration, as discussed below.

The report makes an ongoing case for fostering partnerships between incumbent financial institutions and fintech firms. It identifies that despite recognised benefits, levels of partnering remain low. It attributes this in part to regulatory factors which cause incumbents to take an overly risk-averse approach to outsourcing (as they typically retain the full regulatory burden) and necessitate complex procurement processes. It recommends various measures which government and/or regulators could take to address these issues. For example, it suggests creating direct obligations on unregulated service providers in relation to outsourcings.

The report also suggests that CFIT should be used to build coalitions across the value chain of economic actors to address specific industry challenges, such as the development of the architecture and ecosystems for Open Finance and digital identities.

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

Notably, the review specifically identified that the key talent need for fintech development is “deep financial services domain experience and people management experience”. It suggests creating a specific learning pathway to enable financial services talent to transition more easily into the fintech industry.

London currently drives the UK’s success in the fintech sector, attracting 91% of the $4.1bn of venture capital flowing to UK fintech, according to the report. The review recommends diversification through the development of 9 other fintech hubs around the UK, based on the London blueprint. Warning against inter-regional competition, it highlights the benefits of building a collaborative national web of connectivity. Whilst this strategy may weaken London’s monopoly over UK financial services, it may ultimately serve to promote the UK’s success on the global stage.