Beyond The UK Government’s Fintech Review: Scaling Digital Britain Globally

It is a year on from the publication of the U.K. FinTech Strategic Review, known as the Kalifa Review. The report, chaired by Ron Kalifa, was commissioned by the U.K. Chancellor in the autumn budget of 2019 and delivered a number of usable recommendations in a five-point plan covering: policy and regulation; skills; investment; international; and, national connectivity.

So, how far have we come with the implementation of the report recommendations in the past year?

The consensus across the board is that the report is one of the best of its kind, and more progress has been made in implementing its recommendations than is often found in government commissioned reviews.

An open letter from more than 70 FinTech founders and executive leaders including Revolut, OakNorth, Global Processing Services, Klarna, Wise, and Plaid, was published by Innovate Finance and captured the U.K. FinTech sector’s views.

“It is clear that [the Review] marks good progress made by the Government, regulators, and industry. But rather than resting on our laurels, it is imperative that we continue to build on this momentum and work together to establish an environment in the U.K. that is even more supportive of and conducive to innovation in financial services,” reads the opening statement of the letter.

Janine Hirt, the CEO of Innovate Finance says, “A year on from the Kalifa Review, it’s clear that some strong and considerable progress has been made in the key areas set out by the roadmap – including policy and regulation, skills, investment, international, and national connectivity – but we’re at a critical point when we can’t afford to ease off on the advances made to date.

“It’s evident from the significant backing this letter received that industry is united in the call to ensure that we collectively do more to advance the growth of the sector, and celebrate the success and contribution of FinTech to our lives and economy.”  

Ron Kalifa, the report convener and author, agrees and is calling for even further reforms.

Kalifa comments, “The U.K. is a global market leader in FinTech, and tremendous progress has been made on implementing many of the Report’s recommendations a year on. The Government is supportive and keen to continue to build on the U.K.’s strengths, but further reforms are needed to solidify the U.K. as a place to start up, scale up and create jobs for the future in this increasingly digital and globally competitive world.”

Kalifa knows what he is talking about. He was the chair of WorldPay, the U.K.’s oldest and most successful FinTech, and navigated the best exit in history of U.K FinTech in a $43 billion sale to Florida-based Fidelity National Information Services (FIS) in 2018.

Lord Holmes of Richmond, one of the few peers in the House of Lords that champions FinTech, blockchain and financial regulatory reform says, “One year on from Ron Kalifa’s excellent report into U.K. FinTech, it is encouraging to see how many of his clear recommendations have been taken up by Government, not least support for a Centre for Finance, Innovation and Technology (CFIT). FinTech has the potential to fuel post pandemic brighter futures for the benefit of us all.”

Follow The FinTech Bellwether

Total capital investment into FinTech broke $102 billion across the globe in 2021, a 183 percent increase from 2020. U.K. FinTech saw a total $11.6 billion invested, second behind the U.S. The U.K. boasts over 40 of the world’s 157 FinTech unicorns, taking 5.5 years on average to reach the billion-dollar milestone.

Of the ten biggest funded FinTech deals in 2021, only one, Revolut, was in the U.K. with four from Europe, three from the U.S., one from Brazil and one from the Bahamas.

While the U.K. has been sought after as a great location for FinTechs to start-up, more needs to be done to create access to finance on all rungs of the funding ladder, from seed capital through to late stage, and the Review recommendations of a FinTech growth fund and a reform of the stock listing rules have been welcomed.

Kalifa adds, “As an example, U.K. pension funds do not invest in equities as much as they used to. Equities accounted for 73 percent of their assets in 1999, it dropped to 12 percent in 2018. That means UK pensioners can’t benefit from the growth of all the exciting companies the U.K. is generating, and these exciting companies do not benefit from the investment these pensions could provide. This is in need of change.”

15 FinTechs listed publicly in the U.S. in 2021 with Coinbase and Robinhood attracting much of the attention with their high valuations. In the U.K., Wise (formerly Transferwise), a FinTech pioneer in remittance payments chose to list in London, however, it is generally recognized that there is much room for improvement to get later stage firms through the public funding gates.

The Review made several recommendations for removing barriers for FinTech funding including improving the listing environment through free float reduction, dual class shares and the relaxation of pre-emption rights. Along with recommendations from Lord Jonathan Hill, the former E.U. financial services commissioner, the reforms were implemented in December as part of a broader government led push to make London a more appealing destination for global investors and companies.

Lavan Thasarathakumar, EMEA Government and Regulatory Affairs Director at Global Digital Finance says, “The area of DLT digital financial market infrastructure (dFMI), is an area of real opportunity for the U.K. to move the dial. We have seen a lot of development in this area and the U.K. is well placed to capitalize on it, especially in the areas of digital custody, and private markets digitization.”

Global FinTech Competition Heats Up

The world is going digital at a frightening pace, accelerated further by the COVID-19 recovery, and forward-thinking governments who are preparing for a new wave of global competition for innovative borderless digital services.

Joanne Dewar, CEO of Global Processing Services says “Many international governments have read the Kalifa Review and rightly view it as a powerful blueprint for the future of FinTech. The challenge for Britain is that some governments appear to be adopting its recommendations faster. They are systematically investing in their FinTech innovation ecosystems with a view of boosting their long-term economies.

“We all want Britain to maintain and grow its position as a FinTech leader. Our concern is there could be a risk of the U.K. being leapfrogged by others should the U.K. not take action fast enough.”

“One year on from the publication of the Kalifa Review it is encouraging to see some progress on skills, investment and exports, however, if the British government doesn’t start thinking bigger, it will start losing opportunities and growth to those who do,” says Mike Laven, CEO of Currency Cloud and a U.K. FinTech pioneer.

Omar Ali, EMEIA Financial Services Managing Partner at EY, led the International stream of the Review and comments, “The U.K. is at a key juncture as it positions itself post-Brexit, and international competitiveness is front of mind for both policymakers and industry. Pace on implementation is key, not only to ensure the U.K. retains its leading European position, but also to enable it to compete with and challenge other global financial markets.”

The pace of change is nowhere more evident than in the crypto and digital assets sector. The European Union has set out its framework for cryptoassets regulation, MiCA, and a number of European jurisdictions have introduced innovative frameworks, such as Gibraltar, Malta, and most notably Switzerland, whose impressive Zug Valley, also known as Crypto Valley, has become a hub for blockchain and digital assets firms in Europe.

Kay Swinburne, the Vice Chair of Financial Services at KPMG and a former European Member of Parliament was the Review Policy stream chair, and comments, “It’s very encouraging to see that many recommendations of the Kalifa Review have already been implemented and a number of others are in progress. These include the FCA developing a scale box and a regulatory nursery as well as the Department for Digital, Culture, Media and Sport creating the U.K.’s data strategy.

“However, if the U.K. wants to achieve its objective of being a global center for FinTech, some of the longer-term initiatives need new invigoration, such as advancing solutions to address crypto, digital assets, and digital ID.”

In September 2020 the EU laid down its proposals for a pilot regime for market infrastructure based on DLT and concluded its position in December 2021. The regime will allow those who already hold an MTF or CSD license to operate exempting settlement coins from intermediation. The pilot regime applies to securities that are operating on a small scale for shares where the market capitalization is less than EUR 200 million or for bonds less than EUR 500 million.

“Whilst this is a good step, the U.K. can be a lot more ambitious. The U.K. has a very mature financial market and has a strong innovation culture which will make the appetite for higher thresholds and wider use cases feasible. We await the outcome of the HMT call for evidence on this, which we are told is imminent,” says Thasarathakumar.

“At a time of significant regulatory change to the cryptoasset sector, it is vital that the U.K government foster the right environment for this sector to mature and grow. This sector has the potential not only to drive global technological change but also to help the U.K. deliver its jobs and growth agenda,” says Mark Aruliah, EMEA Senior Policy Advisor at Elliptic.

Progress on accelerating the mainstream adoption of crypto and digital assets in the U.S. has been breathtaking, with taxation of crypto as part of the Infrastructure Bill passed in 2021, and the President’s Working Group focused on a framework for the regulation of stablecoins. An avalanche of policy and regulatory activity has hit the market in 2022 with senate proposals for the CFTC to have regulatory purview over the crypto spot markets, and the SECs focus on security tokens. 

The U.S. Federal Reserve has said that a “digital dollar” could fundamentally change the U.S. financial system though highlights in its January report that it is not yet ready to issue one. This is in stark contrast to the U.K. House of Lords Economic Affairs Committee who concluded in the same month that there is “no convincing case” for the U.K. to have a CBDC.

Lord Holmes, a spring chicken relative to the average age (71) of the 768 sitting peer members of the House of Lords, suggests this position needs rethinking and sets out a bold vision of the new digital innovations and their role in society stating that, “Combining the fine reputation of the Bank of England with the best of our new technologies, brains, and industry could stop nowhere short of a complete reset of the relationship between citizen and State, for the benefit of both.”

Accelerate Further Reforms

When the Review was published a year ago, Lord Holmes was quickly out of the gates front running a number of the Review’s recommendations as amendments to the then impending Financial Services Bill and introducing an amendment to the bill proposing a “financial inclusion mandate” for the FCA, an inspired suggestion.

The FCA’s execution of its competition mandate, brought industry to the FCA Innovation Hub and helped to propel U.K. FinTech into the global premier league, not least through launching the regulatory sandbox, a playbook copied by financial conduct regulators around the world.

While the implementation of the new Digital Sandbox has been greeted positively, the FCAs glacial and often frosty handling of the cryptoassets registration regime has left many questioning how fit for purpose the regulator is for a digital future. High talent attrition rates and staffing issues have compounded the situation and raise the challenges for Nikhil Rathi, the CEO of the FCA, about how scalable the regulator is in the blossoming epoch of global digital innovation.

Rishi Kosla, CEO of OakNorth observes “When a business is growing at between 30-40 percent a year like we are, the difference between our last 12 months and our next 12 months, could be up to 80 percent, so ensuring the ecosystem – in terms of regulation, investment, talent, etc. – is fit for purpose to support that growth trajectory, is essential.

“A year on from the Review, we feel an increased focus on how best to support high-growth, scaling FinTechs such as ourselves by providing additional regulatory and supervisory support for regulated firms in the growth phase would be beneficial.”

The Review’s call for a Digital Economy Taskforce and for greater coordination across departments could use further development, fast. Collaboration between the Bank of England, Treasury, and the FCA is often sought, but this needs to be super sized and streamlined to include other government departments, such HMRC to include tax.

If this is not a Herculean task on its own, the taskforce then needs to foster better collaboration with G20 finance ministers and the FSB, other central banks (through BIS, the IMF and the World Bank), other jurisdictional regulators (through GFIN and IOSCO). The key hack here is to focus on trading and investment partners in jurisdictions with whom the U.K. is best aligned to accelerate economic reciprocity and spur greater growth.

As importantly, government departments and the regulators need to more actively and regularly engage industry in formal forums and settings. It is the knowledge, capital, and agile capabilities of a global industry that will drive digital innovation, much faster than bureaucracy.

It is important that the Government finds ways of allowing digital innovation to flourish without bogging it down in its own inability to, in the short-term, productively respond with policy guidance and legislation. A stronger co-regulation framework between government and industry, as outlined by Malcolm Sparrow, Professor of the Practice of Public Management at the John F. Kennedy School of Government at Harvard University, could be the key here and must be seriously considered.

Nick Ogen, the founder and CEO of RTGS and the “godfather”, if not the “founding father”, of U.K. FinTech who founded WorldPay says, “Whilst the U.K. does have the opportunity to retain its FinTech leadership position, we must address the national and international infrastructure that underpins almost all our innovation.

“This requires a concerted and faster, coordinated effort from Government, The Bank of England, and regulators, with a key recognition that innovation will create competition and long overdue market change.

“15 years on from the last global financial crisis, we tie up $15 trillion a year in financial friction costs largely through industry inefficiencies in simply moving money efficiently. Whilst there are green shoots appearing from the Review that Ron undertook, we need to accelerate momentum.”

Lead From The Front: The Tone At The Top

The U.K. Prime Minister, Boris Johnson, had his dab hand firmly in FinTech as the Mayor of London, promoting U.K. FinTech on roadshows from New York to Tokyo and knows the value of the U.K.’s FinTech golden goose. Rishi Sunak, the Chancellor, who earned his MBA at Stanford, is being heralded by some as a ”tech bro”, and if there was ever a time to call on his West Coast pedigree and flex his “tech muscles”, it is now.

Andrew Bailey, the Governor of the Bank of England, occasionally espouses crypto rhetoric, and has promised the crypto and digital asset sector “tough love” in the U.K. As the former CEO of the FCA during its halcyon days as an innovative FinTech regulator, he is well placed to support Rathi, especially with the impending recruitment of a new FCA chair. This is an excellent opportunity that affords a wholesale rethink of the future of the FCA to ensure it has both the culture and the capability to help scale FinTech in Digital Britain, globally.  

Hirt has the final word saying, “We’ve built a world-class FinTech ecosystem in the U.K., and it’s now more important than ever that we – industry, government, and the regulators – build on the positive momentum and cement our position as the best place to start, build and scale a FinTech business.”