Fresh off the press, the Kalifa Review of UK Fintech is quite breathtaking when you step back to consider the range and ambition of its recommendations. It also highlights some of the considerable challenges to the UK fintech sector in the months and years ahead as we start to re:build Britain.
As part of a team which has had the privilege of working very closely with a whole range of fintechs –both fledgling and full flight – as well as long established financial institutions on the development and use of all things digital over the past fifteen years, the review reflects some of the common themes which I think all of us working in this space will be familiar with. For example:
- The clustered nature of the fintech environment across our regions and how that might be better co-ordinated
- The difficulties in scaling up beyond initial stages and securing investment close to home - rather than having to look to London or overseas (increasingly to the US)
- The complex web of regulation (not just of a financial services flavour) which is, more often than not, playing catch-up with the pace of the technology it is seeking to regulate. Inevitably and unintentionally creating those grey areas which are so hard for businesses to navigate. Clearly there is an opportunity for a more technology neutral approach here
- The impact of emerging from the shade of the sandbox into the sudden glare of full regulation. Not to mention the shift in mind set and experience needed to cope with that, as compared to the key skills and sheer drive and persistence needed just to survive as a start-up
- And last but not least, the friction often seen between the expectations of rapidly moving technology companies and some of the highly structured procedures of established institutions, which requires significant experience to navigate smoothly.
That's not to take away from the real successes of which fintech in the UK should be rightly proud.
- The range of incubators and accelerators which have sprung up within previously more established institutions and the real opportunities they present to businesses at an early stage. Take for example, TSB Labs and the partnerships possible through it
- The sophisticated financial tools now so readily available on the download of an app to help us manage and organise our finances
- The FCA's brief to encourage competition – perhaps a stroke of genius – now much emulated in other jurisdictions
- Not to mention some of the great UK success stories which have grown up within that environment: well-known banks such as Atom bank and Monzo; as well as a multitude of less well-known but none-the-less sophisticated technology companies which have pivoted towards the needs of the financial services industry, whether that's in regtech, wealthtech, insurtech or otherwise.
That said, despite having carved out a role of real global leadership in this area, the review highlights the intense competition the UK is facing. For example:
- Singapore, Australia and Canada are specifically called out as key competitors which are investing heavily in developing their nations' skills in this area
- The challenges created by Brexit - including the real risks of a more fragmented regulatory horizon as well as the battle to maintain the UK's talent pool, with the pull of multiple European capitals actively looking to attract businesses their way.
The current gap around financial services in the EU/UK Trade and Cooperation Agreement also highlights the work to be done here. Albeit the draft adequacy decision in respect of the UK's data protection laws published by the EC only days ago is a promising sign.
Closer to home, with team members across many of the key established and fast growing hubs highlighted by the review – including Edinburgh, Leeds, Newcastle, Bristol and London – we see at first hand the intense competition between our regions for the central resources available to the industry. It's therefore really encouraging to see a focus on moving away from say, London vs the Regions (or even the South West vs the Pennines) towards a more strategic, coordinated effort to compete collectively on the global stage.
A refreshingly accessible read, the review organises its conclusions into a five point plan addressing:
- Policy and regulation – maintaining an emphasis on competition, while continuing to protect consumers. You can keep up to date in this area by following our financial institutions news alert at FIN
- Skills – focussed on accessibility to talent (both national and international) as well as skilling up our own workforce.
- Investment – seeking to fill the gaps in the current fundraising landscape, including through the establishment of a national fintech fund, reviewing our listing rules and revisiting our current tax regime. One striking illustration here highlights the lack of growth in the number of UK fintechs making it to the larger end of the scale, with the US now having four times as many fintech unicorns as the UK (as compared to only two in 2015)
- International – keeping fintech at the heart of international trade initiatives and ensuring the UK continues to take a leadership role on the global policy stage
- National connectivity – recognising the importance of, and need to coordinate, our regional hubs; the sum of course being greater than its constituent parts.
There are some really interesting nuggets in the review which I think should be of real interest to everyone who is active in this space. From a technology lawyer's perspective and from being very actively involved in supporting both technology creators and users in this space, stand-out points of interest for me would include:
- The establishment of a Centre for Finance, Innovation and Technology to take a central role in coordinating much of the activity in the industry. This will have a strategically important role and will hopefully drive greater collaboration across the UK
- Plans to create shared data pools, to make large scale data analysis available to all in the industry in a standardised way. Clearly the interaction with data protection regulation is key here – with data privacy having become a pivotal consideration at an early stage of any initiative in this area. The interaction of these plans with parallel European initiatives to create industry focussed open datasets will also be intriguing to follow
- An associated drive to establish a digital ID system, both at an individual and organisational level, as part of a data strategy focussed on developing common data standards and prioritising smart data. If ever there was a role for distributed technology to help meet the security and privacy challenges involved, surely this is it…
- The hidden benefits of that alone could also be huge – just think of the countless £billions spent by financial institutions in effectively duplicating similar AML processes and what those sums could be put towards
- The development of a central bank digital currency (at potentially wholesale and retail level) to speed up settlement processes as well as to create a more efficient and resilient payment system for consumers. The Bank of England having discussed its interest in this area in its discussion paper on the topic almost a year ago today
- A review of the regulatory implications of using AI – technology clearly rife with opportunity, but which also needs to address concerns around transparency, broader human understanding of the algorithms involved, as well as potential bias and unfairness in the 'decisions' it makes. A topic close to many a technology lawyer's heart!
- The potential creation of new obligations for unregulated technology companies in relation to the use of their technology by regulated institutions, including a direct obligation to comply with relevant outsourcing rules. This could be a HUGE point for technology providers in this space, so having a good understanding of what those rules are and being prepared early will be key! Having said that, it might also be an opportunity to encourage a more standardised approach and streamline some of the lengthy negotiations that are often needed around contracting for technology of this kind. Surely a 'win' for organisations on both sides of the fence – recognising of course that any additional risk will need to be priced in for those providing services and solutions.
This short note can't do justice to the range of developments which might be sparked by the Kalifa Review (extending, as it does, to over 100 pages). However, I hope it highlights some particular areas of interest from a technology law perspective.
One of the many attractions to me of working in this field has always been the interconnected and continually evolving nature of the subject matter involved. That the review focusses on the development and support of tech, but will then itself rely on that same tech to implement its findings, is perhaps a good reflection of that.
I'm also reminded of the brilliant Jim Collins 'flywheel' concept here, with a concerted and coordinated effort being needed to rotate a heavy flywheel 'turn upon turn, building momentum until a point of breakthrough, and beyond'. A good analogy I think of what will be needed to make this work, but an effort which I very much look forward to being part of.
About our Fintech team
I am fortunate enough to work alongside a whole range of great people and talented lawyers both here in the UK and the US who all share a common interest in this field. To find out more about how we can use our extensive experience in this area to help you fulfil your plans, please visit us or get in touch with one of the team.