By director Martin Cook and trainee solicitor Brandon Wong from the Fintech practice at independent UK law firm Burges Salmon
Policy and regulation
In our first of five articles delving into the detail of the Kalifa Review, we look at its policy and regulation recommendations and assess what this might mean for the fintech sector.
The UK fintech sector’s eagerly awaited Fintech Strategic Review, also known as the Kalifa 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 focuses 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 £13.7 billion 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.
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; and
- Securing fintech’s position as an integral part of the UK’s trade policy.
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); and
- 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.
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.
Skills and talent
In our second article on the Kalifa Review, we examine the recommendations regarding skills and talent and how the UK can remain globally competitive for talent.
We highlighted in our first article that forecasts estimate the UK fintech sector contributing £13.7 billion to the economy by 2030. The Kalifa Review attributes 70 per cent of this to job creation. Given the emphasis also placed on supporting businesses that are moving from start-up phase to the critical scaling-up phase, the review highlights that fintechs will require a wide range of specialist talent, and not only in the sought-after technology and data/decision science segments. Though positive, the government will be required to find ways of plugging skills shortages and removing barriers to accessing global talent, particularly with competing jurisdictions keeping pace with the UK’s investment in the sector (such as Singapore noted the review).
Covid, identified as a key threat to the fintech sector, is also cited in the review for its impact on accelerating the requirements to upskill employees in all industries. This is not only relevant to fintechs, but large financial institutions as well, which have been forced to grapple with ‘digital’ sooner than expected. Ensuring staff are retrained effectively should be high up on the business agenda of firms that are serious about engaging with digital transformation. The review also highlights the struggle of fintechs themselves investing in training, often due to the cost and quality of available courses.
Inevitably, Brexit, as the second threat identified, forms a significant consideration for talent acquisition from other jurisdictions. Fintechs must now take account of different immigration systems to access EU talent pools. This is against the backdrop of developments in France (Tech Visa), Canada (Global Talent Stream) and Australia (Global Talent Programme) all with the same aim of easing routes into their organisations, further compounding global competition. The review advocates for the UK to develop a faster and more flexible system and to engage in deliberate brand building.
The role of apprenticeships and work placements at the Further Education level and suitability of Higher Education courses are also addressed in the review. It was noted that across the education sector, more emphasis should be placed on aligning teaching with economic and societal needs and work placements should be used to bring students closer to the fintech industry.
In terms of recommendations, the review puts forward three proposals to bolster the availability of, and access to, the right talent and skills in the UK fintech sector:
- Retraining and upskilling adults.
- Enhancing access to global talent.
- Growing the pipeline of domestic talent.
Retraining and upskilling adults
- Retraining and upskilling adults to meet the needs of UK fintech by ensuring access to short courses from high-quality education providers at low cost, delivered by an independent Steering Committee led by the proposed Centre for Finance, Innovation and Technology (CFIT).
- One of the objectives of the Steering Committee will be to ensure that educational resources keep pace with change in the sector. Given how dynamic and varied the fintech industry is, this will be no small feat. To achieve this, and whilst there are good examples of industry and academic collaboration, the Steering Committee will likely need to push for much greater cooperation and coordination than current levels. Input will be required from a range of fintech firms and those leading digital innovation in the more traditional financial services setting.
- The review states that traditional financial services are also “experiencing new skills requirements due to disruption from tech” which reflects the pressures on the financial services sector generally to engage with digital. In our view, this has the effect of bringing additional focus to the often less-observed business to business (or B2B) side of the fintech market that sees technology-first businesses (including ‘Insurtechs’ and ‘Regtechs’) offering innovative services and solutions to existing financial services firms. The review also refers to the “financial services to Fintech Learning Pathway” case study which implies further collaboration between traditional financial services and fintech sectors through outplacement services. We may therefore see additional cross-sector synergies that buck the perception of some of the traditional businesses and newer business being only in competition; this is sometimes the case but not exclusively.
Enhanced access to Global Talent
- Creating a new visa category to enhance access to international talent for fintech scaleups through a ‘Fintech Scaleup Stream’. This would include enhancements to the immigration system (both in scope and in the actual processing of applications) and ‘reach out’ strategies including for job creators.
- Post-Brexit, and in light of various ‘Global Britain’ initiatives, it is no surprise to see opportunities for skilled migrant workers and entrepreneurs catered for in the review’s recommendations. Given recent budget announcements (including proposed implementation of unsponsored visas for highly-skilled migrants), it is likely that we will see developments in this space – though query whether this will result in specific treatment for fintech or be of more general application.
Underpin skills and grow the pipeline of talent
- Building a pipeline of fintech talent by supporting fintech scaleups to offer embedded work placements to Further Education and Higher Education students and Kickstarters, and considering how to better support Diversity and Inclusion (D&I) in the sector.
- Though looking to existing frameworks to implement work placements in the fintech sector is valuable, placements will have to accommodate for the breadth and rapidly changing nature of the industry. SME fintechs may struggle to provide the level of supervision expected and required, and existing, larger financial institutions engaged in digital should not be overlooked as many will be well-placed to offer support.
- The considerations around D&I are welcomed, especially given fintech’s track record. Suggestions include providing a more evidenced-based D&I approach when allocating resources to the sector and obtaining better diversity data.
It will be interesting to see how the government assesses and takes forward the review’s recommendations. We think it is fairly certain that the skills and talent topic will be a feature of formal proposals coming forward given alignment with broader governmental policy aims.