Clifford Chance

The HM Treasury-commissioned Kalifa Review published today reflects months of engagement with industry and sets out a strategy for ensuring that the UK can deliver on its ambitions to maintain its fintech leadership post-Brexit.

The creation of a £1bn fintech growth fund as well as a new Digital Economy Taskforce and world-first regulatory "Scalebox", improvements to the listing regime to make fundraising easier and cultivating regional fintech clusters are some of the key proposals recommended for swift deployment in the 106-page Review led by former Worldpay chief Ron Kalifa OBE.

Here are some of the highlights in more detail.

Policy & Regulation

The flexibility and openness to financial innovation of the UK's Financial Conduct Authority (FCA) has played a crucial role in the success of UK fintech to date, with its Regulatory Sandbox initiative and launch of the Global Innovation Network to foster cooperation between international regulators. But the review recognises that more is needed.

A key recommendation of the Review is for a new digital finance regulatory framework for emerging technology to facilitate growth, and help address challenges such as financial inclusion. This is likely to cover digital ID and data standards, for example. The Review proposes the creation of a Digital Economy Taskforce that would be responsible for bringing together fintech regulatory stakeholders and for delivering the roadmap for the new digital finance regulatory package.

Building on the success of the FCA's existing fintech Regulatory Sandbox, the Review identifies the need for a “Scalebox” that provides additional support to expanding fintech firms and which supports partnership between incumbents and fintech and regtech firms (to work alongside existing initiatives such as the Fintech Pledge, promoted by the Fintech Delivery Panel). Investor protection and systemic stability will always be the FCA's priorities, but it can help nurture businesses, for example by ensuring that it has the right personnel, that they are available, and that official guidance is as clear as possible.

Recognising that Brexit has introduced regulatory uncertainty in some key areas for fintech firms, the Review makes clear that a post-Brexit priority must be to ensure that there is a coherent and consistent approach for international trade policy in relation to fintech.

Skills

The UK has made big strides in improving the number of STEM students coming out of its schools, and UK universities remain fertile territory for young entrepreneurs. However, a significant amount of fintech talent comes from overseas. The Review rightly recognises that ensuring a future pipeline of fintech experts from both the UK and overseas is key. To support this, it recommends the establishment of a new visa stream to allow global access, as well as ensuring the accessibility of short fintech courses for upskilling UK individuals and the acceleration of embedded fintech work placements for students – nothing beats learning on the job.

Investment

While mechanisms for connecting investors and entrepreneurs already exist in the UK, the Review recognises that improvements can be made to reduce investment friction, particularly for growing firms who are beyond initial seed rounds.

A critical change is proposed to be made to listing rules to try and increase the UK's attractiveness vs. key stock exchanges in other major financial centres. Suggested improvements include reduction of "free float" requirements (where currently 25% shares are required to be in public hands at all times), and the introduction of dual class shares to bring in more flexible governance rights and the ongoing relaxation of pre-emption rights. Concern has been raised by some fintechs that diluting the rules for listing may reduce investor confidence and won't necessarily lead to a more attractive listing environment. In particular, there has been some criticism of the proposal to allow dual class shares with differential voting rights, and the potential move away from the grounding principle of "one share, one vote". While many high profile tech companies have adopted dual share listings overseas to allow them to give them greater longer term certainty for business planning, where conflicts arise between management and investors, there is a risk that investors would suffer.

The Review also recommends the establishment of a £1bn Fintech Growth Fund, intended to act as "the catalyst in developing a world leading ecosystem". The suggestion is that this could be funded by unlocking institutional capital, for example, encouraging the diversion of amounts held in private  pension schemes.

Other proposals include the expansion of tax incentivised investment schemes and benefits, such as R&D tax credits, the Enterprise Investment Scheme and Venture Capital Trusts and the implementation of a global family of fintech indices to enhance sector visibility.

International

Importantly, the Review recognises that the UK cannot go it alone and that international considerations remain key for fintech – a sector that is increasingly borderless. This isn’t surprising with the FCA at the helm of the Global Innovation Network and having already entered into specific fintech cooperation agreements with 9 other jurisdictions.

A key recommendation is the development and delivery of an international action plan for fintech by the Department for International Trade, that will increase the practical and commercial support available to international fintech, prioritise alignment with trade agreements and identify opportunities in growth markets. The Review proposes that international collaboration is driven through a new private-sector led Centre for Finance, Innovation and Technology, to be supported by a new International Fintech Taskforce set up by the Department for International Trade. Both bodies would have a mandate to help provide input on and deliver the international fintech action plan.

The Review also proposes the establishment of an international "Fintech Credential Portfolio" or a new standard for fintech businesses wanting to operate internationally to be led by the Centre for Finance, Innovation and Technology. The aim is to help fintech firms demonstrate credibility by providing easy access to the information needed for successful expansion internationally, such as digital identification, evidence of authorisations and regulatory compliance and evidence of backing or support from recognised investors and/or incumbent institutions.

National connectivity

Critically, the Review looks beyond the idea of UK fintech being centred around London, recognising the need for a strong fintech environment in all parts of the UK with its emphasis on nurturing national clusters. It identifies the following ten clusters:

A cluster is only partly about physical proximity. It is also about having multiple forums for exchange of ideas and, importantly, legislators and regulators being part of the cluster, given how much they can do to hinder or promote the work of those in the cluster. The proposal is that each cluster should produce a three-year strategy to support growth, foster specialist capabilities, and enhance national coordination. The Review recognises that there must be further investment in R&D in order to ensure the continued acceleration of growth in fintech clusters.

The Centre for Finance, Innovation and Technology is also set to play a key role in driving the national coordination of UK fintech strategy and ensuring future fintech competitiveness, relying on a data-led approach, for example though maintenance of a national fintech database, designed to provide open access to data and facilitate sector developments.

Next steps

The Government is already considering the Kalifa Review and has promised that it will respond in full "soon"; we expect its feedback in the next few months. Given the focus that has been placed on fintech by the Government, and the speed at which policy changes are able to be effected post-Brexit, we anticipate that important steps will be taken in relation to a number of the Review's key recommendations before the end of 2021.