Kalifa UK fintech review recommends reforms to boost sector

In his government-commissioned review of UK fintech, Ron Kalifa, former chief executive of Worldpay, also recommended a series of measures to ensure the fintech sector continues to benefit from a pipeline of talent, and build on its existing strengths to grow globally.

While Kalifa said the UK is well-placed to maintain its position as a global leader in fintech, he said "its future is not assured", highlighting increased competition from other financial centres around the world, regulatory uncertainty stemming from Brexit, and "accelerated digital adoption" stemming from the coronavirus crisis as "three broad threats" to the UK's position. However, according to his report, there is an opportunity to boost the UK economy by around £8 billion a year by 2030 if the UK increases its global share of the fintech market by just 2% by then.

Kalifa's comprehensive report sets out a series of recommendations around five themes: policy and regulation; skills; investment; international and; national connectivity.

On national connectivity, the Kalifa review recommended that focus is given to nurturing the "high growth potential" of the top 10 fintech "clusters" in the UK. Those include "super hub" London, as well as "large and established" clusters like The Pennines, which covers Manchester and Leeds, Scotland – in particular the corridor between Edinburgh and Glasgow – and Birmingham.

"Clusters are a worthwhile focus, as they are recognised as powerful economic and social development tools that empower innovation and show more resilience," the Kalifa report said. "Rather than vying to compete with one another, these clusters need to form a more collaborative web in order to strengthen connectivity."

This approach will help UK fintech companies to grow their business internationally, according to the report.

"By promoting connectivity between fintechs and clusters across the UK, we can develop a UK fintech landscape where the whole is greater than the sum of its parts," the report said.

The Kalifa review said that UK fintech clusters would benefit from a similar model of support to that available to the sector in Scotland, where Fintech Scotland operates as a dedicated local body "empowered … to develop and deliver focused strategies that consider the different needs and objectives of the local fintech ecosystem".

The report said that the government should establish a new Centre for Finance, Innovation and Technology to promote greater collaboration both within the UK fintech sector and internationally.

Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law, who specialises in fintech matters, said: "It is pleasing to see Fintech Scotland called out in the review as being an example of a strong support model for the fintech sector. Generally, it is clear from the review how important fintech is to the UK economy and therefore how important it is to ensure ongoing investment and support to ensure that it thrives."

The report also set out a raft of recommended regulatory changes to better support fintechs, from the introduction of a new digital identity (ID) trust framework, to the development of "common data standards" and the evolution of the existing 'open banking' regime into a mandatory 'open finance' system that would enable fintech companies to use data held by large financial institutions – subject to strict conditions – to deliver innovative new services.

The review also endorsed plans for tighter regulation of cryptoassets and the introduction of a central bank digital currency, and further suggested that the government may want to explore reforms to payment services laws.

New guidance was also recommended to help fintech companies understand how the UK financial services rulebooks apply to use of artificial intelligence (AI) and how AI applies in the context of UK equality legislation and data protection law.

The enhancement of the existing regulatory 'sandbox' approach to support businesses in testing fintech innovation prior to mass-market launch was also proposed.

Competition law expert Alan Davis of Pinsent Masons said that the Kalifa review also highlighted some concerns within industry about the approach taken by the Competition and Markets Authority (CMA) to merger control assessments involving fintechs.

The report said: "Concerning the Competition and Markets Authority (CMA), it is clear from stakeholder feedback that the CMA must adapt its approach to this complex sector in order to better balance competition and growth. There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech. Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions. The CMA’s mandate must reflect these market dynamics."

Davis said: "The CMA is strongly focused on 'killer acquisitions' in the tech sector and is increasingly taking a much tougher and interventionist approach. While it ultimately cleared the Paypal/iZettle deal, it did so only after an in-depth investigation. The concern in the market has been that a strong interventionist approach by the CMA could risk a chilling effect on the UK fintech industry and this seems to be recognised in the review which calls on the CMA to take into account the need to facilitate the growth of UK fintechs through M&A activity in order for them to become global champions."

Other recommendations focused on investment called on the government to consider more generous tax incentives to help accelerate the growth of fintech companies and incentivise private sector investment. The government was also called on to consider introducing a new fintech growth fund – "a domestically funded growth capital investment vehicle focused on fintech" – to help fintech companies access the finance they need to grow their business.

The review said that a relaxation of some public markets listing requirements would also encourage more UK fintech companies, as well as those based overseas, to undertake 'initial public offerings' (IPOs) on UK public stock exchanges.

Kalifa said: "Fintech is about change. It is about new firms and established ones, large companies and small and the roles of both public and private sector. At present, these elements and their well-intentioned supporters are not pulling together in a single vision. In this review I have tried to set out what this vision consists of, but more importantly, how it can be realised."

John Glen, economic secretary to the UK Treasury, said the government will consider the recommendations from the review "in detail".