The report identified the problem many start-ups in the financial services sector face in raising capital at the same time as meeting demanding regulatory requirements, said Andrew Barber, an expert in financial services regulation at Pinsent Masons, the law firm behind Out-Law.
The report highlighted that while the fintech sector makes a direct contribution of £6 billion to the UK economy annually and further supports the broader financial services industry, there are "increasing headwinds challenging the sector". It pointed to growing competition for UK fintechs as they seek to go global, including from counterparts in Asia Pacific which are often able to operate under less restrictive regulation.
The Financial Conduct Authority (FCA) has played an important role in enabling "global innovation in financial services regulation", but just 39% of businesses that have participated in the FCA's regulatory sandbox have received further investment and so there is scope for more to be done to help fintechs to grow, the report said.
"There is an opportunity to consider proportionate oversight/regulation in a scaling environment which bridges the gap between the sandbox and full FCA regulation, akin to ‘EU SME Growth market’ concept which has brought proportionate regulation to SMEs for Capital Markets in the EU," the report said. "The ‘ScaleBox’ could also be used to address asynchronous regulation from inbound fintechs to drive innovation in existing UK financial services businesses."
Barber said: "The report provides a number of useful insights from market data, but the most important is the disparity between the number of fintechs with which the FCA engages in the sandbox and the number which achieve sufficient growth to become fully authorised. Growth in the financial services sector is contingent upon regulatory authorisation and capital. The challenge is creating a mechanism for both of these ingredients to come at the same time. The report’s proposal for a bridge much like the ‘EU SME growth market’ seems to address the first ingredient. But the second ingredient will only be enabled if the FCA also allows for a more gradual building of a firm’s capital. This involves an element of risk-taking."
The report noted that fintech investment activity rose by an average of 113% in the UK in each of the past five years compared to 31% growth globally. Despite this, early stage venture capital investment in the UK "underperforms" other jurisdictions, it said.
"Investors and founders have differing views on the issues when matching capital to investments, including: tax incentives; investment approach; and differing attitudes between US tech-led investors compared to UK business/sector-led investors," the report said. "Understanding the quantitative and qualitative factors supporting the growth of each source of capital; monitoring how these develop; and how capital is matched to fintechs will be a key success factor for the UK fintech sector."