The Kalifa Review of UK Fintech was published in February 2021 to a huge welcome. The report sets out a number of bold recommendations to empower the UK to maintain and strengthen its position as a global leader in fintech. A year later, as the effects of the pandemic continue to linger, we follow up with 10 observations of progress.
1. A strong start to the marathon project
The Kalifa Review sets out an ambitious, multi-faceted agenda for the UK. Its implementation has always been more of a marathon than a sprint. Nonetheless (at the risk of mixing sports metaphors) we saw a strong start out of the gate.
Within the first few weeks of its announcement, the Chancellor endorsed the Kalifa Review and committed to implementing many of its recommendations. This was a very promising start, and was further confirmed a few months later when the autumn budget allocated £5 million to allocate seed funding to the Center for Finance, Innovation and Skills (CFIT). This was the means through which Kalifa expected to coordinate the delivery of his strategy. Kalifa said he viewed fundraising as a “major outstanding piece of the puzzle” and was delighted with the results.
2. Slow but steady progress in scale-up support
Many of the recommendations were aimed at sustaining fintech businesses in the UK beyond the start-up stage to create more homegrown global champions. Support was encouraged in various aspects, including capital, talent, and regulation. In most respects, progress has been slow but steady.
On capital, the government launched its long-awaited consultation in November on stimulating investment in productive finance. Among other things, we considered revising the cap on contributions for defined contribution pension schemes to facilitate the use of performance fees. This revision is expected to further expand investment in high-growth areas such as fintech. This consultation ended in January and we are currently awaiting a response from the government.
The government also announced reforms to the R&D tax credit, designed in part to attract growing fintech companies through financial incentives. Among other things, the reforms expanded eligible spending to include data and cloud computing costs and refocused relief on innovation that actually takes place in the UK.
On talent, the government has committed to launching a “Scale Up Visa” in spring 2022. Expedited visa applications for recruitment to companies of recognized size in the UK; We launched the Global Talent Network to bridge the skills gap in talent pools in the U.S. and India.
On the regulatory side, Kalifa suggested that the Financial Conduct Authority (FCA) could implement a “scalebox”, a package of measures to support significantly growing companies. In response, the FCA initially piloted additional support for newly authorized and fast-growing firms through what it labeled “regulatory nurseries”. These initiatives are expected to be rebranded as “Early and High Growth Oversight” when fully implemented later this year.
3. Listing regulations reform work completed
Amid concerns about the UK’s declining status as a destination for global IPOs, the Kalifa Review has recommended a number of changes to UK listing rules. This included eliminating restrictions on certain dual-class share structures and reducing the percentage of shares that must be held publicly. Both measures were intended to favor founder-led companies by allowing founders to retain a higher level of control after listing. The recommendations were reflected in Lord Hill’s UK Listings Review, published around the same time.
The FCA wasted no time in implementing these recommendations. By July 2021, a consultation outlining the proposals had already begun and the changes were confirmed and would come into effect in early 2022.
Meanwhile, the government has been trying to revise the prospectus regime to avoid placing undue burden on issuers. For example, it is proposed to allow companies to provide forward-looking financial information under certain circumstances, which is expected to be particularly helpful in fields such as fintech.
Of course, the proof will be in the pudding and it remains to be seen whether these reforms will actually have the desired effect.
4. No signs of merger controls easing
One of the comments that raised eyebrows at the Kalifa Review was the suggestion that the Competition and Markets Authority should take a more flexible approach to assessing merger controls. The rationale was that a degree of consolidation was important to drive the growth needed for UK fintechs to become global champions.
As expected, the CMA showed no signs of relaxing its controls afterwards. on the other way. The CMA has carried out a number of high-profile investigations in the fintech sector, including an investigation into blocking the merger of domestic crowdfunding platforms Crowdcube and Seedrs and the acquisition of Seedrs by US platform Republic. We are also working on revising regulations to make it easier to block technology mergers. A similar trend continues in the EU and the US and shows no signs of abating.
5. Encouraging start to foreign trade alliance despite lack of regulatory approval
The review highlights the importance of facilitating access to international funds and markets, particularly in light of the relatively small size of the UK domestic market and the recent loss of EU passport rights for companies regulated in the UK.
Since then, the government’s Department of International Trade has been busy negotiating a digital economy agreement with Singapore, reaching an agreement in principle last December. Among other things, the agreement allows UK companies to continue to sell electronic content to Singapore tariff-free, promotes interoperability (e.g. through electronic authentication and mutual recognition of digital signatures), reduces restrictions on cross-border data flows, and ensures that knowledge and The goal is to ensure that we can promote . dividing. It does not appear to include anything about mutual recognition of regulatory standards, which would be particularly useful in establishing the UK as an international foothold post-Brexit.
The Office for Investment has secured £10 billion worth of investment commitments across a range of sectors, including technology, from the UAE through the recently established UAE-British Sovereign Investment Partnership.
6. No single cohesive regulatory strategy
The first recommendation of the review was to deliver a “digital finance package” outlining a new regulatory framework for emerging technologies. The idea was to bring together the regulatory agendas of various government departments and regulators under one coordinated strategy with clear objectives, actions and timescales.
Disappointingly, although we have seen progress in a number of regulatory areas, we still await a comprehensive UK strategy. There remains significant uncertainty about the UK’s long-term direction of travel in many areas (e.g. digital asset regulation) and a clear strategy would be greatly welcomed by the industry. Moreover, bold direction can play a key role in bringing innovation to the UK.
7. Support for financial market innovation
One of the policy areas recommended for inclusion in the digital finance package was support for financial market innovation. Since the report, there have been some promising developments in this field.
On securities, the government announced it would work with the FCA and the Bank of England to provide a financial markets infrastructure ‘sandbox’. This is intended to enable businesses exploring the use of innovative technologies in the settlement of financial products within a more flexible regulatory environment (subject to appropriate protection). The Government is currently working with the Bank of England and the FCA to deliver this.
Regarding payments, the Bank of England launched a new model for central bank currency payments in April. In this model, the payment system operator can hold participants’ funds in an omnibus account at the Bank of England and settle transactions between participants in real time simply by updating participant balances in the omnibus account. This model is expected to support the development of a variety of new payment systems, including systems based on distributed ledger technology.
8. Establishment of UK CBDC case
In line with Kalifa’s recommendations, the Bank of England has continued to invest significant resources in research and development for retail central bank digital currency issuance. Over the past few months, we have published responses to our initial discussion paper, announced that we will begin a formal consultation on CBDC use cases in 2022, and have begun working with a range of lawmakers and stakeholders.
Perhaps unsurprisingly, the reaction was mixed. In particular, the House of Lords Economic Affairs Committee was somewhat lukewarm, concluding in a recent report that “we have yet to hear a compelling case for why the UK needs a retail CBDC.”
9. Broad focus on data, but no clear direction on open finance.
Harnessing the power of data has been an important theme of the Kalifa Review and we have seen many initiatives in this vein. For example, the government has launched an ambitious policy framework on data, conducted a consultation on digital identity, and committed significant funding to data-related initiatives. There has also been consultation on reforming the UK’s data protection regime with a view to moving away from GDPR to provide more tailored support and oversight for data-driven businesses. The Information Commissioner’s Office said the reforms were intended to create a world-leading regime that would not put the UK-EU data relationship at risk.
However, it is unclear where exactly the UK is headed when it comes to open finance, i.e. initiatives to expand user-driven data sharing within the financial sector. The FCA finally published its findings into public financing requests in March. Among other things, it concluded that a legislative and regulatory framework was needed to promote open finance, but had yet to hear any concrete proposals.
10. Investors embrace local development.
Finally, a brief explanation of the mechanics. within uk. The review recommended breaking London’s near-monopoly on UK fintech by developing a number of regional hubs. Investors clearly got the memo. Investment outside London has increased by 237% since 2020, according to new figures from Innovate Finance. Data shows that investment in fintech across the UK has also increased, although regional growth rates remain above the national average. This may not be all that surprising to some, considering the widespread relocation trend triggered by the pandemic.
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Overall, things seem to be moving in the right direction, but some are faster and more accurate than others. We will be watching closely how all of these issues unfold in the coming days. If you have any questions, please do not hesitate to contact us.