The Kalifa Review of UK Fintech was published in February 2021, with great fanfare. The report set out a myriad of bold recommendations to empower the UK to retain and strengthen its position as a global leader in fintech. One year later, as the effects of the pandemic continue to drag on, we follow up with 10 observations on the progress made.

1. A strong start to a marathon project

The Kalifa Review set out an ambitious multifaceted agenda for the UK. Its implementation was always going to be more of a marathon than a sprint. Still, (at the risk of mixing sporting analogies) we saw a strong start right out the gate.

Within the first few weeks of its release, the Chancellor had endorsed the Kalifa Review and committed to implement many of its recommendations. This was a highly promising start and one that was cemented a few months later when the Autumn Budget allocated £5m to seed fund the Centre for Finance, Innovation and Technology (CFIT). This was the vehicle Kalifa envisaged would coordinate the delivery of his strategy. Kalifa reportedly viewed its funding as the “main outstanding piece of the jigsaw” and was delighted with the result.

2. Slow but steady progress on support for scale-ups

Many of the recommendations were aimed at retaining fintech businesses in the UK beyond the start-up stage, with the hope of creating more homegrown global champions. Support was recommended on multiple fronts, including in relation to capital, talent and regulation. Progress on most aspects has been slow but steady.

Concerning capital, the government launched a long-awaited consultation on enabling investment into productive finance in November. Among other things, it looked at revising the charge cap for defined contribution pension schemes to facilitate the use of performance fees. These revisions are expected to unlock greater investment into high growth sectors such as fintech. The consultation closed in January and we are now awaiting the government’s response. 

The government has also announced reforms to R&D tax credits, which again were designed in part to attract growing fintech businesses with financial incentives. Among other things, the reforms expand qualifying expenditure to include data and cloud computing costs and refocus the reliefs on innovation that actually takes place in the UK. 

In relation to talent, the government has committed to launching a “Scale Up Visa” in spring 2022; fast-tracking visa applications for recruits to recognised UK scale-ups; and launching a Global Talent Network to help fill skills gaps from talent pools in the US and India. 

On the regulatory side, Kalifa suggested that the Financial Conduct Authority (FCA) could implement a “scalebox” i.e. a package of measures to assist firms which are growing significantly. In response, the FCA has piloted additional support for newly authorised firms and fast-growing firms via what it initially labelled a “regulatory nursery”. These initiatives are expected to be rebranded as “early and high growth oversight” when they are fully rolled out later this year.

3. Job done on reforming Listing Rules

Amid concerns over the UK’s declining status as a venue of choice for global IPOs, the Kalifa Review recommended a number of changes to the UK Listing Rules. This included removing restrictions on certain dual-class share structures and reducing the proportion of shares required to be in public hands. Both measures were intended to favour founder-led companies, by allowing founders to retain a greater degree of control after a floatation. The recommendations were echoed in Lord Hill’s UK Listings Review, which was published around the same time. 

The FCA has wasted no time putting these recommendations into practice. By July 2021, it had already launched a consultation outlining its proposals and the changes were finalised and in effect by the beginning of 2022.

Meanwhile, the government has been seeking to amend the prospectus regime, to ensure that it is not overly burdensome for issuers. For example, it is proposing to allow companies to provide forward-looking financial information in certain circumstances, which is expected to be particularly helpful in sectors such as fintech.

Of course, the proof will be in the pudding and it remains to be seen whether these reforms will indeed have the desired effect.

4. No signs of relaxations on merger control

One remark in the Kalifa Review that raised some eyebrows was the suggestion that the Competition and Markets Authority should take a more flexible approach in its merger control assessments. The rationale was that a degree of consolidation would be critical in facilitating the growth that UK fintechs need in order to become global champions.

As we expected, the CMA has not shown any signs of relaxing its controls since then. On the contrary. The CMA has made a number of high-profile investigations in the fintech space, including an inquiry which led it to block the merger of two homegrown crowdfunding platforms, Crowdcube and Seedrs, and resulted in Seedrs being acquired by the US platform, Republic. It is also proceeding with revisions to its rules to make it easier to block tech mergers. Similar trends continue in the EU and US and show no signs of abating. 

5. An encouraging start on foreign trade alliances, though no regulatory recognition

The Review highlighted the importance of facilitating access to international funding and markets, not least given the relatively small size of the UK’s domestic market as well as the recent loss of EU passporting rights for firms regulated in the UK. 

Since then, the government’s Department for International Trade has been busy negotiating a Digital Economy Agreement with Singapore, and it reached an agreement in principle in December. Among other things, the agreement seeks to ensure that UK businesses can continue to sell electronic content to Singapore without facing tariffs, promote interoperability (e.g. through mutual recognition of electronic authentication and digital signatures), reduce restrictions on cross-border data flows and facilitate knowledge sharing. It does not appear to include anything on mutual recognition of regulatory standards, something that would be particularly useful in establishing the UK as an international launchpad post-Brexit. 

The UK Office for Investment has also secured a commitment of £10bn of investment from the UAE into a number of sectors including tech, though the recently established UAE-UK Sovereign Investment Partnership.

6. No single cohesive regulatory strategy

The Review’s very first recommendation was the delivery of a “digital finance package” that would outline a new regulatory framework for emerging technologies. The idea was that this would bring together the regulatory agendas of all the various government departments and regulators under one coordinated strategy, with clear objectives, actions and timescales.

Disappointingly, while we have seen developments across various areas of regulation, we are still awaiting an overarching UK strategy. In many areas (such as the regulation of digital assets), there remains a considerable degree of uncertainty as to the UK’s long-term direction of travel, and a clear strategy would be extremely welcome in the industry. Moreover, a bold statement of direction could play an important role in attracting innovation to the UK.

7. Support for financial market innovation

One of the areas of policy recommended for inclusion in the digital finance package was support for financial market innovation. There have been a couple of promising developments in this area following the report. 

In relation to securities, the government announced that it will work with the FCA and Bank of England to deliver a financial market infrastructure “sandbox”. This is intended to enable firms exploring the use of innovative technologies in the settlement of financial instruments to do so within a more flexible regulatory environment (subject to appropriate protections). The government is currently working with the Bank of England and the FCA to deliver this.

With regard to payments, the Bank of England launched a new model for settlement in central bank money in April. Under this model, a payment system operator can hold its participants’ funds in an omnibus account with the Bank of England and settle transactions between participants in real-time simply by updating the participant balances in the omnibus account. The model is expected to support the development of a range of novel payment systems, including those that may be based on distributed ledger technologies. 

8. Establishing the case for a UK CBDC

In line with Kalifa’s recommendations, the Bank of England has continued to devote significant resource to research and development on issuing a retail Central Bank Digital Currency. In the past few months, it has published the findings of responses to its initial discussion paper, announced that it will launch a formal consultation on the use case for a CBDC in 2022 and begun engaging with various lawmakers and stakeholders. 

Perhaps unsurprisingly, reactions have been mixed. Notably, the House of Lords’ Economic Affairs Committee has been somewhat lukewarm, concluding in a recent report that they “have yet to hear a convincing 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 was a prominent theme in the Kalifa Review and we have seen a number of initiatives in this vein. For example, the government has launched an ambitious policy framework on data, run a consultation on digital identities and committed significant funding to data-related initiatives. There has also been a consultation on reforms to the UK’s data protection regime, with a view to making certain departures from GDPR in order to provide more tailored support and supervision of data-driven businesses. The Information Commissioner has indicated that these reforms are intended to create a world-leading regime, which at the same time will not endanger the UK-EU data relationship.

However, it remains unclear exactly where the UK is headed with regard to Open Finance i.e. the initiative to broaden user-driven data sharing within the financial sector. The FCA finally published the findings to its Open Finance Call for Input last March. Among other things, it concluded that there was a need for a legislative and regulatory framework to facilitate Open Finance, but we are yet to hear any specific proposals. 

10. Investors embrace regional development

And finally, a brief comment on dynamics within the UK. The Review recommended breaking up London’s near monopoly on UK fintech by developing a number of regional hubs. Investors have clearly got the memo. Regional investment outside London has increased 237% since 2020, according to new figures from Innovate Finance. The data suggests that investment into fintech in the UK as a whole is also up, but that regional growth rates surpass the national average. This may come as little surprise to some, given broader relocation trends fuelled by the pandemic.

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Overall, things broadly seem to be moving in the right direction, though some with more speed and precision than others. We will be keeping a close eye on how all these matters develop over the coming years. Should you have queries, please do not hesitate to get in touch.