Last week, there was a hearing at Parliament that tackled some of the challenges to growing the Fintech ecosystem in the UK – a strategic sector of great importance for the country.
The UK has long been a top Fintech global hub. Brexit, policy inertia, along with competition may put this leading sector of finance at risk. The hearing, entitled the Future of Financial Services, saw three witnesses participate in the discussion. Christian Faes, Executive Chairman and co-founder of LendInvest, Michael Moore, Director General of the British Private Equity and Venture Capital Association (BVCA) and Stuart Williams, President, of ICE Futures Europe. Faes is also the Chair of Fintech Founders, an entity that advocates on behalf of the UK Fintech industry. Fintech Founders brings together the UK’s top Fintech entrepreneurs with the aim of supporting better collaboration with the UK government, regulators, and other vested interests.
In October of 2021, Fintech Founders distributed a survey of their members which indicated:
- A majority (56%) of founders believe the UK is currently positioned as the world leader in Fintech, a percentage that has declined from 2019 when 63% of respondents saw the UK as the world leader.
- 96% of respondents were very confident about the outlook for their business in the next 12 months, up from 81% last year.
- 34% of founders say that recruiting talent is the single biggest issue facing them
- 37% mentioned access to funding as the main issue – the most frequently chosen option.
- 52% of respondents are interested in expanding to markets across the European Union.
You may read more about the survey here.
The Kalifa Review is another, a highly touted publication that advocates on behalf of improvements to the financial service ecosystem in the UK along with supporting Fintech innovation.
Published in early 2021, the Review provided a five-point plan to sustain and grow Fintech. These included policy recommendations such as creating a new regulatory framework for emerging technology and establishing a Digital Economy Taskforce so ambitions align across the government.
Globally, the Review advised delivering an international action plan for Fintech.
Regarding investment, the review recommends expanding R&D tax credits, the Enterprise Investment Scheme (EIS), and Venture Capital Trusts (VCT).
The review recommended creating a £1 billion “Fintech Growth Fund.”
There is plenty more in the publication. The Kalifa Review may be viewed here.
So what were some of the interesting points shared at the hearing?
Faes, a longtime, vocal advocate on the need to support Fintech innovation said there is a lot that needs to be done. In years past, the UK has had a legitimate claim to being the world leader in Fintech but Fintech Founders members are indicating their confidence in this statement has been waning in the past years. Faes noted that the Khalifa Review was published in February yet little has been accomplished in regards to the policy recommendations.
“We are almost a year on and next to nothing has been done,” Faes stated. He added there have been some positive things like forthcoming employee Visas which can help with the talent shortage.
Faes said that it has become harder for startups to get regulated. Faes explained that at one point it would take around 4 months for young firms to get regulated but now it takes 12 to 18 months. “Startups can’t start business until they actually get regulated.”
Faes conceded that COVID may have impacted the process but offered to return to the Committee with specific examples of regulatory delay. “Before it was very pro-innovation,” said Faes commenting on the FCA, today it is less encouraging and less supportive of competition in financial services.
“It is a bit of a revolving door… it can take 2 to 3 months to get a case manager now,” Faes said, pointing to one of the reasons for regulatory impediments.
Asked if any member of the panel believes there is a risk of pursuing more deregulation, Williams said “I think there is little risk of us going too far.” The greater risk is not implementing it quickly enough. Moore said at the moment this is true. Faes concurred with the assessment that there is little risk of going too far in regard to deregulation.
Moore noted that getting quicker decisions from the FCA would boost the attractiveness of the UK market for financial services.
Faes added that many of his members want to expand internationally but the top hurdle is regulatory compliance and if free trade agreements can streamline the process this would certainly help UK Fintechs in their ambitions. “That would be brilliant, Moore shared. “The challenges of free trade agreements are the trade-offs within them and what is sacrificed…”
Faes addressed the crypto-asset sector stating crypto is a significant opportunity to challenge incumbent financial services. “There is a huge sector being built” and huge amounts of money being raised by some of these businesses, but the FCA has been “very unwelcoming” to these crypto businesses in the UK.
Faes said there were about 250 crypto companies that have sought to get registered in the UK but only ten have actually gotten regulated, adding that a large number probably didn’t qualify to get regulated.
“The reality is that people are withdrawing their applications to do business here,” stated Faes. “And they just go elsewhere, it’s a global marketplace.”
Faes said it is very difficult for crypto founders to interact with the FCA. “It plays into this broader feeling of being closed to innovation.”
If you had a jurisdiction that had less prescriptive regulation, that is where you would go to start a business, Faes explained. “We have an opportunity now” in regards to attracting capital and startups.
Access to capital remains the number one issue for Fintechs and is a key issue for both startups and scale-ups. Faes said that improving EIS is only available if you are a qualifying trade and it specifically excluded financial services. “We have a great scheme that encourages businesses but it excluded financial services,” Faes testified.
Asked about banking and Fintech innovation, Faes said you may be surprised to know that actually a lot of startups struggle to get bank accounts. Faes lauded open banking while casting shade on an unnamed banking executive that apparently labeled open banking as not a success.
“There are about 2.5 million payments transferred a month through open banking,” Faes said. “In 2018, there was about 300 thousand throughout the course of the whole year … I think we need to go further.”
Williams was asked about the market for crypto exchanges expressed his opinion that broader regulation and global standards are on the way.
The gist appears to be that established firms, or entities that deal on a wholesale basis, receive better services from the FCA but the level of compliance is increasingly diminishing the competitiveness of the UK financial services market. For early-stage Fintechs, this challenge is amplified as proportional cost undermines the sector and lack of dedicated attention on a timely basis may undermine the entire sector over time – if it has not already done so.
“It’s about having an environment where innovation is encouraged. We are trying to create market, global leading sectors. One example that is specific to our industry is in relation to the Competition and Markets Authority [CMA], recently we had two … pioneers in crowdfunding, Seedrs and Crowdcube … world leaders set to merge and the CMA blocked that merger. I think there was a lot of head-scratching around that … if we want to create a global champion … let these two companies join together and they could be a global leader. The CMA blocked it and now in the last week or so we see that Seedrs is being sold to an American company.”
Again, an example of a missed opportunity, said Faes, stating that the regulator got in the way of progress for the sector.
The caveat is there is a huge amount of regulatory review going on at the FCA as well as structural changes which are taking place at the securities regulator. But if the efficacy is declining, and authorization or approvals are not forthcoming, firms will inevitably look to go elsewhere.
“The funnel can’t get it through quick enough.”