As part of the UK's budget in 2020, the Chancellor asked Ron Kalifa OBE to conduct an independent review to identify priority areas to support the UK’s fintech sector. The review canvassed views from across the industry, including from regulators, incumbent institutions and fintech firms. The final report and recommendations were published last week and have generally been seen positively, with one of the recommendations – a new visa scheme to enhance access to international talent for fintech scaleups – already being taken forward by the UK chancellor.
In this post, we take a closer look at some of the regulatory recommendations that could impact firms operating (or seeking to operate) in the UK.
The report recognises that the UK has already been a leader in the regulatory sphere, expressly referencing the Financial Conduct Authority's (FCA's) competition objective, the Bank of England and FCA new bank start-up unit and the FCA's sandbox. While the report recommends that the UK implements a 'Scalebox' that would support firms focusing on innovative technology to grow, there are also a number of recommendations that would have a broader impact, including on already-successful financial institutions. The main recommendation is that the Government delivers a digital finance package that creates a new regulatory framework for emerging technology.
The report sets out a number of sub-recommendations that a digital finance package could cover. Some of these are summarised below, but the report does cover a number of other areas (central bank digital currency, ESG, financial inclusion) that could also affect the direction of policy in this area. We also note the proposed creation of a Digital Economy Taskforce (with an independent chair and participants from different government departments and regulators) to deliver the fintech strategy and recommendations.
The report recommends that the Government takes forward various proposals on topics that are the subject of a great deal of input at the moment. In particular, the report recommends that the Government:
- establishes a digital ID trust framework (covering corporate and individual ID) – on digital ID, we have considered some of the key areas of interest in our podcast;
- adopts common data standards to facilitate improvements in the financial services sector. A common data standard was something which was mandated as part of the CMA's open banking work and has generally been seen as part of the success of open banking, at least from the perspective of those seeking access to data;
- continues to progress open finance (ie control by consumers of their financial data, beyond open banking) as a mandatory regime. Along these lines, the report concludes that emerging businesses often do not have sufficient access to data to develop innovative products and to compete with established firms with large customer bases and data sets. Interestingly, the report also suggests that open finance should inter-operate with other open-data initiatives in the UK. Whether or not consumers are happy to allow such interoperability and potentially very broad access to their data is likely to depend on perceptions of security, trust and whether there is a real benefit.
Artifical intelligence (AI)
The report recommends that the position of AI under the existing regulations should be considered further. Without using the term expressly, many of the concerns arising in the context of data ethics are flagged as areas of risk, such as bias, discrimination and lack of fairness. The report recommends that the PRA and FCA rules should include specific guidance on the use of AI – we note that this moves away from a principles-based, tech-neutral approach (which is referenced in other parts of the paper) but clarity on the regulators' expectations in this area is something we expect to be welcomed.
Market infrastructure (in particular, trading venues, clearing houses, central securities depositories) is perhaps a surprising topic for the report to cover, as many of the legal issues involved are quite specialised. However, the report notes that modernisation of UK law to allow UK FMIs to process digital instruments is essential. Among other things, the recommendations include allowing the full dematerialisation of securities, reviewing established pieces of legislation and considering the implications for transaction reporting – all of which are areas that have been under industry discussion for a number of years. The EU Commission included a DLT pilot (effectively a sandbox) for market infrastructure as part of its digital finance package, allowing certain provisions of EU legislation to be disapplied in certain, limited, circumstances, but the Kalifa report seems to be suggesting going a step further and reviewing the existing legislative regime with a view to more permanent change.
Regulation of cryptoassets
The report states that both the initiative and the Government’s stated objective of considering the case for a wider regime are welcome. It is perhaps surprising that the report does not recommend that the Government explores the wider regime at this stage, given the evidence from the contributors that many crypto providers would positively welcome the opportunity to be regulated. For those looking for further background, we have previously summarised HMT's proposals.
While the UK government is already reviewing the regulatory framework applicable to payment service providers, the report stated that 'our contributors identified a number of problems within the existing regulatory framework that create barriers to new market entrants, hinder innovation and ultimately have a negative impact on customers'. If the same contributors are also contributing to the Government's review (and, when published, the FCA's consultation on its approach to payment service providers), it seems we can expect to see responses requesting a move towards principles-based regulation.
Fintech is not a niche within financial services. Nor is it a sub-sector. It is a permanent, technological revolution, that is changing the way we do finance. Its essence is in both fast-growing fintech companies, and the investment and use of technology by our incumbent financial institutions.