The Kalifa report has shone a light on an important sector in the UK economy. But how else could the regulators respond?
Bernadine Reese is managing director at Protiviti UK, a global consulting firm. With her 27 years of experience in the financial sector, she shares her view on finding a flexible approach for fintech regulation.
While the pendulum of UK regulation swings between “more principled” and “more prescriptive”, there has always been a focus on competition and innovation. In 2016, the Financial Conduct Authority (FCA) established its first ‘sandbox’ pilot, authorising companies to test out new technology with real customers. The initiative has been widely supported, and replicated in more than 50 countries, as part of the Global Finance Innovation Network.
In March this year, just two months after the Brexit agreement, entrepreneur Ron Kalifa published his recommendations to develop the idea further. He said the UK had led the way “in its policy and regulatory approach to fintech” and hailed the sandbox approach. But he called for a new ‘regulatory scalebox’ to see the work of the FCA continue. The FCA has signalled its intention to rise to the challenge with a “regulatory nursery” to encourage new startups.
Kalifa’s ideas are important to help the sector flourish and maintain the UK’s global fintech reputation. According to The Global City, the UK attracted $4.1billion of fintech investment in 2020, ranking it number one in Europe and second in the world. The adoption rate of new technology in the population is well above the global average. The fintech job market has witnessed strong growth. And 82 per cent of global financial and professional services firms plan to form fintech partnerships in the next five years.
This pace of change calls for an approach that protects customers, but also gives fast-moving firms a chance to be competitive. Kalifa has called for a new Digital Economy Taskforce to develop a policy roadmap and a new regulatory framework for emerging technology in the sector. He also believes the Competition and Markets Authority could be more flexible in the way it polices fintech mergers and acquisitions.
We think the time is right for a coordinated approach across regulators and industry to get the balance right. For example, in January 2020, the FCA began supervising anti-money laundering requirements for crypto businesses, and firms have been through a one-year transition. We’ve spoken to people who have experienced the registration process and found it challenging.
Whenever an industry is newly regulated, companies often find it difficult to understand what they are being asked to do. The handbooks are large, the rules are extensive, and there are many standards to meet. The level of detail can be overwhelming and that’s why support is needed. But there also is an opportunity to think about this support more broadly.
As the government consults on financial services regulation after Brexit, trade body UK Finance has issued a detailed response. One of those opportunities, it says, is to regulate industries according to the service they deliver, and not the type of institution they are: because it’s the activity that gives rise to the risk not the company.
We think this realignment of the regulatory regime will help ensure consistency of approach, improve regulatory outcomes and could make the UK more attractive. In time, it could also allow companies to provide new services to customers. Of course, these ideas apply beyond fintech, but more tailored regulation could further enhance current initiatives like the scalebox as well.
The UK has a big opportunity to think about what it wants to be after Brexit. There is a long journey ahead, as it untangles 40 years of close ties with Europe. But it’s clear there is a chance for regulators to keep the UK competitive and uphold standards for customers. There is a careful balance to strike. But everyone has pulled together in the past year and proved that change is possible, so we believe the time is right to pursue the path towards a flexible approach to regulation.
Fintech firms, and many others, would benefit. And the big pendulum swings might just slow down as well.