Kalifa Review: Others waiting for UK fintech’s ‘crown to slip’
The head of the much-awaited government-backed review into the fintech industry has warned the UK risks falling behind if recommendations aren’t quickly implemented.
Former head of payments firm Worldpay Ron Kalifa led the review published today which sets out plans to capitalise on the growing fintech industry.
The scope of the review is large, ranging from fintechs at the earliest stages of seed funding through to more-established businesses.
The sector has been at the forefront of innovation in recent years – UK fintechs made £11bn in revenue in 2019 and represents 10 per cent of the global market. But the pandemic has accelerated digital adoption across the board and other countries are quickly catching up.
The review found three main threats: the pandemic, Brexit and competition from overseas hubs like Singapore, Australia and Canada.
Kalifa said the recommendations, including a vamped up sandbox, a new £1bn growth fund and a tech visa “must be done now. Others are waiting for our crown to slip.”
Introduction of a ‘scalebox’
The success of the UK’s fintech community is in large part due to the supportive regulatory environment with local sandboxes across a section of sectors.
Now Kalifa is calling for an expansion of the sandbox regime through a “scalebox” arrangement through which firms focusing on innovative tech receive additional support.
Unlike the Financial Conduct Authority’s sandbox, introduced in 2015, the scalebox would be available on a rolling basis rather than through time-limited windows.
Additionally it would offer support even if the proposal is not the first of its kind but is still an interesting innovation.
Last summer the FCA launched a “digital sandbox” with the City of London to give startups access to specific data sets which will then be used for testing and validating new tech.
The Kalifa review wants this to be a permanent fixture in the regulatory environment but broaden it to include access for established regulated firms, not just fintech.
Fintech growth fund and tax relief
The government has spent nearly a year dishing out over £1bn in convertible loans and Kalifa has now recommended the government boost fintechs further with a new fund.
“With a £2bn fintech growth capital funding gap in the UK, many entrepreneurs prefer to sell rather than continue to build their promising company,” the review notes.
Kalifa now wants to bring usually risk-averse investors like pension funds and insurers into the fund to plug the funding gap and raise capital in the UK rather than in the US.
More than half of entrepreneurs have said their most likely exit would be to sell to a foreign trader, compared to 16 per cent who’d opt for a UK-based buyer.
The £1bn fintech growth fund is set to focus on Series B to pre-IPO stage fintechs, modelled on the Business Growth Fund.
Other recommendations include an expansion of tax incentives including R&D tax credits, Enterprise Investment Scheme and Venture Capital Trust tax reliefs.
A survey commissioned by the review revealed 97 per cent of founders have utilised state aid schemes, including EIS, SEIS and VCT but there have been concerns over access. Kalifa argues an expansion of the relief to regulated to fintechs “will level the playing field”.
Ahead of a separate Treasury-backed review into listings led by Lord Hill, Kalifa has set out recommendations to encourage fintechs to list in London.
There are encouraging signs that activity in London’s IPO market is picking up. But of the 3,787 IPOs at the world’s major stock exchanges between 2015 and 2020, the US accounted for 39 per cent (on Nasdaq and the NYSE), while the UK trailed with 4.5 per cent.
Preempting some of Lord Hill’s recommendations, Kalifa has called for free float requirements on the stock exchange’s Premium segment to be reduced from 25 per cent to 10 per cent for a limited time post-IPO. He has called for the relaxation of pre-emption rules to be maintained at 20 per cent following the Pre-Emption Group’s recommendations last April.
Kalifa also recommends a fintech index which could become a “bellwether” for fintech stocks and “cement the country’s reputation as a listing destination.”
The review has recommended changes to the current tech visa system to combat fears that the fallout from Brexit could deter top talent from moving to the UK.
“Brexit gives Paris, Berlin and other European fintech hubs a window to capitalise on uncertain messaging. In order to sustain its global dominance in fintech, the UK needs to strengthen its position on immigration or risk a significant shortage in human capital.”
Kalifa has proposed a new “fintech scaleup stream” within the Global Talent route. Those with a job offer at the required skills level from a recognised scaleup would automatically qualify for the stream.