Legal Update: Kalifa Review - A revolution for FinTech?

Legal Update: Kalifa Review - A revolution for FinTech?

The government also released a study on FinTech in the United Kingdom, which includes several important and far-reaching recommendations for the financial services sector. Finally, the analysis explores how the UK will consolidate its place as a world pioneer in FinTech whilst stopping innovation and money from fleeing to other jurisdictions (yes, in light of Brexit!). The initiatives are aimed at bolstering the UK fintech ecosystem by building a pro-innovation regulatory climate, making the UK an enticing location for experts in the sector to research and function, enhancing opportunities for the UK's private and public capital markets to promote domestic development and expenditure (rather than searching for more hospitable offshore venues), and placing UK FinTechs at the forefront of the industry. The suggestions are both welcome and essential. They draw on existing FinTech trends in the industry. Now is the time to put the plans into action. To the nation...

Foreground

Chancellor Rishi Sunak declared in the 2020 Budget that the government will conduct a study of the UK FinTech market. The study, headed by Ron Kalifa OBE, was released in July 2020, and the report identifies focus areas for business, regulators, and policymakers. It provides a range of guidelines on how the UK should draw on its current strengths and establish a solid regulatory structure.

The study examines the UK's significant growth and advancement in FinTech, as well as the position that legislative measures such as the FCA's regulatory sandbox and the Bank of England's New Start Up Unit have played in transforming the country into a FinTech hub. Brexit, competitiveness, and the COVID-19 pandemic are three large threats to the UK's role that must be tackled, according to the study. It notes that foreign centers are attempting to duplicate the UK's popularity and that Brexit has generated regulatory confusion. COVID-19 has also increased global digital acceptance, according to the study. It demands urgent intervention in the following areas: employment, commerce, inclusion, and recovery. A collection of guidelines and sub-recommendations follow. We'll have a peek at the most important ones below.

Finance, Innovation, and Technology Centre

The study suggests that the Centre for Finance, Creativity, and Technology be created. The following are some examples of indicative targets:

1. Increasing the pace of FinTech adoption;
2. The number of SMEs are relying on outside capital;
3. Doubling the number of FinTech unicorns based in the United Kingdom;
4. Growing the number of FinTech companies listed on the LSE;
5. Growing the number of employees in the FinTech sector; and
6. FinTech market share in the United Kingdom is growing.

SME financing: a coalition

The study argues that alternative providers outside existing banks are needed, and that strategies that better adapt to the real finance needs and characteristics of different SMEs are needed. It notes that the alliance would use applied analytics and data science to assess development obstacles and build proofs of concept for innovative products, among other items.

FinTech policy in its entirety

The study argues for a holistic FinTech approach that covers a broad variety of problems, including cross-sectoral issues that aren't relevant to financial services (such as data). The plan, according to the paper, should have specific goals, steps, and timeframes. According to the paper, the government should consider whether some primary areas should be listed for special attention. It notes that these priority areas may be unique sub-sectors (for example, cyber security) or subjects (e.g. financial inclusion).

Kit for Digital Finance

In view of Brexit and the EU's own Digital Finance Package, the study argues for a UK digital finance package (see our briefing here). The existing regulatory system is defined in the study as "vertically-focused," with a lack of consistency in mandates, policy direction, and objectives. It recommends a legislative system that allows cross-cutting topics like digitization to be organized.

Main features of the UK Digital Finance Package

1. It's all about the data. This will include a government-created digital ID confidence system that would involve, among other items, a business digital ID.
2. Establish and incorporate a set of universal data specifications. The study argues that universal data standards are important, and that improvement in the coverage and acceptance of financial data standards must be made.
3. Smart data can be prioritized. According to the paper, this can be accomplished by using a "citizen-centric strategy" that allows users to use, exchange, and remove their data access. The study recommends a cross-sectoral approach to Smart Data, as well as mandating data exchange inside and across industries (such as Open Banking) and helping to advance Open Finance as a mandated regime.
4. Artificial Intelligence (AI) is a term that refers to a The study advises that the regulatory ramifications of AI be addressed, as well as clarity about how the PRA and FCA laws can be implemented in the light of AI on topics such as transparency and responsibility.
5. The Digital Money of the Central Bank. A Central Bank Digital Currency (CBDC), according to the paper, could aid in the implementation of emerging technology (such as blockchain) in financial services. The study explores the advantages of both a retail and wholesale CBDC and recommends a hybrid model.
6. Assisting in the digitisation of the Financial Markets Infrastructure. This, according to the study, can be achieved by: entirely dematerializing shares in compliance with the Central Securities Depositories Regulation (CSDR); updating the CSDR, Financial Collateral Regulation, and Settlement Finality Directive legislation; adopting blockchain technologies in post-trade processes; and researching how trading in tokenised securities can be enabled on investment platforms.
7. Introduce a revised legal system for cryptoassets in the United Kingdom. The study calls on the UK to move immediately in response to the EU regulatory plan for a Markets in Crypto-Assets MICA (see our briefing here). It recommends a "functional and technology-neutral solution" to a bespoke regime. The study further applauds efforts relevant to stablecoins, such as the briefing document from HM Treasury and the request for proof on the UK's legislative approach to cryptoassets and stablecoins (see our briefing here).
8. ESG (Environmental Science Group). FinTech, according to the study, has a vital position to play in relation to ESG in terms of data gathering and distribution. It makes many suggestions, including creating a mechanism to promote sustainability-linked assets (such as sovereign bonds or commercial debt), encouraging consistent sustainable reporting requirements and terms, and implementing a centralised electronic registry for ESG results.

FinTech policy has to be tweaked in certain ways.

1. Payments are regulated. The study raises questions about the current regulatory framework's effect and asks if changes are needed in certain ways (e.g. strong customer authentication and capital and liquidity).
2. FinTech, emerging technology, and markets are both buzzwords these days. Many aspects of current financial services legislation should be revised to reflect technical and industry trends, according to the study, which calls for technology-neutral regulations.

Inclusion of financial resources

FinTech can be used to promote financial inclusion and capacity, according to the paper. The below are some of the proposals for regulators:

1. Extending the financial education curriculum to provide financial education in classrooms, digital product opportunities, and environment risks;
2. FinTech firms are given options to work on certain demographics or regions in order to increase financial inclusion;
3. Promoting financial inclusion among incumbents and promoting a retail lending referral scheme; and
4. Examining whether FinTech could be used to address particular financial inclusion problems (such as the distribution of the Post Office Card Account) and whether cashback without a transaction (currently banned under PSD2) could be permitted under the Payments Review.

Taskforce on the New Economy

The study recommends a new Digital Economy Taskforce structure for executing the FinTech plan, detailing a range of functionality that it could provide, including:

1. The government should create and mandate the taskforce.
2. The taskforce should have its own set of goals (for example, assisting in the growth of the UK FinTech strategy);
3. The taskforce should be temporary, in the sense that it should only operate before the FinTech plan is completely formed and the taskforce's priorities are met; and
4. When conducting its tasks, the taskforce should be expected to consider some particular concerns (such as the promotion of financial inclusion objectives).

Scalebox

Businesses in the FinTech industry should be added to a "scalebox" arrangement, according to the paper. The following are some of the facets of this:

1. Improving the current FCA regulatory sandbox (for example, having it usable on a rolling basis rather than in time-limited windows);
2. A modern, permanent “data sandbox” to promote cooperation and enable for digital collaboration, concentrating on so-called Priority FinTech Areas; and
3. Collaborating with FinTech and RegTech businesses (this would involve, for example, regulators encouraging regulated firms, as part of their operational risk assessment, to think about the potential benefits of technology).